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Funding is often referred to as the critical ingredient in the birth, growth and success of any tech community. When it comes to benchmarking the European tech landscape, funding is again pointed out as one of the major drawbacks. This is changing.
Over the past five years, capital raised by European Tech SMEs through venture capital funds has almost quadrupled (x 3.9) to reach a record €16.2 billion in 2016. This landmark of 3,400 deals was broken, marking a record in the number of funding rounds for European Tech SMEs last year. It is worth noting that this growth in funding rounds has not impeded the average round size, which has grown by more than 12% over this period.
The 2017 year-to-date data signals a validation of this trend, confirming the strong momentum European tech currently sits in. The progressive European recovery materialising through improving EU GDP growth estimates and falling unemployment rates on the continent will only strengthen this momentum.
This tremendous growth in funding is largely fuelled by early and mid-stage funding rounds, as data shows a slowdown in late-stage funding notably during 2016 (-14.3%). Strikingly, European venture capital funds have reached a decade-long high in capital raised (€8.8 billion) and have enjoyed strong capital flows through exits (€40 billion) in 2016. This drop in late-stage funding therefore confirms greater risk appetite by European venture capital funds (hence strong activity on early and mid-stage deals) and a growing late-stage funding gap.
Late-stage funding is however key to ensure European Tech SMEs can achieve a global scale and compete on an equal footing especially with US counterparts. To solve this late-stage funding gap, European Tech SMEs can resort to an established solution: a public listing.
The strong rally in the market during 2017 has provided a favourable environment for tech SMEs that increasingly opt for a listing, as SMEs indices reached record highs in June. The total value of European IPOs was up 28% in Q1, illustrating this shift in the funding choices made by European companies.
Most recently Finnish mobile game company, Rovio, the makers of Angry Birds, announced its plans to list publicly. Spotify and iZettle are all tipped to go public in the near future as well. This proves IPOs aren’t out of reach for European tech companies, which have typically lagged behind their US counterparts in that regard in the past.
However, there isn’t as much focus on how smaller tech SMEs can leverage capital markets to fuel the next stage of their growth. This is beginning to change as some market operators strongly invest to step up their infrastructure and help bridge the late-stage funding gap while offering wider exit options to venture capital and private equity funds.
Euronext has been at the forefront of this shift. The pan-European exchange has started allocating dedicated resources to focus on the financing of SMEs with a focus on tech companies since 2013, having identified the momentum early.
Euronext has rolled-out a number of initiatives in this regard. It launched TechShare in 2015: an educational programme to help tech SMEs become familiar with capital markets. Aiming to help innovative businesses better understand markets’ mechanics, TechShare equips tech entrepreneurs with the tools to best leverage capital markets at no cost. The first cohort (2015) of the one year-long programme welcomed 29 participants, while the second cohort (2016) coached as much as 47 participants while demand surged. The third cohort due to start this month will be part of a 140-strong community.
The several steps taken by Euronext have led to tremendous growth in its tech franchise, with 96 tech SMEs listings since 2013 that have raised some €2.5 billion solely on the primary market. Its community of listed tech SMEs is now 330-strong with verticals such as TMT (including hardware, entertainment, software and media), cleantech, and life sciences. Over the past 3.5 years, Euronext tech SMEs have raised capital in excess of €8.7 billion.
French ecommerce company Showroomprive, which gives users access to online flash sales, is one such firm. It listed on Euronext in 2015 and raised €226 million, which was used to grow its international base. Takeaway, a Dutch leader in online food sales and delivery was able to raise €328 million on Euronext markets in 2016. X-Fab from Belgium produces analogue and mixed-signal integrated circuits and listed on Euronext earlier this year, raising €426 million, making it the biggest Euronext Tech IPO in 2017.
Euronext also appears to be building an attractive ecosystem (including institutional investors and specialised research analysts) that provide solutions for smaller tech SMEs. 3D printer Prodways and rare disease specialist Inventiva have raised €58 million and €23 million respectively on Euronext in 2017.
Recent listings also demonstrate the success of its TechShare programme as some of the programme’s participants have already joined the listed tech community of Euronext, including handling robot builder Balyo and home-away Wi-Fi broadcaster Osmozis. Both raised €46 million and €9.5 million in 2017 respectively
Euronext has been operating in the UK, Belgium, France, Portugal, and The Netherlands for a number of years and is now seeking to take advantage of the economic momentum in Europe by launching operations in Germany, Italy, Spain, and Switzerland. The expansion provides greater opportunities for scaleups regardless of their geographies.
To support these scaleups, the exchange has already lined up a number of initiatives, including its Morningstar Equity research programme to ensure financial analysis to support its tech community and its Tech 40 Label and Index to help European companies improve their exposure to investors.