07 Jun The Future for Eurozone Venture Capital is Rosy
The economic outlook at the beginning of 2016 was uncertain for much of the Euro Area. The economic slowdown in China alone stunted the global growth rate by 0.75 percent last year. Moreover, seemingly unfriendly conditions due to volatile financial markets gave investors and entrepreneurs alike reason to take pause. But despite all of this, the market showed resilience in the first quarter. There was an uptick in domestic demand and increased employment numbers. Additionally, the Eurozone bloc saw overall growth of 0.5% (seasonally-adjusted) in Q1 over the previous quarter, an acceleration from the 0.3% increase it saw in Q4.
According to the December 2015 issue of the Ernst & Young Eurozone Forecast, “economic conditions within the Eurozone continue to rebound with Eurozone capital investment expected to underpin a steady recovery into the medium term.” Punctuating that sentiment is the start-up ecosystem in Western Europe, which has grown tremendously in the last five years. Within this scope, Germany, France and the UK have pulled ahead as the definitive leaders of the pack. Europe’s compound annual growth rate (CAGR) of 21.5% is currently outpacing that of the US (14.7% CAGR) by around 10 percent. In the wake of such growth, a noticeable clamor has been rising in volume over which tech hub will ascend to its rightful place as the “New Silicon Valley.” But while these European hotspots do have a good deal of future potential, they could be chomping at the bit too soon.
Venture capital funding may be becoming more attainable in the Eurozone, but it still has a ways to go before it can go toe-to-toe with its US counterpart. An analysis of the 2013-2015 venture market by VC firm Target Global showed three distinct differences between the US and Europe:
- The percentage of growth stage (B and C) deals is significantly higher in the US than in Europe
- Late stage (D+) deals are very rare in Europe
- Series B rounds, which represent roughly 19 percent of deals in the US compared to only 11 percent in Europe, dropped in Europe over the three-year period
Furthermore, between 2006 and 2014 the majority of EU funds were smaller than €50 million. This leads to the conclusion that many small startups in Europe simply have not been able to obtain the follow-on financing they need to take off and thrive, or in many cases even stay afloat.
The other major factor lies with timing. The markets in the US and in Israel have been developing for decades, whereas the Euro Area did not start to become relevant until around ten years ago. On top of that, the average time to an exit is longer overall in Europe at 5 to 7 years (compared to 3 to 5 years in Silicon Valley).
That is not to say that Western Europe isn’t producing its fair share of successful businesses. Some of the most lucrative consumer niches in the market are currently being dominated by European bred startups, including music streaming companies such as Spotify and SoundCloud, and gaming companies like Rovio (creator of Angry Birds) and SuperCell (creator of Clash of Clans).
The startup landscape in Europe is made up of numerous different countries with their own independent economies and business regulations. Its terrain can arguably be considered more difficult to navigate than that of the US. However, the fact that these entrepreneurial breeding grounds are so spread out can actually be considered a strength when viewed through the right lens. The Eurozone’s geostrategic location gives its burgeoning companies access to the Russian, Latin-American, Israeli and US markets; not to mention that a less physically condensed landscape facilitates a wider range of innovative ideas. As the saying goes, “Europe needs to focus on building bridges, not valleys.”
As technology seeps into practically every business niche in the world, whether it’s advertising tech in Paris, e-commerce in London or in financial tech Berlin, Eurozone venture investors can rest assured that they will continue to have plenty of new, ground-breaking startups in which to invest in the coming years. Will we be hailing any singular twenty square mile plot of European land as the new startup Mecca? Probably not anytime soon. But certainly a network is forming in Western Europe that is well on its way to keeping pace with its Californian brother. The future for Eurozone venture capital is rosy; it’ll just take some time.