Blooming Late report and the two sides of late stage funding

Earlier this week, Tech.eu released the Blooming Late, a 60-page report on the rise of late-stage funding for European tech scale-ups. It’s the third in a series of reports diving into capital funding in the EU tech ecosystem

Other than finding out that the €850 sweaters and €780 jumpers that Web Summit tried to pass as swag sold out before the conference was over, going through this report was one of the highlights of my week.

Today we are going to go over the key takeaways of the report, and as usual, wrap it up with a few (unoriginal) thoughts of my own.

Europe is growing – but we all know that If you’ve followed this blog for a while (gracias!), you already know that the European tech ecosystem is growing by almost all quantifiable measures – capital raised, number of rounds, companies built, etc.

It’s every VC’s wet dream – up and to the right.

The third report in the series, titled Blooming Late, is focused entirely on something that’s been missing in Europe for a while – late-stage, growth capital and $100 million rounds.

In the last 12 months, companies like GetYourGuide, Deliveroo, Transferwise, Bolt (go Estonia!), Monzo, Revolut, OakNorth, UiPath and more have raised rounds of over $100 million.

“In Europe and Israel, there has been a steady increase in late-stage funding rounds for homegrown tech companies from 2015 to Q3 2019, with the last 12 months (Q4 2018 - Q3 2019 included) accounting for a major surge after a slight dip in the first half of 2018” – Blooming Late report

Truth be told, it’s great to see the ecosystem grow. And it’s even better to see it grow in different directions.

Even though fintech is clearly leading the way (Transferwise, Revolut, Monzo, N26, etc.), other industries like food delivery and transportation are throwing some remarkably decent punches.

• Software. UiPath, Veeam,Outsystems.
• Foodtech. HelloFresh, Wolt, Deliveroo.
• Transportation. Blablacar, Gett, Bolt, Cabify.

But wait… there’s more!

When you look at the number of late-stage funding rounds in Europe per year, everything looks shiny and polished. Again – up and to the right.

But as any marketer knows, a single metric on its own often doesn’t tell the full picture. So let’s be assholes and ruin the party by slapping another metrics into the chart above: European tech IPOs over time.

Now it doesn’t look so fun anymore. Let’s dig in.

“While there were 36 European tech IPOs at the peak in 2017, that number steadily decreased by nearly 42% to only 21 in 2018. In 2019, the number of tech IPOs in Europe will be significantly lower even than that; Tech.eu tracked only 5 tech IPOs in the first three quarters of the year so far.” – Blooming Late report

Let’s not get ahead of ourselves. Yes, Europe’s late stage capital is growing at a decent pace, but we are also trading IPOs for big, $100 million rounds.

That’s not a bad thing per se, but it’s worth discussing it.

Frequent IPOs are healthy for local and pan-European tech because of the ripple effects (liquidity for investors and employees cascade down to the ecosystem in the form of new companies, angel investments and more).

But it’s also healthy to see a group of companies that decide to stay private and focus on building a sound business before going public à la Uber.

At the end of the day, part of the story we are not seeing is that we are switching one for the other – and with the whole WeWork debacle, this trend won’t reverse for a while. It will slow down as we “chase profitability” as an ecosystem.

What’s missing in the European late-stage game?

I’d argue that two things are missing – late-stage talent, and late-stage local capital. I’ve covered both in different editions of this newsletter, but let’s put them together right now.

First, the lack of late-stage talent with experience scaling companies to $1 billion is a significant (but often under-appreciated) reason why we haven’t had a European Google, or why Europe is not a late-stage powerhouse (like the US and China are).

Here’s a quote from Matt Clifford’s interview:

“A lot of scale is counter-intuitive and you just need people who have done it before. And, you know, it’s hard in software. In Europe, what are the companies who have done a billion dollars in Software sales? There’s some, but not many. If that’s your aspiration, you need to find a way to access those people in the Valley, or elsewhere. I think that’s gonna be hard for a while.”

The ideas and processes you need to scale up to $100 million are counterintuitive, so you need people who’ve done it before. Otherwise, you’d spend time and money figuring them out, which is a luxury most scale ups don’t have.

The second thing missing is local late stage capital, the emphasis on local. Per the report:

“The large investments in European tech scale-ups are coming from a very diverse mix of investors; made up of internationally active PE & VC firms but also big multi- nationals, hedge funds, state funds, etc.” – Blooming Late report

Just to give you a rough idea, of the top 10 investors in late-stage financing rounds for European tech scale-ups, more than half (6) are headquartered outside of Europe (US, Japan, South Africa, Hong Kong, Singapore and China - in that order).

Softbank itself has pumped nearly €4 billion into European late-stage companies from 2015 to Q3 2019.

It’s good that we re getting late-stage capital, and we are more than grateful that the US is addressing the infamous Series B gap.

But there are structural disadvantages to taking outside money, which by definition, ejects the returns of said capital outside the ecosystem.

Why? From a previous edition of seedtable, on why this makes the European flywheel slower:

Famously, when a company IPOs, a couple thousand employees will become single-digit millionaires and (after drinking some champagne) start new businesses, or start investing in the space. But if a company raised outside money and hired outside employees, the cascading effects of a liquidity event will get diluted. At the end of the day, the ecosystem is growing and positioning itself between the US and China. It’s a great position to be in, politically and economically, but as with everything in life, there’s room for improvement.