Europe, €9.3b and the path from Good to Great

Europe, €9.3b and the path from Good to Great

Earlier this week, something quite exciting happened. Dealroom released their Quarterly European Venture Capital report for Q2 2019.

One thing stands out: Q2 broke the all-time record for tech investment in Europe, with €9.3 billion invested.

Is this good news? It absolutely is.

Exactly a year ago, during Q2 2018, tech investment in Europe hit €5.8 billion, a record at the time. Come Q1 2019, the number reached €6.8 billion. Between Q1 and Q2 there was an almost 3 billion jump in but a few months. This translates into a 60.3% year-over-year growth. Not bad for a semi-mature ecosystem like Europe.

But while Europe is bragging about the new records, the US and Asia are in a slow turn. As Dealroom puts it, “Compared to Asia and North America, Europe is the only region showing a significant VC investment growth in 2019 to date.”

The absolute numbers of these two regions are still much better than the ones in Europe, sure. The US amassed a total of $30.3bn (€26.67bn) invested in Q2. The Asian ecosystem, on the other hand, reached $15.1bn (€13.29bn) in the period.

The thing is, both periods are admittedly, quite quiet compared to previous years. Their numbers are there, but their growth seems to have stalled.  

And while the rest of the world may have stalled, Europe is growing faster than it ever did. This is a sign that the ecosystem is maturing, and that Europe is finally becoming a good enough place to attract significant foreign capital.

In today’s edition, we will look into why this might be happening, and how it can affect early-stage European founders.

Why is Europe the new darling?

My take is that European tech has become an attractive enough ecosystem that the opportunity cost of investing here (and not somewhere else) has stopped being a deterrent.

We know that the number of startups and funded companies has been growing every year. We also know that Europe has somehow been consistently attracting more and more talent despite the below-market salaries being offered.

The number of mega rounds in Q2 2019 so far confirms it. In fact, the 10 largest rounds in Q2 (Deliveroo, Glovo, Northvolt, GetYourGuide, etc.) accounted for €4 billion or 43% of the entire quarterly investment.

A decent part of these big rounds is US and Asian investment.

We can’t yet be entirely sure, but it is possible that the Trump-fueled trade war between the US and China is playing a major role in money shifting continents.

On one hand, the US is turning its eyes to Europe. The US doesn’t want to (and usually is pretty bad at) investing in Chinese tech. There are also just too many security concerns involved.

The American market is a bit overcrowded. This means Tier 1 and 2 American funds looking for new opportunities are forced to choose between being small fish in a large pond, or big fish in a small one. They’re choosing the latter.

During my last stay in Paris, I personally met with Ventech and Tech Nexus, two US firms who are there as they follow the most exciting opportunities. And they aren’t the exception, they are the norm.

On the other hand, China is shifting to Europe. China has never been too eager to invest in the US in the first place. Now add to that fact the ongoing trade war between the two countries.

The result of all of this? Europe is getting a steep influx of capital coming from both corners of the world.

The number of investments coming from the USA and Asia into Europe has grown quite dramatically in 2019 reaching more than 40% of total investment. On the contrary, domestic investment has gone down from 38% in 2018 to 30% in 2019.

Asides from an increasingly attractive ecosystem and China v. USA dynamics, there’s another reason why capital is increasing. Thanks to the sustained growth over the years, new venture capital funds have started popping up every week.

I consistently report new funds showing up across the entire spectrum – from accelerators to late-stage opportunity funds - and this week is not an exception.

This sustained growth across the industry proves one thing above all: The European startup ecosystem is here to stay. Realizing this, Big American firms have started to actively look for European deals to try and diversify their portfolios at a time when US deals are, some might argue, getting a bit too expensive.

And as I mentioned, most of the big American firms are actively looking for European deals, looking to diversify their portfolios at a time when some argue that US deals are looking expensive.

Does this matter for early-stage founders?

Yes, and no.

It’s important to mention that most of this growth comes from insane late-stage rounds, like the $1 billion Northvolt raise.

The report only looks at €100 million mega rounds because these investments accounts for 45% of the total capital in Q2 2019. But other not-so-small companies like Paris-based Payfit (raised €79 million) have an impact as well.

A Tech Visa for Talent will give local companies access to a pool of talent that was previously impossible to tap. Gresham’s Law applied to Talent Markets makes it so that you are either growing (and attracting talent) or decaying (and pushing talent out).

In time, if Good Talent is hoarded somewhere else, Bad Talent will be given more movement and circulation within the Talent Market. As more and more Bad Talent starts to circulate within a market, companies will start hiring that Bad Talent, mostly because this is the only currency being traded.

If Bad Talent is rewarded with a job and power, word will go out and Good Talent will move while Bad Talent will notify gravitates towards whatever they can get.

Enabling talent to gravitate to Europe will create a positive Talent growth loop on the continent, or at least facilitate and maximize positive growth loops on a select number of tech hubs where all talent will flock to.

The rest of the ecosystem – from seed to Series B – holds around the same momentum they’ve been holding for the last few years. In fact, there were more sub-€100-million rounds in Q2 2018 than Q2 2019.

This is not necessarily a negative indicator though. In fact, I predict that smaller rounds will grow at a significant rate in the upcoming year as well, closely following the trend led by bigger rounds. Two big reasons:

Acquisitions, IPOs, and large secondary rounds give liquidity to founders and early employees. These people more often than not  end up becoming angels or starting early stage funds.

We’ve seen this with Google in 2004 and Paypal, and we’re seeing it now with Uber in the US, or Skype in Estonia

On top of that, in an industry like venture capital where feedback cycles can be 7+ years, late-stage mega rounds are the best predictor for a fund’s success. They act as social proof not only for that fund itself (Accel just raised fund number VI) but for the entire ecosystem.

Other like Creandum V and CIC closed $1.5B in new capital, which will fuel a record year for European tech.

There is now enough incentive to go around that people will actually put their money where their mouth is and invest. This is a stark difference to the dry ecosystem we all knew 5-10 years ago.

The good thing about this is that, as with any growth loop, it will only get better. If you are thinking about starting a company that requires VC money in Europe (and to be clear, most don’t), there has never been a better time to do it.

The path from good to great

The European tech ecosystem has seen modest yet steady growth when it comes to VC investment. 2016, 2017 and 2018 saw good investment numbers. Good, but not GREAT. As if VC’s were a bit reluctant to dive head-on into this market...

2019 could be the year that changes all of that. It could be a turning point. The year in which Europe acquires true growth momentum, the year in which the continent graduates from a kid with a dream, and becomes a Champions League contender.

Or everything could be a flop, an odd coincidence. It’s on us to deliver.