I started working in Venture Capital in 2017 in Europe.
The market was on fire! I saw so many startups launch and raise from angels. In Europe, we were great at investing in small rounds. Startups found angels and micro-VCs to raise pre-seed rounds under 1M€.
However, there were also some loud voices speaking up about the lack of capital for later stage funding. These came mostly from VC investors who saw their portfolio scaleups suffer. During that time, European scaleups had to accept slower growth or get acquired before they could reach the impressive unicorn status.
Since then, lots has changed, and this change has even been accelerated by the COVID pandemic.
The European venture market has been flooded with capital from Limited Partners. In Europe, LPs such as governments, pension funds, corporations, and family offices have shifted their investments to put a bigger share into Venture Capital funds.
These days, there are many VC funds in Europe – many great seed and later stage funds have been created over the last few years.
Thanks to this, we’re hitting record funding in 2021. $59B was invested over the first 6 months this year in Europe. ‘This means that we might see 150% year-on-year growth from 2020 to 2021. This kind of explosive growth is unheard of on the global venture capital market.
This is mainly driven by the number of late stage deals in Europe, which have tripled in the last 5 years.
This is amazing news! Europe has become a place where you now have the resources to scale your startup to a unicorn and beyond.
Another trend that we see is that the LPs have done a great job in finding skilled General Partners that make good investment decisions. The European venture capital market has been professionalized.
GPs of seed funds know what they’re looking for, and it’s all about the team. Second-time founders who’ve been in the startup ecosystem for a long time have an easy time raising funds.
They can easily raise €1-3M at a high valuation. This is not necessarily because of their product or metrics, but rather based on their merits and prior relationships.
But who are these skilled General Partners that run Europe’s VC funds? Well, many used to be angel investors! Of course, they prefer to invest as VCs rather than as angel investors. That way, they have more money to invest and get paid to make those investments— operations that they would have had to finance out of their own pocket as angels.
We used to have a flow of new angel investors into the market as startup founders launched an IPO or got their startups acquired, but that’s no longer the case. Now, these people can make another startup and easily raise millions of euros without much of a product as they are experienced founders. Of course, they also have the option to raise a VC fund instead.
But while the number of late stage investments has tripled, the number of pre-seed deals has instead declined 2016 to 2019, from 5300 to 3500. In other words, we’re now losing 1800 pre-seed deals every year in Europe.
A gap has appeared at the pre-seed stage in Europe, especially for first time founders that struggle to raise their first round of capital.
The gap gets even bigger when we look at founders who stand outside of the classic European startup ecosystems. Already underrepresented founders, like women and people of color, find themselves with an even larger hurdle than before to get a foot into the ecosystem. This might partly explain why we don’t see much change in the number of deals raised by underrepresented groups.
It is harder than ever to get a foot in the door of the European venture capital market, even though you might have a startup that is doing well. Business Angels used to be the players to support first time founders with experience and network. However, those types of angels have become more and more rare in Europe.
In the short term, we might not see any significant effect of the pre-seed funding gap on the European startup ecosystem. However, we might start seeing an effect a couple of years from now, and we’ll be wishing we had done something about it sooner!
Today, we are seeing European unicorns raise large amounts of capital and grow the economy of the European continent.
For example we have Klarna, the Swedish fintech that raised $639 million in June 2021 from SoftBank at a $46 billion valuation.
We also have the German enterprise cloud solution Celonis that raised $290 million from Accel at a valuation of $2.5 billion in 2019.
You’ve probably heard about the food-delivery marketplace Deliveroo in the UK that recently launched an IPO with a 7.6 billion pounds valuation.
The French startup Backmarket recently reached unicorn status, as they raised 276 million euros in May 2021 at a valuation of more than $1 billion.
This summer, we heard of the Estonian taxi app Bolt that raised 600 million euros to be valued at 4 billion euros.
Do you know what they all have in common? They were founded by first-time founders. If they launched their startups today, they might not be able to find that first angel investor to finance their startup.
Let’s start talking about this issue and think about potential solutions, so we can insure the future growth of the European startup ecosystem.
Hopefully governments see this as an issue of urgency to protect Europe’s position as a global tech leader for future economic growth. Moreover, late-stage funds should see a reason to start worrying about future dealflow. I hope that together, as an ecosystem, we can start putting our heads together and find a way to turn this trend around.