In these times of extreme macro-uncertainty – when politics and economics clash and nobody knows what the out-come might be – we are scrutinising what is happening to European venture with even more attention.
Based on current activity, we continue to be of the view that the European venture market is holding up. Our Headline Transactions Index (HTI) for April shows the month up compared with a year before (14% by number of deals and 22% by value), which year-to-date corresponds to a 12% increase by number of transactions and a 10% drop by value.
A picture of broad investment stability with perhaps a downward touch. We tend to have a more upbeat view of the European venture market than other sources, due to our methodology being skewed towards larger deals and leaving aside biotech deals.
Interestingly, the latest Dow Jones VentureSource data confirms that the number of financings in the firstquarter was down by only 7% compared with the same period the year before, and in fact acknowledges that European venture capital (VC) fundraising – money raised by the funds themselves – was up 8% in value, leading the Wall Street Journal to comment that European VC is poised for a rebound.
Here are the three fundamental trends which make analysts optimistic.
1 The wonderful borderless world of the internet economy is creating a raft of opportunities open equally to European companies, bringing an element of playing field level with the US that just does not exist in traditional tech VC categories. This is vital since the internet is today the undisputed number-one value creation opportunity in venture.
l The internet is creating new amazingly scalable consumer segments and is ripping apart entire segments of the old economy, such as retailing and financial services.
l The internet is about to accelerate as it moves to version 3.0 – mobile. A raft of opportunities are emerging, potentially displacing existing internet giants. It took 40 years to bring IBM to its knees after it emerged as an undisputed leader, Microsoft lost its colours after 20 years, Google is today challenged by Facebook after only 10 years and some analysts are now wondering about Facebook’s last-ing power in 5 years’ time.
l This explains why US funds are increasingly active in Europe – no less than 50% of our large headline transac-tions involve US investors.
2 In the traditional world of IP-led tech innovation, Europe is well placed thanks to its tradition of capital efficiencyand a strong corporate ecosystem.
l European start-ups have a track record at being super capital efficientbecause they had to. By contrast, access to money, the traditional strength of the US VC model, is not nearly as important as before because the cost of tech-nology has fallen considerably and continues to do so.
l In the post-2008 world, support from corporate investors is becoming key as a way to mitigate commercialisation risks and improve capital efficiency. As it happens, Europe has more companies in the Fortune 500 than the US (148 compared with 133) and all corporates are now seeking to take advantage of open innovation, including investing in more nimble start-ups.
3 Lacklustre initial public offering (IPO) markets are playing to Europe’s strength by de facto creating a vast pool of late-stage opportunities.
l These opportunities are more in line with European investors’ risk-averse profile compared with US investorsl Short of debt leverage, European mid-market private equity (PE) funds are jumping on the growth equity band-wagon, potentially bringing the scale of money that European venture has lacked historically.
l Europe has traditionally had a vibrant PE industry which is now quickly retooling for growth equity. These PE funds provide new exit potential for smaller European VC funds as an answer to otherwise extended exit horizons which are killing the traditional venture model.
The debacle surrounding the Facebook and Groupon IPOs – down about 25% and 50% respectively from their introduction price – make us think the lack of IPOs is a durable fact of life.
Examples this month include Just-Eat financed by Vitruvian Partners and Bathrooms.com financed by Augmentum Capital.
Provided Europe, with home-grown or other funds, learns how to scale hard when needed – when companies finallyget their model right after their series A or B funding round – then European venture has a bright future.
This assumes of course that Europe breaks the spell of in-country financings– for example 90% of financings from German VC investments are in German companies according to PE consultant FHP – and gets better at directing expert money to relevant companies wherever they are, a feat so far best achieved by US funds operating in Europe.