Brexit Driving The Slide Of Europe’s Venture Capital Industry by PitchBook

European Venture Capital Market More Resilient Than Expected

Introduction

Despite the persistent concerns we’ve seen in the media related to Brexit and a sluggish economic backdrop, the European venture market has actually remained relatively in line with the global venture capital market. Things aren’t necessarily falling off of a cliff, but just as we’ve experienced a slowdown in total deal counts in the US, we’ve also seen a pause in Europe. Further, we’ve also continued to see investors put more capital to work in European deals, while betting less frequently. In short, the cyclicality we’re seeing in Europe really doesn’t alarm us any more than it would in the US.

One thing that should be considered is that the types of growth concerns around Europe will have a more pronounced impact on older and legacy industries. Many venture-backed companies aren’t at a point to be overly impacted by a slow-growth macro economy, especially at the early stage, and with that, investors will still look for quality companies and entrepreneurs to back. Sure, there can always and typically will be reverberations that trickle down to everyone should the economies in the region continue to stumble for a prolonged time, yet we think where we are right now points to a more cyclical environment than an abrupt downturn in sentiment.

Throughout this report we examine European venture capital deal, exit and fundraising activity and also provide a spotlight on activity within the UK and Ireland—the Nordic region is also treated upon in more detail. We hope this report helps inform your decision making process and as always, feel free to reach us at [email protected] with any questions or concerns.

[drizzle]Nizar Tarhuni

Senior Analyst

Fewer Deals, Larger Sums

Overview

Europe’s venture industry has continued along with relative resilience throughout 2016 despite the various concerns we’ve seen in the media related to Brexit and a continuously sluggish economy. Though deal count fell for the third straight quarter in 3Q—much like it has around the rest of the venture world—the overall value of these completed deals is paced to fall only slightly below last year’s decade-high total of Eur 14.7 billion. More than Eur 2.6 billion of venture capital has been invested in Europe during each quarter this year, which is a higher total than any other quarter between 2009 and 2014. A handful of outsized transactions have underpinned this year’s deal value, to be sure—six deals have closed on over Eur 100 million—but even smaller deals have grown in size. With that, the median late-stage deal size climbed to over Eur 5 million for the first time since the financial crisis, while the median size of earlystage deals is tracking to come in higher for the third consecutive year. All in all, financings of over Eur 1 million accounted for over 60% of all completed European deals for the first time since 2008.

Brexit Europe Venture Capital

US investors looking to diversify their portfolios abroad have continued to find Europe an attractive option. 65% of closed deals in 2016 have included US investor participation, and with the pound and euro each falling against the US dollar recently, there will continue to be a currency-related mutual benefit for such investment.

Brexit Europe Venture Capital

Nordic’s activity increasing

Rounds by region & sector

The UK and Ireland continue to pace the continent in terms of deal activity, grabbing roughly 35% of completed deals. Deal count in the region stayed roughly level during 3Q, while nearly all other regions saw a significant fall. The Nordic region is one that has quietly established itself as a major player within the European venture industry over the past several years. Other than the UK and Ireland, the Nordics were the only other European region to see more than 100 completed financings (112) in 3Q, and have now surpassed the 100-deal mark in seven of the past 10 quarters. One reason for the growing rate of investment is the strong network of investors located within the Nordics. State-owned or funded Finnvera, TEKES, SEED Capital Denmark and Almi Invest have made a particular point to invest in Nordic startups, each participating in more than 30 venture capital deals since the beginning of 2014.

Brexit Europe Venture Capital

Brexit Europe Venture Capital

Spotlight: UK & Ireland

Overview of UK & Ireland venture capital activity

While the venture capital landscape across the UK/Ireland region has moved in relative lockstep with the global venture market, aggregate capital invested in the region remained resilient in the wake of the UK referendum to leave the EU. Last quarter, just over Eur 1 billion was invested across 207 deals; a figure that comes in relatively flat on a quarterly basis, and a volume statistic that is down just under 3% during the same time frame. At the current yearly run rate, 2016 is on pace to see over Eur 4.4 billion invested across roughly 900 or so deals, which would put total financings on track to come in at the lowest level we’ve seen since 2011—aggregate capital invested is pacing to close 2016 at the secondhighest level of the last decade.

Brexit Europe Venture Capital

While most traditional venture capital-backed industries are unlikely to be heavily affected by the broader effects of the UK referendum, we may see implications for specific industries, for instance, fintech. Over the years, London has established itself as an epicenter for the fintech industry, in addition to a broader European financial hub. EU membership granted the region free movement of human capital, the capacity to scale in other European markets, as well as access to a single European capital market and digital market initiatives. As London’s advantages from its membership in the EU could potentially subside to an extent, other aspiring fintech hubs including Berlin, Amsterdam, and Stockholm could see more investment and entrepreneurship shift in their direction. Germany has attracted talent by utilizing a combination of tax breaks and government involvement in its venture market to create a self-nurturing ecosystem—a compelling arrangement that may ultimately entice venture capital-backed companies even outside of the fintech sector to leave the UK & Ireland region. Further, the landscape surrounding the flow of institutional money in the UK’s venture capital industry will be interesting to observe moving forward. The European Investment Fund (EIF) has long been one of the largest limited partners funnelling capital into UK venture capital, so as the Brexit dynamic continues to play out, it will be interesting to see what the effect will be in terms of how the EIF continues to fund UK-based GPs.

Brexit Europe Venture Capital

Exit value in the UK/Ireland region came in at Eur 1.3 billion last quarter across 64 completed transactions, representing a YoY decline of over 15% and 45%, respectively. Challenging market conditions particularly affected the IPO exit route during the third quarter as companies increasingly moved to either delay or cancel their offerings. As was exemplified

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