After a period of turbulence stemming from political uncertainties, Europe is looking to get its venture industry back on track. The 2Q 2017 European Venture Report breaks down the data showing the origin of the recent decline in deal volume and how record fundraising levels are set to provide a boost.
Highlights of the report:
- Paris is set to benefit from new policies encouraging investment and innovation to become a major tech and VC hub in Europe
- The largest VC-backed offering since 2014, Delivery Hero's IPO may be a benchmark for investor appetite for further IPOs in 2017
- Last year's record fundraising is being followed by further high levels, even though the number of vehicles closed still dwindles
Europe setting up for next phase of growth
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- Paris is set to benefit from new policies encouraging investment and innovation and become a major tech and VC hub within Europe
- Delivery Hero's IPO was the largest VC-backed offering since 2014, and may be a benchmark for investor appetite for further IPOs in 2017
- Last year's record fundraising is being followed by further high levels of commitments, but the number of vehicles closed continues to dwindle
While it covers a smaller area, Europe faces a diversity of culture, language and laws that equate to more challenges for investment, as well as varying rates of adoption and growth of technology. Over the past few years, the industry has seen a decline in the number of deals completed, though overall deal value has stayed relatively stable. With the past year's geopolitical uncertainty somewhat behind, several supportive European Union regulations set to take effect and an influx in fundraising commitments over the past couple years, Europe looks to be on the verge of renewed growth in its VC industry. We hope this report is useful in your practice. As always, feel free to send any questions or comments to [email protected]
European VC activity methodical
Europe VC activity continues decline
For the past year and a half, European VC activity has been in a pattern of decline. Deal count was down for fifth consecutive quarter in 2Q, notching just 540 completed rounds. Round sizes have continued to grow, though, with each of the two previous quarters tallying and increase in overall deal value. As we continue to collect data for 2Q, it will likely also show a quarter-over-quarter increase.
Much like the US market, the increase and subsequent decline in completed rounds over the past decade is primarily due to the rise and slowdown of angel and seed financings. As you can see in the chart below, seed deals almost mirrored the flow of aggregate round totals. The reason for this may be simple. From 2007 through 2013, no fewer than 61 micro funds (those with under ¤50 million in commitments) were closed each year. Since that timeframe, however, the number of closed micro funds has declined in total each year, with just four funds being closed so far in 2017. The effect these funds had on the industry is noticeable, as is their decline. First financings (the first institutional investment in a company) have dropped off steeply during the past two years. Just 343 first financings took place in 1H 2017, 47% fewer than during the first half of last year.
Looking to take over where the seedfocused funds left off, accelerators are becoming a much more popular vehicle over the past few years. The largest startup campus, Station F in France, has also opened in the recent months, and will contain accelerator and startup programs run by the likes of Facebook (NASDAQ; FB), Microsoft (NASDAQ: MSFT) and other. Especially with the recent decline in the number of seed funds raised, accelerators will play a significant role in the future of the venture industry. Not only will they help create deal flow for later investors, but they may also help sift through ideas that are unviable for a company before reach out for VC funding.
Brexit causes little change to investment for the moment
The Brexit vote threw European venture capital for a loop. The UK has long been the major hub for investment, and post-Brexit many believed that would change. A year after the vote, though, it seems not much has changed. Nearly 40% of completed European rounds have been made into UK or Ireland-based companies, in line with historical levels. Other regions have looked to capitalize on the potential movement of startups away from London. The opportunity may still yet present itself, as the full reaction to the UK leaving the EU may not be realized until the exit has been fully negotiated and agreed upon. A hard Brexit will have more consequences for the industry, especially if more restrictive immigration laws are enacted, as those would push foreign entrepreneurs to other VC hubs. The European Investment Fund, a main source of capital for VC funds across Europe, has already frozen investment into several UK-based managers because of Brexit— including Seedcamp, a pre-seed and seed-focused firm—though the EIF will honor commitments that had already been made. There has also been news in the past few months of major banks—including JP Morgan and Deutche Bank—moving jobs away from London, the finance capital of Europe. So far, Bloomberg is tracking around 13,000 jobs at risk of being moved. While those jobs may not tie directly to VC, the loss of such highprofile jobs underscores the potential for other finance-related jobs and activities to move outside of the UK.
European VC trends remain the same
Activity by size & sector
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