A pledge for European Venture Capital and Start-Up Companies.
Searching Google for “Stereotypes of Europe” will provide the researcher with plenty of articles. Opening any of them will very probable yield arguments around working attitude in some cultures, or conservative attitude and rule obedience in especially German culture and after all not very many key words that you would associate with entrepreneurship. Comparing this with the ever-present American dream, as a European Venture Capital investor you could ask yourself the question whether this is the right spot to work in.
As an investor my job is to try to think in larger terms and try to see opportunities to find companies that can return our fund (see also one of my previous articles on fund metrics). However, I am also European. I am certainly also more prudent as a person than the average American is. Statistics proof, I am not the exception.
In Europe we do smaller rounds. An average financing round in Europe throughout all stages has EUR 3.5m, while an American financing round has an average of EUR 5.2m. Numbers differ from year to year, but US rounds are usually some 50% larger than European ones. In Europe we also do less rounds (roughly three times more deals in the US) and in total less money is invested (roughly 5.5 times more in the US). This feels like a match with the above-mentioned stereotypes. The argument of conservativeness leading to less risk appetite and thus smaller financing rounds sounds like a plausible logic. Following this train of thought on company level, smaller rounds and less total investment lead to more prudent business making and naturally a higher capital efficiency, which seems to be a European trait.
Ultimately, historic exits have been higher in the US as well, where deals would return an average of EUR 90m versus an average of EUR 30m in Europe — a coherent conclusion of the arguments above one could argue.
So, are Europeans neither good in Venture Capital nor able to build great companies?
Let me start with an example. Over the last 12 months, two of our portfolio companies raised their respective Series C financing rounds and ultimately both gathered interest from US growth funds. In the discussion leading up to both investments there was one argument that caught me by surprise and that I would have not thought of being a value driver and part of an investment rationale for a US investor.
The investor was really impressed by the fact that both companies had achieved their respective revenue level with “only” the money they had historically raised and not even fully consumed.
Interesting contradiction of the above. On the one-handed side, evidence points towards the fact that the more prudent and capital efficient approach of European investors and companies historically results in smaller exits. On the other hand, there is an American investor, who invests in European companies exactly because of this trait. Subsequent question is whether there could be a more fundamental development going on.
In order to review this, it makes sense to focus more on the most recent developments. As a next step, I thus assessed the best traceable exit market, being the IPO market, over the time horizon of 2018 and 2019. If the hypothesis of a development towards a stronger European market is correct, it can be expected that Europe is capable to produce significant IPOs. Looking at the last 18 months, this seems valid.
To begin with, there is Spotify. The company founded in Stockholm (Europe) achieved a USD 25bn valuation in its 2018 IPO, an ambitious valuation that remained stable ever since (USD 26m). Next in line is adyen, the Amsterdam (Europe) based company went public at a valuation of USD 8bn and is today valued at over USD 20bn. Slightly behind adyen, the US based Dropbox went public at USD 8.2bn valuation and has today a market cap of USD 10bn. Finally, the London based company Farfetch that IPOed in 2018 at USD 6bn valuation and maintained its price until today (all valuations obtained from Bloomberg). There are more European and US companies that went public very successfully, but the message is clear, European companies are leading the pack despite the very large placements including uber and lyft (both lost substantially after the IPO).
More importantly, these are not just nice examples, but they are substantiating an overall trend. For instance, the first three quarters of 2018 saw 69 tech IPOs in Europe versus only 28 tech IPOs in the US — a trend that has been forming for at least five years. Furthermore, European companies performed much stronger after the IPO with an average of 222% increase in share price versus 42% in the US.
After this step, the idea of a catching-up European market feels more rational, but it seems sensible to go one more step to substantialize the finding further.
Thus, let me take a look at investment fund performances, which looks like a proxy on whether portfolios as a whole are attractive. There is a conference for VC and PE funds (GPs) and fund investors (LPs) in Geneva every year, where merely the whole industry assembles to discuss the current state of private investing in the US, Europe and APAC. Traditionally, US PE is the strongest asset class returning best to investors. Not so in 2019. This year, European Venture funds returned by far better than any other asset class (always putting the 5-year cohort as a denominator) and was the only asset class (comparing US VC, US PE, APAC VC, APAC PE, European VC and European PE) delivering substantially over 20% in IRR.* Even though LPs remain cautious around investing in venture capital, these numbers are very encouraging!
To sum it up, history proofs that exits have been better in the US. However, over the last few years, the “European way” of building companies has received increasing attention from global investors, also because of the capital efficient, “more prudent” way of building companies. Finally, also the exit market and fund performance figures encourage that the European market is indeed increasingly attractive.
A concluding personal remark. In my opinion, the time has never been better to work in and with European Venture Capital. Thus, I would encourage every founder to go out and seize the opportunity.
* Some of the underlying more granular data is confidential and thus, I did not share any pictures or graphs on this one.