The continued rise of European venture
Why Europe's VC fund ecosystem is compelling
I’ve long been fascinated with the European venture ecosystem. I vividly remember sitting in a library at the London School of Economics, where I did my undergrad, reading about the launch of Passion Capital’s new Seed fund in 2011. An operator like Eileen Burbidge, who was an early employee at Skype, starting a Seed fund focused on Europe? It was exciting — and it seemed like the dawn of a new era.
Many of my classmates, myself included, ended up going from university into banking or investing to start their career. Some of my LSE and Goldman classmates included founders who are now defining the present and future of European tech — Dave Nolan and Kevin Glynn from Butternut Box, Murad Saidov from Beamery, Przemek Gotfryd from Capchase, Estelle Merle from Topi, Natasha Ratanshi-Stein from Surfboard.
Many founders from the prior eras started their careers in banking or consulting. Not so anymore — much of the European startup ecosystem is now defined by alumni from top European companies, who skipped their stint in banking or consulting and instead joined the likes of Skype, Wise, Spotify, Revolut, Criteo, Delivery Hero, Deliveroo, N26, BlaBlaCar, Glovo, Adyen, Klarna, GoCardless, Zalando, Rocket Internet, Checkout, UiPath, Sorare, amongst others, to build their skills for a career as founders.
This influx of talent is manifesting itself across the continent. Europe’s diversity and proximity, with most major cities just a short 3-hour flight, means that unicorns are springing up in all corners of the continent. 124 cities from 28 different European countries are home to close to 400 billion dollar plus companies . A few of Europe’s biggest companies — UiPath (Romania), Wise (Estonia), Klarna (Sweden) — haven’t come from Europe’s traditional tech hotspots of London, Paris and Berlin. This phenomenon has precipitated a rise in regional funds and angel investors focused on helping to build out these ecosystems.
Why Europe, why now
Our interest in Europe’s developing VC fund and startup ecosystem is perhaps because we’ve had a front row seat seeing the maturation of this market as investors in a number of European funds and companies over the past 10 years.
We recently invested in Bunch, who are building the infrastructure to enable companies, funds, and angels to efficiently invest into European startups. So we’ve seen first-hand the increasing interest in angels and funds participating in the European startup ecosystem.
We’ve also seen a number of companies we are involved with — iCapital (a large and growing team across Europe), Carta (acquired Vauban and Capdesk), Republic (acquired Seedrs) — move into Europe in a big way. As I’ve said before, it now appears to be the time that alts are going mainstream in Europe.
We are definitely not the first to take stock of the rise in European tech, but we have certainly taken notice.
The European venture market has come a long way in the past 10 years. And the next 10 appear poised to be even more promising. Market dynamics suggest that Europe should continue to grow into a thriving startup ecosystem for founders and funds alike, and make for a compelling opportunity for funds, particularly early-stage and emerging managers, to outperform.
Europe has a number of fundamentals in its favor: leading research universities, a shared value system, engaged policymakers, embedded transport infrastructure and strong talent.
Investors have clearly seen the opportunity. There’s been a 10x increase in investments in Europe and Israel from 2015-2021 (Dealroom). Yes, late-stage (Series C and D) valuations and rounds sizes have decreased pretty significantly in late 2022 and the same should be expected for much of 2023 (Cherry Ventures). But that shouldn’t dampen the overall enthusiasm with the European market.
It’s no secret that the European venture ecosystem is an exciting market — and many investors have shared why they believe this to be the case. They’ve voted with their feet — US funds like Sequoia, Lightspeed, and others have put teams on the ground in the past few years.
LocalGlobe, a fund that has massively contributed to the ecosystem’s rise and backed a number of Europe’s top companies, has coined the term “New Palo Alto” to signal that there are many great companies to be built within a 4-hour train ride of London (Dealroom).
Atomico’s State of European Tech report took stock of the past few years of European tech. 2021 saw the European tech ecosystem hit record breaking levels of $100B in funding. 2022 ended the year down from 2021, but it’s worth noting that the progress from even just 10 years ago, which 3 new unicorns were minted in Europe and Israel in 2012, 2021 saw 130 unicorns minted (1 every 3 days) and 2022 YTD saw 65 unicorns created (Dealroom).
New Palo Alto is roughly on par with other major tech hubs — New York and Beijing — in terms of enterprise value and number of unicorns. The proximity to other cities and abundant transportation options ease the way for founders and VCs to travel to other startup hubs.
Furthermore, governments are strongly supportive of tech and science. Governments are providing assistance in the form of startup loans, grants, fund of funds, R&D, tax incentives, tech visa. The European Investment Bank (EIB) recently committed €3.75B to a fund dedicated to investing into European late stage venture funds. European leaders, such as French President Emmanuel Macron, have pledged support to the ecosystem as well — the French government has invested €11B of public funds aimed at financing innovative fields like AI and quantum technologies, with an additional €5B earmarked for the second phase of his France 2030 program. France is also exploring the creation of a similar system to the UK’s Seed Enterprise Investment Scheme, which offers tax breaks to startup investors.
Why is Europe on the rise?
Here are a few trends that suggest European tech is on the rise and why LPs should be looking to allocate to European VC funds:
Proximity
US investors rarely hesitate to hop on a plane to NYC from SF. That’s a 5+ hour flight. Imagine only having to fly from SF or NYC to Austin to reach virtually any startup ecosystem within Europe. The majority of European tech hubs are but a 3 hour flight away.
Perhaps it’s not a surprise that the number of cities that are home to unicorns. 124 cities from 28 different European countries have produced 360+ unicorns. Some of Europe’s biggest companies (UiPath, Spotify, Klarna, Wise, Getir) have come from cities other than London, Paris, or Berlin.
What it means: Regionally focused funds at early stage, particularly Seed, should do well, particularly in the less developed areas of the European ecosystem, like Eastern Europe. These regional funds can be feeders into larger funds at Series A. Some examples of this are the likes of Cherry Ventures, which has built a strong brand in the German ecosystem at Seed and has built a portfolio of many top companies in the German startup ecosystem. The best way to access these regional funds in a risk-adjusted way may be to invest via a fund of funds strategy across major markets and emerging markets (Eastern Europe, Nordics, Southern Europe) within Europe.
Maturation
The European ecosystem is beginning to form alumni networks with early employees from top companies in the region spinning out to start new companies. There are a number of strong alumni networks that have developed a next generation of founders. We are also seeing an increase of US startup talent move to Europe and join top companies. Choco’s COO, Kevin Huang was one of the earliest employees and a senior member of the team at DoorDash. Sorare’s Head of People, Kiana Davari, was the first people hire at Lyft, where she helped scale their team from 40 people. These are just two examples of strong US talent moving to Europe to join exciting companies, but I think we’ll see this happen more frequently as Europe builds its startup ecosystem and offers a great place to live.
What it means: As we have seen happen in the US, we’ll see well-trained talent from top companies in Europe spin out to start new companies. We’ll also see increasing angel investment activity from operators in Europe who will continue to build out the startup ecosystem by investing into companies where they can add value and leverage the newly available investment infrastructure to run SPVs built by the likes of Bunch, Vauban, and Odin. A thriving ecosystem of talent spinning out of larger companies and a strong angel ecosystem should serve to benefit early stage investing — even creating a new crop of emerging managers over the next few years. Yes, it might become more competitive for Seed funds or round sizes may become a bit bigger, but there’s still ample opportunity for funds focused on early stages to back and build companies with fantastic talent.
Talent
Europe is flush with developer talent. The continent is home to almost 50% more software developers than the US (6.1M devs in Europe vs 4.3M in the US). Perhaps it’s not a surprise that 3 of the world’s top 5 computer science programs (Oxford, Cambridge, ETH) and 31 of the world’s top 100 programs are in Europe.
What this means: European startups have access to strong developer talent. This should help companies build products that matter. Given Europe’s talent pool, it would also not be surprising to see Europe become a leader in categories like AI.
More with less (capital efficiency)
European startups are often more capital efficient than their US counterparts. Historically, it’s taken European startups roughly 50% of the capital required to reach unicorn status.
What it means: Funds who invest early into European startups should benefit from lower levels of dilution to their winners, which should help drive stronger returns. Small funds will stand to benefit even more, as less dilution means that initial investments should see even higher multiples on invested capital provided that the outcomes are large enough.
Reasonable valuations
Historically, Europe has had meaningfully lower entry valuations at seed stage than the US. UK’s average pre-money valuations come in at $4.2M (vs. $12.5M in the US) and average round size coming in at $1.1M (vs. $4M in the US) (Multiple Capital).
What it means: With lower entry valuations and less dollars raised, early-stage funds in Europe have the potential to generate strong returns, even moreso as there are more $B outcomes in Europe. Data from Dealroom on the “New Palo Alto” region shows that NPA is roughly on par with major tech hubs like New York and Beijing in terms of total collective enterprise value and number of unicorns. Lower entry point and smaller round sizes pave the way for strong outcomes with top performing companies that will drive funds.
Active at Seed
Europe is the most active region at seed stage in the world. As of a year ago, almost 40% of all global seed stage capital is raised by European startups.
What it means: Europe’s seed stage ecosystem appears to be thriving. There should be continued interest in European seed, which should be a boon for early-stage managers in Europe. There should also continue to be increased interest from both local and international VC funds at Series A given the growing size and scale of the seed opportunity in Europe.
Top VC hubs emerging
European countries are emerging as top funded VC hubs. The UK, Germany, France, and Sweden are emerging as hotspots for VC funding. Dealroom data shows that these four countries are amongst the top countries worldwide for attracting VC dollars.
What it means: More capital will flow into mature ecosystems across Europe, particularly at growth stage. If seed investors can get in early enough to emerging ecosystems beyond the mature hubs in Europe, then they should see follow-on capital from regional European or US-based funds as Europe’s entire ecosystem matures. This hypothesis has been proven out by the European Investment Fund, where data from their fund performance shows that 50% of their 50 best performing funds were funds managed by emerging managers. And 20% of those fund managers were located in emerging geographies within Europe.
Government support
Europe is home to strong governmental support for startups. Many European governments want to enable tech to thrive — and they are putting their money where the movement is, as discussed above.
What it means: European governments appear to be supportive of growing the startup ecosystem in the region. This is a positive sign for startups and VCs alike, as it means more capital flowing into the region to help it grow.
So what does this mean for allocators?
Investors should be getting exposure to Europe, particularly those from the US. It’s a way for US investors to diversify away from the US tech ecosystems and benefit from some of the compelling dynamics that European tech offers.
FinTech, climate tech, and deeptech represent opportunities for European funds and companies to show their talent. Europe, and specifically London, is home to one of the strongest financial services ecosystems and regulatory environments. Climate friendly regulators in Europe also make climate tech a compelling opportunity. And Europe is home to a number of universities that are amongst the best in the world in computer science, so deeptech and AI should continue to thrive in the region.
Is there capital to deploy into the increasing influx of European startup talent? You bet. European VCs have raised more fresh capital than ever from Q3 2021 to Q2 2022 (Dealroom).
And there’s good reason for the capital that’s been raised. Europe has rivaled other major hubs in the world in terms of number of unicorns created.
Europe is at the precipice of an incredibly exciting time for the future of its tech ecosystem.
What are top European allocators and LPs thinking?
We asked some of the top allocators in the region who are active investors in funds as to why they are so excited about the European venture and startup ecosystem.
Rene Andres, European Investment Fund (EU / EIB backed VC Fund of Funds)
Mario Goetze, Companion-M (LP in a number of European VC funds and investor in a number of European startups)
Joe Schorge, Isomer Capital (European VC Fund of Funds)
Levent Altunel & Enrico Ohnemuller, Bunch (leading infrastructure provider for VC funds and angels)
Andreas Munk Holm and David Cruz e Silva, EUVC (syndicate for LPs to invest into European VC funds)
Nicky Sugarman, Stanhope Capital ($30B AUM multi-family office)
Mark Schmitz, Equation (European VC fund of funds)
Rene Andres, EIF
Why are you excited about the European VC ecosystem?
For many years, the percentage of people in Europe seeing great opportunities for becoming entrepreneurs is increasing. This, paired with a higher ambition level of founders building impactful and large businesses and a great European talent pool, offers a great investment opportunity. European VC is becoming more and more a sizable "assets class," also fueled by some large-scale success stories from Europe (btw: returns of VC investments are totally on par with the US). However, there are still a very limited amount of, and not yet not significantly growing, LPs in Europe actively investing in VC. This is to me one of the most untapped and overlooked opportunities for actually any investor.
What types of funds/strategies are most exciting to you right now and why?
Very early stage (i.e. pre-seed/seed) strategies, sometimes focused on certain verticals, run (i) by former entrepreneurs/angels or (ii) "misfits" / spin-outs of teams and solo-GPs of often larger VC firms. These are mostly first-time or emerging managers operating < €60M funds.
Established VC firms that (i) have managed to keep an entrepreneurial mindset in the firm (e.g. new partners are being built and others stepping down to make room for the next generation) and (ii) have a strong ambition level to help to build large scale and impactful business not just for Europe.
New / different approaches to VC, e.g. specialized VC secondary funds, fund incubation strategies, angel co-investment structures, or other new approaches to investing in entrepreneurs.
What's your prediction for European VC funds in the next few years?
Tough fundraising environment (i.e. LPs reducing and slowing down investments in VC funds), probably leading to some sort of consolidation with some VCs disappearing over time. But overall, great opportunities continue to exist, as long as you are long-term in the market ;-).
Mario Goetze, Companion-M & German professional footballer (German National Team & Eintracht Frankfurt)
Why are you excited about the European VC ecosystem?
Europe in general has great potential. American VCs are entering Europe more and more due to opportunities (attractive conditions), which creates the possibility of big synergies, but also competition with American and European VCs. Overall, this is good signaling that the market is getting stronger.
What types of funds/strategies are most exciting to you right now and why?
Deeptech, HealthTech, Cyber and ClimateTech as sectors are very interesting at the moment; I like emerging fund managers with smaller fund sizes who are more flexible / adaptable, also creating a special domain expertise. They are somehow complementing the already existing fund ecosystem.
What's your prediction for European VC funds in the next few years?
Emerging and single GP funds are on the rise. A fragmented Europe still a certain challenge due to culture and language in comparison to U.S. or China as an economy. Diverse teams and good talent in Europe can be an advantage.
Joe Schorge, Isomer Capital
Why are you excited about the European VC ecosystem?
It continues to grow in depth, maturity and sophistication. The world needs technology solutions, and Europe’s technologists and entrepreneurs are delivering, which is increasingly powerful due to a funding and company building environment that is also going from strength to strength. The past 12 years have been a strong upward ride where each year sets new records. Even though 2021 was abnormally high, 2022 continued in the growth curve set by the prior 10 years. So now in early 2023 we’re looking at a new crisis in banking, however, that is a capital market issue not affecting the operational strength we observe in companies, particularly the more defensive areas like B2B, deeptech, etc. Also we’re pretty used to surmounting crises now — we had Covid, Brexit, stock market crash in the last few years alone. It never ceases to amaze me how fast our VC and founder partners work to understand, adapt and move forward in these difficult situations. There is an amazing talent base or hard working people in the tech community and they underpin my continued excitement — the world needs innovation and technology, and entrepreneurs find a way.
What types of funds / strategies are most exciting to you right now and why?
I like small early stage funds, those on the front lines with founders. Funds of less than €100M in size are able to put the first professional money into companies at a time the first products and customers are coming together. This means low valuation entry points and high potential multiples, but also working with companies at the time VCs can add the most value, from setting strategic direction, early hires, product road mapping, initial customer acquisition, etc. When small funds get a large outcome, it delivers high multiples back to LPs. The data is clear for a couple decades in both the US and Europe, when you read Cambridge Associations and EIF publications — small funds outperform, and in VC, emerging managers tend to outperform. It is counter-intuitive perhaps, and hard for institutional investors to access, but that is where the highest returns are statistically most likely to be found in VC. Not surprisingly in our own set of 67 fund investments, the highest performers that have broken 10x on a fund level are all sub-€100M emerging managers.
What's your prediction for European VC funds in the next few years?
The market is maturing and getting more competitive. That is good. Investors and companies benefit. It means more clear VC leaders will emerge and, at the same time, some firms will exit the market quietly and slowly as they cannot raise new funds. There will continue to be innovation, i.e. new firms formed at a high rate around people spinning out of larger firms, angels going pro, etc. Market sophistication will increase, like more secondary liquidity providers entering, and groups like us will do more in this area. And at the strong foundation of it all, European founders continue to do more with less, which puts them in a good position to prosper through cycles.
Levent Altunel and Enrico Ohnemuller, Bunch
Why are you excited about the European VC ecosystem?
Europe has matured significantly over the last few years. If you take Germany, for example, 10 years ago you could find a handful of active funds, and even fewer globally leading German tech startups. Fast forward to today, there are hundreds of institutionalized investors, and dozens of unicorns and soonicorns, proving that you can build big tech companies in Germany and even more in Europe. This has also pushed a lot of US VCs to cross the Atlantic and increase their presence in Europe, with household-name US VCs even doing pre-seed investments in Germany. If we are able to continue on this trajectory, I believe that it won’t take long to close the gap. And we at Bunch help accelerate this by making professional investing more accessible.
What types of funds / strategies are most exciting to investors right now and why?
I have to say that I am a huge fan of people taking risks, whether it is building their companies or their own funds. The wave of emerging VCs here in Germany gets me incredibly excited about what’s to come for many reasons:
First, emerging VCs are more comfortable with doing investments that larger VCs would pass on. This means a lot of businesses that deserve funding but may not fit the ICP of traditional players are able to prove themselves. This in turn can lead to outsized returns, as the largest outcomes generally derive from contrarian strategies. There seems to be the phenomena that VCs do their best deals in the first 10 years of their investing career, which seems logical to me — no biases, higher willingness to take risks and a stronger network among other up-and-coming entrepreneurs.
Second, emerging VCs will lead to a more diverse tech ecosystem. There is a certain bias in people that they like people more if they are more similar to themselves (the “mini-me” bias). Emerging VCs come from more diverse backgrounds, and in turn will also have a higher likelihood of backing diverse founders. This has lots of positive effects for founders, the tech ecosystem as a whole but also society at large, as the tech industry is still the fastest way of social mobility.
Third, these emerging VCs not only have different cultural backgrounds, but also professional backgrounds, having been operators themselves in various industries. This also means that these investors can help founders in other ways: operational experience, industry-specific knowledge, customer introductions, etc. This will lead to better outcomes for startups.
We are working hard to help these emerging VCs to start out by making smaller fund sizes financially viable. That’s why our purpose is to empower those who dare to take risks.
What's your prediction for European VC funds in the next few years?
There are only few VCs in Europe that have a comparably strong brand as some of the large US funds. However, I think a few European players are emerging that will rival those to some extent. I hope that more and more of the later stage rounds will be led by European funds, which will continue to strengthen Europe as a startup ecosystem.
At the same time I think that emerging VCs will make things more competitive for VCs. While top teams considered raising from the top 10 funds over the last years, I am convinced that successful emerging players will be able to mess with this going forward. While some “old school” VC funds will struggle to stay relevant, it will be beneficial for the ecosystem as a whole.
Andreas Munk Holm and David Cruz e Silva, EUVC & Isomer Capital
Why are you excited about the European VC ecosystem?
Despite the macroeconomic headwinds, European VC is in an incredibly exciting place right now. We’re seeing a wave of founder/operator-led funds, many Eastern European ecosystems are witnessing their first wave of exited founders coming back as angels to support the ecosystem and the more mature ecosystems are having their second and third waves. There’s a distinguishable difference between the sophistication level of the European venture ecosystem today and that of just five years ago. So as an LP syndicate bringing angels together to back the best funds in Europe, if we’re not excited now, I don’t know when we would be!
On a more macro-level to readers that don’t think about Europe all day, I would emphasize that Europe has all the fundamentals for a strong tech ecosystem. Together, the 44 countries make up the largest economy in the world, 80% of the adult population attain upper secondary education or more. We’ve got 6.1M developers vs 4.3M in the US. On top of that, our founders can leverage the comparative advantages of the different geos of the continent and our investors buy at prices significantly lower than their US counterparts.
However, Europe is an extremely fragmented market with startups born in every city — 30 cities have over 50,000 developers with unicorns appearing from places as far flung as Romania. Add to this that we’re witnessing a boom in entrepreneurship leading startups and VC funds to pop up everywhere. This fragmentation makes Europe super hard when it comes to venture. The non-public and network-based nature of the industry applies here as much as anywhere, making it incredibly resource intensive to continuously source and analyze the best opportunities across the continent — deals that all move fast, in private and require specialist expertise and networks to analyze.
What types of funds / strategies are most exciting to you right now and why?
Europe being fragmented, the saying that small is beautiful is even more true in European venture than it is in most other places. Building a brand, network and organization to dominate one niche vertical or geo is much more feasible than building a pan-European, industry agnostic behemoth. So most often, the small, niche focused players are the ones we typically get most excited to see. And remember, in Europe, being small is much smaller than it is in the states — we’re talking sub €100m, and often much less.
Loving small typically also comes with loving emerging managers — and as the reader would likely know, emerging managers come in as many grades of quality as Mr Grey knows shades of grey. But finding an emerging team that is just waiting to be fueled with ten or twenty million and unleashed on their vertical or geo is nothing short of beautiful.
Given the complexity of Europe and its fragmented nature, I would be remiss not to mention fund of fund strategies. It is not coincidence we’ve built an LP syndicate that allows investors to more readily diversify their fund portfolio — even the good and dedicated picker would often be better off with a wider portfolio in Europe than they would in other geos. And if you’re not ready to spend the time and resources to truly understand and cover Europe, a fund-of-funds strategy is much more relevant in Europe than you’d maybe normally consider it.
What's your prediction for European VC funds in the next few years?
It’s not a rarity to hear about managers putting their fundraise on hold these days. And just as anywhere, we’ve had too many tourists the last couple of years and vacation time is over. And that’s a good thing.
I could fear that our industry’s flight too close to the sun will have a slightly longer negative impact on the LP environment in Europe, making the many LPs that did their first VC investments in the last two or three years withdraw from the asset class. Which is a shame, ‘cos in many ways, these LPs acted as much out of hubris as the VCs they backed.
Luckily, we’re seeing funds being raised at smaller targets today and thought leaders on the continent promoting this approach. Stride, Credo, Angular and Seedcamp have all been vocal about their dedication to staying small and hopefully many will follow their example.
Nicky Sugarman, Stanhope Capital
Why are you excited about the European VC ecosystem?
Globally, venture is an attractive place to be investing right now, and Europe is certainly a key part of this. We have seen a steady stream of sizeable exits in the region, and an even longer list of companies ready to exit when the macro picture improves. As well as acting as proof points for the ecosystem, we have repeatedly seen how one success often provides the roots for others, as well as minting new angel investors, which helps spin the virtuous cycle. Europe has typically traded at a discount to the US, and with more US funds coming over here and investing at Series A and later, investing in a local early stage fund provides an attractive place to gain exposure to the next generation of leading companies coming out of Europe.
What types of funds/ strategies are most exciting to you right now and why?
Early stage remains the place to be, as well as where the competitive environment for local GPs is best compared to later stages where international investors start to pay more attention.
What’s your prediction for European VC funds in the next few years?
Continued growth of the asset class and finally some meaningful interest from institutional LPs in Europe and the US as recognition for the returns being driven by the region and the opportunity set is represents.
Mark Schmitz, Equation
Why are you excited about the European VC ecosystem?
The best years are still ahead. We have reached critical mass in terms of serial entrepreneurs, angels, and the VC ecosystem is more mature than ever. Europe is fragmented, yet also diversified in terms of high-class academic / research institutions and founder DNA — this will prove invaluable during a difficult market period.
What types of funds / strategies are most exciting to you right now and why?
We focus on early stage with an emphasis on pre-seed and seed. We also specialize on emerging managers. The quality of fund managers recently starting funds is impressive across the board, from former unicorn founders to angel syndicates institutionalizing to Tier 1 spin-outs. We are all over this category — and also appreciate that it's a more diverse cohort compared to established peers.
What's your prediction for European VC funds in the next few years?
The fundraising environment has certainly become worse, but for the best-in-class, we continue to see oversubscribed funds on the back of great performance. Overall, we expect more specialized managers coming to market and also regional champions emerging, while the pan-European platforms that accomplish to build a strong brand will make Series A+ more competitive than ever before.
Europe hasn’t yet hit its heyday
European venture is at quite an interesting time in its development. Yes, there are macro and demographic issues in the region that are worth monitoring, but the trend is our friend with the European ecosystem. Strong talent, an increasing number of successful companies, a capital efficient mindset, meaningful governmental support, and close proximity are ingredients that make for a recipe of success.
The past 10 years have laid the foundation for quite an exciting next 10 in Europe.