European Venture Industry Slows Further In 1Q16 by PitchBook
Introduction
European venture investment continued to decline in the first quarter of 2016, not only due to intensifying macro and political concerns but also the slowing of the VC cycle worldwide. To some degree, European startups were insulated from the extremes of the cycle that is ongoing in the U.S., in terms of massively inflated late-stage activity, but they weren’t wholly unaffected. Although figures for VC investment in Europe-based companies may inch up a bit further even for 1Q, it’s clear that any potential hangover among VCs, on top of the array of other risk-inducing factors, will lead to a subdued year for VC activity across the continent. Further legislative efforts on a regional basis, as well as the still-apparent promise of the Capital Markets Union becoming reality, may shake up the current barrier-abounding environment to some extent. The boom of VC invested from 2014 through 2015 may also encourage future entrepreneurial activity as employees leave to found their own ventures. It’s also undeniable that quite a few venture firms are still seeing success on the fundraising trail, leading to substantial sums of capital awaiting deployment. Thus, when all is said and done, there are enough positive factors for European venture industry activity that this year may not see a dramatic decline in investment. Numbers will be subdued, relative to the last handful of years, as larger economic concerns remain to be resolved and the venture investment shakeout continues, but it isn’t so much a time for alarm as for shrewd caution.
Garrett James Black
Senior Analyst
European Venture Industry activity by both count and value slides
Overview
In some ways, top-level European venture trends mirror those in the U.S. currently. Especially when foreign investors are taken into account, there remains plenty of institutional capital looking for opportunities throughout the Eurozone, which is one reason why a fair number of late-stage rounds still closed in 1Q 2016. But it’s clear that as activity overall slides—particularly at the early stage—VCs are pulling back in the face of increased risk and consequently fewer worthwhile opportunities. As opposed to last year, this slide is now matched by a slowdown in euros invested, signaling increased perception of risk. On a quarterly basis, the number of completed venture rounds in Europe declined by nearly 23%, while total value returned to numbers more akin to those seen in 2014. Faced with greater macro uncertainties in addition to familiar challenges such as fragmented markets and regionalized access to capital, there are more obstacles for both founders and VCs than in the U.S. At the same time, the European startup scene did not overheat nearly as much, so any coming correction owing to that won’t be as significant a detriment. All in all, 2016 is shaping up to resemble 2012 in terms of activity.
As European venture industry activity plunges, France/ Benelux & GSA prove resilient
Rounds by region & sector
2011. An uptick in caution among VC firms could be one contributing factor, but it’s also highly probable that the Brexit wild card is spooking investors. Access to customers could be curtailed for at least some time, while regulatory burdens would remain unclear and difficult to navigate. We’ve seen a handful of VC surveys indicate talent retention and recruiting, should the U.K. exit the EU, could become more difficult, as visa processes get reworked. Last but not least, the implications for taxes, particularly on investment capital, remain unknown. Hence the decline in U.K. & Ireland startup financings, although it’s worth noting that on the mainland, venture investors are still plying companies in France/Benelux and GSA at fairly healthy rates, comparable at least to 2012 levels.
Spotlight: Nordics
Overview of European venture industry activity in the Nordics
Even removing Spotify’s massive late-stage financing from last year’s tally leaves the Nordic region at more than Eur 1 billion invested in venture rounds. Consequently, the Eur 230 million invested in the first quarter of 2016 isn’t as much of a slowdown in money deployed as it may appear, but rather slightly over historical quarterly averages. Activity is off pace, of course, as is the case across the venture industry worldwide. The fact the Nordic region simply saw less overheating is why the rate of investment hasn’t slowed quite as dramatically as elsewhere, although investor wariness is clear. That is also attributable to sustained local activity.
As the portion of overall activity with U.S.-based investor participation slid over the past few years, even though venture investment totals steadily climbed, regional investors ramped up correspondingly. Unaffected to the extent that U.S. VC firms have been by overly optimistic valuations, Nordic or even Northern and Western European VCs in general have found more cause to maintain their investing pace, if even at a slightly subdued level relative to the past three years. There was some minor swelling of investment sizes, as the increase in larger rounds indicates below. Given how interest in certain sectors—such as fintech—that have strong footholds in the Nordics has skyrocketed as of late, some degree of round inflation was bound to occur, particularly on a sector-by-sector basis.
The concentration of capital invested in software is to be expected, accordingly, although the success of biotechs in 2016 to date should be noted. Nordic fintech in particular has only grown more alluring to investors, given the potential inherent in the Eurozone’s fragmented payments market as well as strong institutional support, as evidenced by Nordea Bank launching an accelerator program for fintech startups last year. Such promising factors are why 1Q 2016 still saw a fair proportion of rounds at or exceeding Eur 5 million in size. Investors, particularly of the domestic variety, still are willing to offer substantial sums. Going forward, activity should proceed at a dampened level, similar to what we observed before the boom period of 2013-2015. Increased apprehension is here to stay, but positive factors such as the krone’s weakness and relatively strong Swedish growth will help assuage fears of broader economic troubles affecting local companies.
A temporary slowdown?
European VC-backed exits
Although conditions that have encouraged M&A over the past few years remain in place, volatility and uncertainty around growth forecasts have contributed to a slowdown in the buying of VC-backed startups in Europe. Corporate buyers look to venture portfolios for innovative technology and talent, not so much potential synergies that an established business would provide. But in the current environment, strategic acquirers are dialing back activity as they assess opportunities more carefully. Some of the more attractive opportunities in terms of innovation have seen their valuations climb, and, given how much they may be spending, might be just costly enough that potential buyers are taking their time to thoroughly vet prospects. As for IPOs, general uncertainty still plagues public markets, discouraging those looking to debut, although not nearly to the extent seen in the U.S.
Trending larger, but smaller opportunities remain
Fundraising
2016 started off strong for VC fundraisers, with Eur 3 billion collected across 17 vehicles. As the breakdown by size reveals, a bevy of large funds were responsible for the surge in capital raised, ranging from Index Ventures’ two vehicles to Creandum IV. As we’ve previously stated, this further testifies to limited partners exhibiting increased selectivity and bias toward entrusting larger firms with their money, particularly given their advantages in investing across fragmented markets. Accordingly, it’s important to note that even as the majority of commitments in terms of euros has been flowing to bigger and bigger funds, in last quarter alone nine funds of Eur 100 million or less were closed. There is considerable enthusiasm around seed funding opportunities in pockets around Europe, particularly as waves of talent that have benefited from the recent venture boom go on to start their own companies. Granted, past years have still seen a primary trend toward larger funds, which possess considerable advantages in a fragmented market such as Europe’s, but that doesn’t preclude seed funds from being able to find viable opportunities.
