US venture funds are coming to Europe and this time it is different.
The US funds’ foray into Europe is in full swing as Pitchbook’s data shows: Participation of US funds in European venture deals has grown from 8% in 2010 to 17% for early-stage deals and 23% for late-stage deals in 2019:
US funds have one crucial structural advantage that should allow them to come into Europe and take a very significant share of the market:
a technology-savvy and deep pocketed US limited partner base consisting of endowments, pension funds and very big family offices that allows them to raise big funds.
US funds have been active in Israel for much longer and according to Pitchbook participate in close to 50% of local funding rounds. A similar penetration of the European market is entirely possibly and would certainly be great news for European scale-ups that look to compete globally and need to raise capital in line with their ambition.
Past forays of US funds in the late 1990s were short-lived for several reasons not least because they found a largely immature European ecosystem. Almost all of them quickly retreated to their home turf. Today, this is maybe a different story. US investors find a fertile hunting ground:
· European founders are ambitious and well prepared. Many have cut their teeth at the same successful American businesses, such as Google, Microsoft or BCG that are also the training grounds for US founders. Many have lived in the US for work or study. They read the same blogs, have the same role models and similar ambition to their US counterparts.
· Increasingly European start-ups expand internationally early, rather than focusing for too long on their home market. And when they expand, they go after their largest market opportunity, generally the US. For obvious reasons, US investors can create enormous value by guiding such expansion.
· Operating in Europe is very cost effective. If one compares Berlin and San Francisco, developers cost half and office space costs one third. Moreover, the founders’ philosophy is still different, less WeWork and more scrappy start-up. Naturally, funding rounds can be smaller but still buy a similar amount of progress.
· Most active European VCs have been started only in the 2010s and partners have a very different mind and skill set than the ones US investors have met here in the late 1990s. Many are engineers by training and many funds are well staffed with former operators. Having worked with venture firms from both sides of the pond, I would say that today many European firms have nothing to envy the US firms, other than the senior level connections into the global tech giants that come from having backed them in their early days.
· While European early stage venture funds are numerous and good partners to work with, the continent lacks growth capital desperately. The ratio of growth capital to early stage capital in Europe is only 40% of that in the US. Therefore early US entrants such as Insight Ventures have made such a big impact.
· European legal systems have broadly accommodated the specific requirements of venture backed companies. In most European jurisdiction lawyers experienced in implementing technology financings are easy to find and cheaper than in the US. Having invested in more than ten European jurisdictions I cannot recall insurmountable challenges.
One major difference, however, remains. The US ecosystem is very centralized in the Bay Area and a few more recent hubs. Europe has always been very decentralized. Today, Berlin, London, Paris and Stockholm are the most significant hubs, but as Atomico’s recent State of European Technology report shows much activity is in other cities such as Lisbon or Barcelona, the headquarter of Glovo. To be a successful investor in Europe a US fund can locate in a nice city with a good airport to live and put in the airmiles. It’s never more than 2h by plane.