Victor Basta

European tech has funding black hole

Blogs
3 mins read

While Europe’s start-up ecosystem has grown by leaps and bounds in the last decade, it risks being choked by the lack of later stage financing, which has hardly budged in five years. The result is a yawning – and growing – chasm between the number of ‘grown up’ European tech companies eligible for late stage growth money and the capital available in Europe to back them.

In 2016, the US saw 462 Series C and later rounds, but there were only 36 in Europe. At the Series A level, the US had four times as many funding rounds as Europe. Magister Advisors believes this gap is not only hurting the growth prospects of European tech, but also opening a gap in the funding market, which new funds could fill profitably.

By comparison, the US funding market – whilst often brutal – has capital available at all stages.

Analysis suggests a clear ‘rhythm’ to the US funding market:

  • Over the past five years, about 1000 companies received Series A funding each year
  • Natural selection means about half of these raise a Series B round, while a quarter go on to a Series C round. The market may work ruthlessly, but at least it works logically.
  • Finally, 100 to 150 companies each year make it to a Series E round or later, representing a mix of pre-IPO ‘home runs’ and those running expensively towards mediocre success.


    • European funding is transformed, but still more to be done

  • Whilst European funding has transformed, later stage rounds still barely exist.
    • The number of European Series A rounds has increased from 100 per year in 2011 to 250 in 2016, indicative of the support which technology companies are receiving across Europe.
    • The jump in available funding is fuelling a generation of founders to build disruptive, often scalable, companies that are competing internationally from Europe.
    • Given Silicon Valley is at least 40 years old, for Europe to reach 25% of the US level of Series A financings in five years is extraordinary.

    However, all the energy driving the start-up eco-system is slamming against a wall of (non) funding beyond Series B rounds.Unfortunately, this lack of later stage funding is chronic. Put simply, the later stage funding market in Europe barely exists. Moreover, it is not developing, even as European companies are scaling quickly and internationally.Why is this happening?

    There are several possible reasons:

    There aren’t enough companies deserving of Series C rounds.
    The pool of qualified companies in Europe remains shallow. However, companies are now scaling faster and this ‘lack of supply’ will change in a couple of years. As it takes that long to raise a later stage fund targeting these companies, it is arguably already very late to address this impending increase in the number of quality companies.

    European companies get sold much earlier than US companies.
    Undoubtedly this is true; European companies are snapped up at earlier stages of development than many US competitors. Because of smaller funds and a more cautious approach, many European investors value a €100million exit in the same way as US investors would view a $250m exit. But it’s not as simple as ‘lesser ambition’; many European investors have seen companies fail as they internationalise, preferring to take the money and leave the buyer with that risk.

    Capital efficiency is much stronger in Europe than the US, so European tech companies need less.
    Capital efficiency is the discipline of using less capital to achieve more. The discipline from European investors is different and often more intense than US VCs. It has led to European ‘unicorns’ averaging $300m of revenue, while US unicorns run at $100m+.However, we are talking about Series C rounds, not very late stage capital.Capital efficiency, in our view, reduces the requirement for very large Series D or later rounds, but it doesn’t eliminate the requirement for a functioning Series C capital market.

    European tech CEOs don’t have the experience to justify later-stage money.
    This is changing quickly. A decade ago, hardly any European tech CEOs could build the companies and spin the funding stories required to raise Series C rounds. Today, we reckon that more than 25% of European tech CEOs we meet are qualified and able to attract these kinds of rounds.

    Over the next five years, many European companies will qualify for Series C rounds to accelerate their push to become global businesses. We believe they may end up having to grow much more slowly. With the years and billions invested in motivating European founders to take huge risks now paying off, it is nothing short of criminal that the lack of later stage funding now threatens that success.

    Author profile:
    Victor Basta is managing partner of Magister Advisors

    Funding start ups
    Technology funding
    http://www.magisteradvisors.com