Against all expectations of a year ago, the European market continues its progress

The stampede of newcomers into European tech investment is accelerating. Who will be the winners?

Against all expectations of a year ago, the European market continues its progress. In fact, one could argue that the European market is progressing more quickly than its more mature US brethren. In Q1’17 the US market was down -11% by value according to PWC/CB Insights. By contrast, the value of European Large HTI Transactions (≥$10m) was 18% higher in Q1 ’17 compared to the same period last year.

This is not an entirely trivial assessment, and in fact many headlines are more bearish. “European VC activity falters once again in 1Q”, says Pitchbook; “When comparing Q1 2017 to the same period the year before, little has changed, though some metrics are slightly less favourable than in Q1 2016” states Crunchbase; “Europe deal activity continues upward march”, says PWC/CB Insights, even if their European data still shows a decrease in value (-8%) and an increase in the total number of funding transactions. Focusing solely on the Technology Market, Tech.eu calls it right, they say, “In terms of funding, the quarter was the second best we’ve recorded since we started tracking in 2013, surpassed only by Q1 of 2016, when Spotify raised €1 billion in convertible debt.” With this, Tech.eu saw a decrease of 3% total funding in Q1 ’17 compared to Q1 ’16, however, we at Go4Venture are interested in equity funding, not debt. Taking this into account we are in fact seeing an increase, with Q1 2017 as one of the best first quarters over the past couple of years for European Tech funding.

So why these various assessments? And why this continuing European tech investment market progress? And if this is cyclical, when is this going to end?

For regular readers of the Go4Venture Bulletin, you know our answer. After spending 2010–12 calling the end of the market, we have come to a different conclusion: where it used to be the preserve of specialist tech funds, the tech investment market is now of interest to all investors, which is the overriding factor supporting investment levels. We don’t believe this is a cyclical factor. We see it as a structural change which is changing (for the better) the perceived value of innovation.

As we’ve put it before, “everybody has become a technology investor” and this discovery process by a new set of investors is creating a profound change to the market:

· At the larger/later stage end, we see big public market investors invading the late-stage world, creating a price bubble which is now dis-inflating as companies come to public markets (latest victim: Cloudera, which priced 2/3 below the price of its D round two years ago).

· At the smaller end we see a number of investors which may be new to technology but use their experience to deploy in specialist verticals such as healthcare (e.g. Merieux Developpement), mobility (e.g. d’Ieteren) or smart buildings (e.g. Marcol). In short the market is lifted by newcomer investors, and these newcomers are learning the tricks quickly: it pays to specialise rather than play the cycle (a la unicorn).

To get a sense of how profound the market change is, have a look at the March 2017 crop of Large HTI investments: out of 26 March 2017 transactions, only 6 (about 20%) were led by traditional tech VCs. Instead:

· 12 were led by corporates, either directly or via their corporate venture arm. Note that Fosun, the Chinese conglomerate and investment company famous for owning Wolverhampton FC and Club Med, alone led 2 investments.

· 5 were led by family offices (btov Partners, Hi-Inov, Global Founders Capital, Invus Capital)

· 4 were led by private or growth equity groups (3i, BDO Development Capital Fund, NPM Capital, Tikehau Capital)

This move in innovation financing away from traditional VCs is actually good for the VC business or entrepreneurs. For VCs, this means more opportunities to refinance their positions. For entrepreneurs this means more options, more doors to knock at. Reaching out beyond the VC world is what Go4Venture’s syndication service is about, connecting companies with a strong lead VC with corporate and generalist financial investors. For more information about the Go4Venture service, click here or email michael.galvin@go4venture.com.

To read the full March 2017 bulletin on Go4Venture, with company profiles and analysis, click here.