European tech continues to grow and grow while spreading more evenly across the continent. Dealroom data shows the number of European unicorns founded outside of the UK, Germany, Netherlands and Sweden quickly increasing and even smaller towns are seeing early-stage activity pick up. It’s fair to say that the next great European company can come from anywhere, and is more likely than ever to not come from one of the more established hubs. VCs need to adapt to this new reality.
VC funds who are looking to invest in Europe can no longer just sit in an office in Mayfair and wait for founders to come knocking. The best founders from across the continent are now starting their businesses and raising their first rounds without leaving home and competition to invest in the best companies (from Europe and abroad) is fiercer than ever. VCs need to figure out how to cover Europe to find and meet the entrepreneurs where they are, or miss out.
How a particular fund decides to approach covering Europe depends on their size, resources and strategy. There’s no one-size-fits-all solution, but here are a few of the most common approaches I’ve seen used (in somewhat decreasing order of ‘level of commitment’).
Having an office in a city with full-time employees is as close as you can get to the ground, being seen as a local by founders in that country and hopefully becoming the first point of call of a fundraising company. It also allows for the most active participation in the local ecosystem; attending events, taking meetings in person and building a relevant local network (of potential partners, employees, co-investors etc.) to be able to add more direct value to a portfolio company that is also based there.
However, having more than one physical location comes with costs, regulatory issues, and logistical and cultural challenges that funds often seek to avoid. The need for in-person partnership meetings, investment discussions and simply the culture being set by the ‘home’ office has led to various funds struggling with the problems that come with splitting up the team and some funds being firm in their principle to never have more than one office.
In general in Europe it’s rare to see funds with more than two or three offices because the costs of splitting up the team quickly outweigh the benefits of being on the ground in many places. If we look at the 15 VC funds represented on the latest Midas List Europe (and exclude US offices): 7 only have one European office, 6 have two European offices and 2 have three European offices. Despite there being 28 member states in the EU to cover and these funds usually looking to invest in all of them, even having three European offices is rare. Clearly there isn’t a need to be on the ground in every market and “covering Europe” often involves just being on the ground in the hub cities.
Another thing we notice in Europe is that funds that started in smaller ecosystems will often be more likely to open up a second office in a larger hub city, while those founded in a larger ecosystem will be less likely to open up a second office (eg. if they started in London, they would be less likely open up a second office elsewhere). We see this in particular with the generalist funds that started in the Nordics like Northzone (Stockholm to Oslo and London), Creandum (Stockholm to Berlin), EQT Ventures (Stockholm to Amsterdam, Berlin and London) and Heartcore (Copenhagen to Berlin and Paris); growing out of their starting point to look to compete more on a pan-European level by also being in one of the larger hub cities.
This makes sense as there might not be enough activity in a smaller city to support a large VC fund that is increasing their assets under management and once they have built a brand and have good coverage of their home market, the funds are looking to follow the founders they want to back (and employees they want to hire) to the hubs that are attracting them. Even in the US we see this on a smaller scale with Sand Hill Road VCs opening up satellite offices in South Park to be closer to city-dwelling founders and employees.
For a new fund setting up in Europe, able to choose where to be based, this means it usually makes sense to set up in one of the major hubs as the primary location (usually London) and look to use a different strategy to cover Europe from there rather than look to launch multiple offices or start in a smaller city.
Employees focussed on particular geographies
As with most problems, a VC’s solution often involves just throwing bodies at the problem (in this case, Associates). Assigning employees to cover a specific geography is the second closest to the ground option as it allows for paying significant attention to a geography and having people travelling there regularly (racking up those air miles and Eurostar points), while avoiding the issues caused by having team members who are not based in the home office. We see more funds in Europe, particularly the large ones based in the main hubs of London or Berlin, take this approach. There’s a benefit to employee focus; having one person looking at a geography full-time often allows for better coverage that having a handful of employees each look at it part-time.
While in the US it’s common to see junior VCs assigned to a particular sector, in Europe we more often see them assigned to a particular geography. Often being hired explicitly to cover that geography for the fund, and often this will be the region they are a native of and speak the local language of. It’s not unusual to see job descriptions that state the fund is looking to hire a person who will cover DACH, cover Nordics etc. This person will then be responsible for spending time on the ground in that ecosystem, attending events, staying up to date with the local investors and startups and hopefully being the one who brings in the interesting startups from that geography to meet the Partners at the home office.
At Partner level, we generally see Partners have sector focus in their investments, rather than a specific geographic focus, as their role is more about adding board-level value, where sector experience can be more valuable, rather than sourcing new investments. However it’s not unusual to see a Partner who is French leading a disproportionate number of French investments, a Partner who is Swedish leading a disproportionate number of Swedish investments etc. because often there is a personal interest, and because companies from that geography might reach out to that Partner and actively choose to work with them.
For example, looking at the current Balderton team in London, each of the four Associate profiles mentions the geography they cover (UK/Germany, France/Spain/Portugal, France, Nordics) while none of the Partner profiles have any mention of covering a particular geography.
Scout programmes and venture partners
If a fund doesn’t have sufficient headcount to spend time in a geography, they might consider incentivising external individuals to help bring startups to them that they might not see otherwise. These people (generally not the fund’s payroll) are sometimes called Venture Partners (when they refer deals) or Scouts (when they invest on behalf of the fund) and can be remunerated with a fixed sum for an investment the fund ends up making or a share of the fund’s carried interest on a deal they sourced upon a successful exit.
There are plenty of people around Europe who are active in their local startup ecosystems who would be interested in a role like this as a way to support their local market, learn about investing (as they might not have the funds to angel invest themselves) and benefit if a startup succeeds without quitting their day job (often as a startup founder or startup employee themselves).
For the fund, they are increasing their deal flow while paying only for success with low overhead costs. Over time they are building relationships with the Scout to better understand the geography, evaluate new investments and occasionally might end up trying to hire them later on if they prove valuable. However there are risks involved in having someone representing your fund, and making investment decisions outside of the normal process, which is why often these relationships are kept hidden or the roles only given to people with very close ties to the fund already, such as former employees who move into a Venture Partner role when they transition out of a full-time role.
Recently more European funds have been more public and transparent about their use of Scouts such as Backed’s 24 Scouts (although nearly all are in their home market of the UK, with the goal of increasing diversity of deal flow rather than geographic coverage) who source deals for the fund and Atomico’s 12 Angels (9 of the 12 are outside of Atomico’s home market of the UK) who invest the fund’s money.
Limited Partner investments in other funds
Large, established funds have the significant advantage of having a large pool of capital available and greater legitimacy with institutional LPs when compared to an emerging manager without a track record who will often struggle to raise their first fund. As such, it can make sense for large funds to invest in smaller funds across Europe that invest earlier than they do as a way to do market research, gain earlier insider access to the best investments, gain more diversity in their deal flow (including geographic diversity) and hopefully also find a good return on their investment if the fund does well.
In Europe we saw this initially with accelerator programmes being backed by larger VC funds to support the development of the European ecosystem and to see more diverse companies, earlier than they would themselves. There is little competitive concern as the accelerators are investing pre-seed or at company formation, which is much earlier than the larger VC fund would make a direct investment. Examples include Seedcamp (funding from Index, ADV, Draper Esprit etc.), Entrepreneur First (funding from Greylock, Mosaic, Lakestar etc.) and The Family (funding from Index, Accel, Hummingbird etc.).
In more recent years, we have been seeing more examples of LP investments from large VC funds into seed funds with more typical VC investment models. An example would be Draper Esprit, based in the UK, who have backed seed funds in Denmark, Finland, Germany, France, Spain, Portugal and Turkey with the intention to better cover Europe. I would expect to see more of this in the future as a way for established VC funds to “outsource” their seed strategy and back funds across Europe as they grow to focus on later-stage direct investing themselves.
The success of this strategy depends on how much information the seed funds are willing to share with their LPs and whether this LP investment indeed leads to improved visibility and access for the fund. In any case, it does create an ally who is going to be willing to assist the fund and be a source of information. For a large fund this alone can be a good investment if it improves their own later stage investment decisions however, generally the idea that large funds are able to use a smaller fund’s formal access rights (such as pro-rata rights) to buy their way into great, over-subscribed deals is often overstated and shouldn’t be a driving factor for making an LP investment.
Data & AI
Using data for deal sourcing and evaluation can allow a fund to have better coverage across geographies with less people and for this reason, nearly all European funds are doing it to some degree. Every VC fund seems to have a data strategy but just as “AI startups” might say they’re using AI, only to convince VCs; VCs might overstate how they’re using AI to convince LPs.
At the simplest level, most funds subscribe to data tools such as PitchBook or CB Insights to keep track of (and profile) companies who have raised rounds in the sectors and geographies that interest them. For later-stage funds especially they can build a target list across Europe by keeping track of which companies have raised earlier funding rounds and then reach out to them without needing to be actively sourcing them where they are located (eg. a Series B fund’s targets are simply any company in Europe that the database shows has raised a Series A) and the quality of the data coverage for larger funding rounds is generally pretty good (although there are always significant companies that don’t fit the mould and would be overlooked by this approach).
For earlier-stage funds, there is often no previous funding round to qualify investments on, the data is less reliable and the signals are weaker but if used correctly, data can create an even larger advantage to discover companies earlier and in smaller ecosystems that aren’t visible to other funds who are relying on referrals, word-of-mouth and manual research. Being able to use data to evaluate companies faster (or at least triage to make better use of limited employee time) can further create a significant advantage. There are various different data sources that people use like tracking press articles from local tech blogs (each country seems to have their own publications of varying sizes), new AngelList profile creation, Twitter followers of central figures in the local ecosystems, LinkedIn changes of employees of the significant local startups, regional app store data etc. to flag startups that might be interesting to then have human team members take a look and reach out to them.
Two notable examples in Europe are InReach Ventures (with “DIG”, out of the UK) and EQT Ventures (with “Motherbrain”, out of Sweden) who have been very public about their goals of building an advantage over other VCs by using software to discover and evaluate new investments. Looking at their portfolios, it is clear they have managed to track down startups across Europe that they might not have seen if relying on more traditional methods.
Local networks, partnerships & friendships
The simplest strategy for a VC is to just be active in a local ecosystem in a positive, constructive and helpful way (regardless of the amount of time actually spent on the ground or how important a focus it is to them) to build general awareness and goodwill towards the fund. This involves regularly catching up with local founders and other investors, attending conferences, writing content, hosting local events and dinners, and giving time to help local startups even without having invested in them.
While serendipity plays a big role, it’s possible to be intentional with your time in such a way that sets you up for more success and makes it more likely that you meet and have access to the best companies in a certain geography. Building a strategy around a specific geography by identifying the key players, the best investors and best events allows a fund to use their limited time in the most impactful way. Smaller ecosystems especially are often not given much attention by the large London funds and appreciate it when an investor is simply willing to meet with local companies and help in any way they can. Even if this does not lead to an immediate investment, being top-of-mind and building a reputation of being helpful pays off in the longer term.
In particular it is the local founders who are the first point of contact for anyone looking to start a new company in a region and will refer these new founders to the investors they are closest to, are able to recommend and who are responsive. For example, if you want to know which startups from a country applied to the latest Y Combinator batch, you can often simply ask the founder of an existing YC company from that country as they will have been the one these founders reached out to for application advice and a referral before applying.
It’s not unusual to see a fund make their first investment in a country that’s then shortly followed by more investments in that country as they are then seen as a good target for fundraising by other local companies, their knowledge of the market and the quality of deals they see compounds from sitting on a local board, having other founders make referrals, or simply from the local press writing about the investment. I’m sure their inboxes suddenly see more emails starting with “I saw you made an investment in…” after the first investment. It’s also possible to demonstrate this level of interest without having had to have made an investment first.
Investment focus and specialisation
This isn’t really a solution for a generalist pan-European fund, but the simplest way to deal with the increasing geographic challenge in Europe is to simply narrow focus in other areas such as stage or sector. As the number of startups in Europe keeps increasing and a fund’s resources don’t necessarily keep up, it might make sense to simply shrink the remit to make it more manageable.
For the >$1bn funds in London, where the economic model is built on investing in the fund-returning outlier than can come from anywhere in Europe in any sector, it’s difficult to rule out a certain geography or sector. But for a smaller fund, having a focus on a particular sector makes it easier to build a brand and reputation around knowledge of that sector, making them the first choice investor for founders in that sector to work with regardless of where they are based. Funds like Point Nine (for SaaS, out of Berlin) or Heartcore (for consumer brands, out of Copenhagen) have built VC brands in their sectors and are able to attract founders from all over Europe easier than they would if they were generalists.
In the past we have often seen funds expand their geographic focus as they outgrow the startup activity in their home markets (as with the Nordic funds mentioned earlier opening up additional offices in larger ecosystems) but more recently with startup activity increasing all over Europe, we now sometimes see the opposite where a fund that was previously investing all over Europe is now deciding to only invest in one geography. Where previously there wasn’t sufficient startup activity in their home country to support building a portfolio and they were forced to look across Europe, today there might be a sufficiently large pool of quality companies in their home market so that they can now place their focus there.
These are just a few of the ways that I’ve seen VC funds cover Europe, if there’s anything that you think I missed, please let me know by leaving a note in the comments.