2016: The Year European Venture Capital Changed Gear
Despite the unprecedented macro and political uncertainty that has characterised 2016, this has undoubtedly been a very prolific year for European tech VC funding.
I compiled a list of new tech-focused funds publicly announced this year and, with a couple of weeks to go, the headlines are hot: close to €8.4B of capital was raised by 68 European funds, at an average fund size of €127m (I’ve ignored clean/bio/med-tech funds for simplicity).
A few take-outs from the data:
1. Growth! Since I’ve only been tracking new funds this year, I haven’t got a direct comparable for 2015. Luckily Atomico came to the rescue with their freshly released State of European Tech 2016 report, with data on new tech funds provided by Invest Europe (EVCA) up to 2015. After applying some adjustments to my data to make it as like-for-like as possible (e.g. they exclude Russia and Israel, they do not include all “growth” funds nor all corporate venture funds), in the most conservative scenario where I completely ignore corporate venture funds and growth funds, it looks like 2016 will be up at least 33% in terms of capital raised (well on pace with last year’s growth) and 10% in number of funds (reverting a trend that saw number of funds closed drop by 20% in ‘15), making ‘16 a record year as far as recent memory is concerned. And that is by excluding some funds that undoubtedly do ‘venture’, such as Idinvest Growth (backers of Onfido, Happn, Zenly), Nokia Growth (Clue, Drivy) and Santander InnoVentures (PayKey, Elliptic) which Invest Europe might actually have included. So the actual growth could be much higher.
Within the year, H2 appears markedly down compared to H1. One could infer that the Brexit referendum and US election had an impact on fundraising activity in the second part of the year. In reality Q1 & Q2 appear to be two exceptional quarters with the mega funds (>€250m) like Index Ventures, Nokia Growth Partners, Rocket, Accel London, EQT Ventures and Partech Ventures Growth together raising €2.6b in capital in the first half of the year. Excluding mega funds, H2 was only about 17% down in value compared to H1, and interestingly was up 46% in the sub-€100m category.
Fresh new funds raised by VCs is typically a strong leading indicator of the direction of the industry, as funds have to deploy capital within a specified period of time (3–4 years for first cheques). So, in a year in that will see capital invested at levels roughly on par with ’15, this is a great sign of things to come for European startups.
2. More late stage capital. Capital was raised at all levels and for all venture stages, not just at the small early end as it’s often conventional wisdom with European VC. The mega funds in particular raised €3.5b combined. These are the funds that can write €20m+ cheques at Series B-C-D and support companies until larger exit, a segment of the market in which Europe has historically lagged the US.
It’s great to see more capital becoming available at that level, to help European champions scale, with the welcome appearance of EQT Ventures as a 1st time fund in that category (and the largest raised in ’16 at €566m).
3. New breed of GPs. While the mega funds continue to raise larger funds, a new generation of 1st time funds is clearly emerging. 44% of the new funds announced were 1st time funds (30), representing 30% of the capital (€2.5b), with the average first time fund being €65m (excluding EQT Ventures mega fund, which would skew the numbers). This is a very important category as 1st time funds tend to come to market with innovative strategies and models (e.g. Entrepreneur First) , often tailored to their local market (e.g. Kibo, Daphni) or to the previous experiences of the GPs (e.g. BlueYard, EQT Ventures), new ideas and perspectives, filling gaps overlooked by established funds. Shai Goldman’s spreadsheet on sub-$200m US funds reports ‘only’ 25 1st time funds raised in the US this year. In that size category Europe has 27 already and, if one assumes that most if not all 1st time funds are in the sub-$200m category (maybe an incorrect assumption for the US), then Europe is likely to have produced more 1st time funds than the US this year, which would be remarkable.
I’ve written at length about 1st time funds and what they entail here, it’s great to finally see LPs embracing this category in Europe too. It’s also great to see successful entrepreneurs, executives and investors recycling their wealth and experience back into the ecosystem.
4. More specialisation. More funds are being raised to go after a specific opportunity or strategy: from Seraphim and OHB space-tech funds, to Entrepreneur First follow-on fund for deep-tech startups, to Anterra’s agri-tech fund, to Partech Growth fund, to Kibo and K Fund Spain-focused funds, to Barcamper in Italy, Daphni in France and Karma in Estonia. Stage, sector and country specialists are emerging, led by specialist managers with relevant experience.
This is fantastic news for European founders who can finally find the best-fit capital for their business or sector, while increasing their chances of success with the right support.
5. Democratisation. It’s clearly not just about the UK and Germany anymore. While this math is bit simplistic, as most funds can also invest outside of their home country, non-UK and non-German HQ’d funds accounted for c. 60% of all capital raised, with Sweden and France crossing the billion euro mark, Netherland, Finland and Israel each solidly in the €400–500m range and Southern-European countries like Italy, Spain and Portugal emerging with €200–250m in capital raised in each. Even Estonia and Bulgaria are coming up with their local VC funds.
This was the main theme that emerged from Atomico’s recent report published at Slush ‘16: capital is following companies from an increasingly diverse range of geographies and hubs across Europe. Great news for founders outside of the traditional tech hotbeds.
6. Government support. To the best of my knowledge, at least 26 out of 68 funds (38% by number and 45% by value) announced in 2016 had a national or European governmental institution as a LP, with the European Investment Fund (EIF) alone present in 20 funds (I believe in line with 2015). The recent announcements of a €1.6B pan-European EU-sponsored fund-of-fund programme and of a £400m top-up to the British Business Bank suggest there is more of that to come in the near future. This continues to be the reality of the fragmented European venture capital market. The bet remains that over time, as the industry continues to grow and mature, generating large and larger exits, attractive returns will eventually flow and attract private institutional capital from the likes of pension funds and insurance companies to the asset class.
This is already starting to happen at an accelerating pace, which is a great sign, with the recent news of Legal & General committing to Accelerated Digital Ventures, AP4 (Swedish national pension fund) investing in EQT Ventures, and Italian insurance group Generali in Earlybird Venture Capital most recent fund. It’s also worth noting that, out of my list, 40 funds raising a total of €4.6B do not have any government agency as LP, including 20 1st time funds, showing signs of European funds being able to stand on their own two feet.
Now onto more and bigger exits, please! If every fund manager is targeting to return 3x to their LPs, this vintage will need to return >€25b. That’s easily somewhere in the €100–200b worth of exits from the portfolio companies of these 68 funds over the next 5–10 years. While it certainly feels like a big endeavour, considering the pace of exits is now in the order of magnitude of €10b/year, the European tech industry has never been stronger and better positioned.
Onto an even greater 2017!
Originally published at sotp.me on December 13, 2016.
