The Year in Review: People & Purpose at Earlybird
As 2019 draws to an end, we want to take the opportunity to give you an insight into what has driven us here at Earlybird over the past year. We start off by touching on our convictions around People and Purpose (“the Power of And”), provide you with an update on our investments and portfolio this year and conclude with an overview of the VC ecosystem in 2019.
“THE POWER OF AND”
The Power of And is about bridging the gap between social impact and financial returns: We are a financial investor first and foremost. Our investment activity encompassing European technology leaders reflects this ambition to deliver superior returns to our limited partners. At the same time, we take our impact on the world around us seriously and strive to make a positive contribution. More than ever before, this year was driven by efforts to bridge these two ambitions. We did so by kickstarting two major initiatives, which will shape our firm in the years ahead: driving people and purpose. We deeply believe that these initiatives complement our mandate to provide pan-European venture capital to outstanding teams. Below, we provide a summary of two main steps towards realising this idea of the “Power of And”.
1. People
Talent is the single most important factor for building successful companies. This shouldn’t be a surprise to any entrepreneur — nor investor. Getting talent strategy right will not only make for healthier companies, but it will benefit just about every stakeholder involved, both from the perspective of an institutional investor but also the employee on a very personal level. That’s why our colleague Julius dove deep into what drives talent attraction and retention for early-stage companies in a joint study with Kienbaum (link).
As a VC, we live off identifying and investing in non-conformist (“disruptive”) ideas. Both our firm’s experience and research show that diversity in teams contributes to non-conformist company DNAs. So, besides getting incentives in talent management right, we want to work with the most diverse set of founders. In particular, we believe in the chance to change the narrative of migration in order to facilitate a more diverse European tech ecosystem. Consequently, we worked with a strong partner network — ranging from ReDi School over renowned law firms to management consultancies, research centres and other VCs — in order to establish a 1-year, pro-bono accelerator program specifically tailored to entrepreneurs with a migration background. The program will kick off early next year and we are particularly excited about proactively supporting diversity among founders.
2. Purpose
As a leading European VC with a portfolio worth more than $1.5bn, we have the unique chance to leverage our assets in order to make a positive contribution to humanity. This opportunity shapes our purpose: We realise that our access to analytical insight, financial resources, our strategic influence and public voice gives us meaningful levers but also an obligation to use them for the benefit of society. At the same time, it’s our nature as venture investors to always look for positive outlier financial returns. Now, these thoughts led us to establish our Earlybird Climate-Tech Practice. The climate crisis demands immediate response on a large scale and we believe technology can be a core contributor to solving this crisis. This is the largest challenge humanity faces in the 21st century and consequently provides the highest ethical but also entrepreneurial opportunity one can think of.
Beyond adapting our investment strategy by founding our Climate Tech Practice, we actively reduced our gross and net emissions on a firm-level and, importantly, became personally engaged: our partners Fabian and Ferry Heilemann co-founded “Leaders for Climate Action”, a movement of close to 200 CEOs in European tech (check it out here). Don’t get us wrong — we do not consider ourselves a role model nor did we succeed in bringing our gross emissions to zero (we invite you to soon track our annual CO2 emissions on our website). If you would like to learn more about how we strive and struggle to make a positive impact on the world around us, please see Paul’s post on the topic.
DEVELOPMENTS AT EARLYBIRD
We were pleased to widen our pan-European footprint through investments in a variety of promising sectors. Within our Digital West Fund, we were lead investors in eight new, future-oriented companies. For example, Getsafe, the AI-powered insurance company, raised $17m in a Series A funding round led by Earlybird (see press release here). Aiven, the operating system for the future of cloud computing was supported by Earlybird as a lead investor within a $10m Series A (see our investment thesis behind this round here). Another major investment was the $4m Seed financing round in DeepCode, that has developed a software that helps to make developers more efficient by supporting them to write better and more secure code (see article here).
The Digital East Team has raised its second fund, continuing to back potential global winners from Emerging Europe. The team already made two new investments: Picus Security, the European leader for breach and attack simulation software; and FintechOS, an end-to-end rapid digital application development for financial institutions. We are also proud to continuously back our existing portfolio, investing in several follow-on rounds this year. For example, UiPath, the Romanian unicorn which raised its first outside capital from Earlybird’s Digital East Fund, has raised $568m at $7bn valuation in April 2019 by T. Rowe Price, Coatue, Dragoneer, Wellington, Sands Capital, and several existing investors, becoming the global leader in RPA. In addition, our Digital East portfolio companies Hazelcast, Minit, Obilet have raised substantial follow-on rounds. At Digital West, we were happy to invest, among others, in N26’s Series D, led by Insight Venture Partners at $3.5bn valuation — making it the highest valued German startup — as well as in Inkitt’s $16m Series A led by KPCB, and Crosslend’s €35m Series B.
At the Earlybird Health Fund, we made new investments in two groundbreaking ventures. We invested in iSTAR Medical SA, where Earlybird participated in the €40m Series C financing round together with LSP, Gimv and BNP Paribas Fortis Private Equity. iSTAR’s MINIject device, used during Minimally Invasive Glaucoma Surgery, promises to revolutionise the treatment of glaucoma. Furthermore, Earlybird co-led the £12.3m Series A funding round alongside Cambridge Innovation Capital in the UK for Sense Biodetection. The company aims to decentralise healthcare and change the way Infectious Diseases are diagnosed and managed. Within the existing portfolio, Atlantic Therapeutics received three prizes this year, among them the LSX MedTech Company of the Year award. Perfuze Ltd, that is creating innovative technology to treat acute ischemic stroke and was awarded two grants totalling €6.9m of non-dilutive funding and also received FDA breakthrough device designation. Another FDA breakthrough device designation was also gained this year by Miracor Medical SA for its PiCSO Impulse System, that is intended to reduce infarct size after very serious heart attacks so as to prevent heart failure and to improve the quality of life of patients. Last but not least, Polares Medical SA has recently started its First-In-Man clinical study using its minimally invasive solution for the treatment of mitral valve regurgitation in the heart with results to be published soon.
THE ECOSYSTEM IN 2020
Enough talk just about us — what trends do we see in the wider ecosystem? Across the board, the European ecosystem experienced record fundraising heights (as discussed, we were happy to contribute to this trend with the first closing of Earlybird’s second Digital East Fund). As a consequence, it was not surprising that VC investment volume is growing in Europe. At the same time, the US market moved sideways, and China is experiencing a decline. Obviously, the absolute levels are still lowest in Europe, yet our ecosystem catches up in terms of % GDP invested, approaching 0.2% similar to China (yet still way below the US with c. 0.6% share!).
Secondly, we see clear indications of increased multi-stage VC investing capacity and globalization of the late-stage tech investing market. The EU VC Fund market keeps growing in terms of capital volume and number of funds while average fund-size increases.
The direct consequence of this is that late-stage capital is now more readily available to European entrepreneurs, solving a traditionally bottlenecked part of the funding journey. In fact, on a global scale, the capital available in the later stages exceeds early/seed-stage funding, a key inflexion point.
This development has clear deal-level implications in the EU market: More than ever before, VC money is doubling down on winners. The top funnel is becoming more restrictive as the market moves towards higher round concentration.
Interestingly, this picture is discontinuous on the exit side. Following outlier volume in 2018, in 2019 the EU exit market shows low $ volume and fewer transactions. One underlying reason for the slowdown of billion-euro exits: M&A took the lead in 2019 after landmark-IPOs in 2018. It should be noted that a slowdown is not the end of the world. Especially it doesn’t mean that entrepreneurial activity is regressing in quality — in fact, today’s tech-companies are significantly more mature at IPO than 15–20 years ago (according to 2018 figures).
Europe is also still conservative in terms of valuations: the data shows 50–100% higher pre-money Series A valuations in the US compared to the EU. Yet, EU Unicorns are catching up with the US. In fact, EU unicorns show ~2x higher capital efficiency at exit compared to US / CN unicorns.
In summary, all of this culminates in one overarching trend: the European VC market is maturing significantly. The EU is beginning to mirror the developed state of the US or Chinese funding environments in relevant KPIs — with a higher capital provision, more follow-on financing and more maturity on venture-level. We find this especially promising given that Europe still retains its unique DNA of high capital efficiency.
Clearly, there is still a lot of room for development. 2020 will be a challenging year with a potential global economic slowdown. On the venture level, we might see more “Safe Bets” (think WeWork, Compass, Fair.com) getting into troubled water. As a side effect of this climate, we predict that a relatively high prevalence of post IPO valuation corrections may continue (think Pinterest, Slack, SmileDirectClub).
On the other hand, 2019 moves into 2020 full of opportunities. Firstly, we think that early-stage VC activity might reach old heights, mostly given favourable entry-valuations. This benefits the entire innovation ecosystem in the mid to long run. Secondly, capital efficiency coupled with high capital availability and maturity of startups will lead to the emergence of more and more global leaders from the EU, which will, in turn, nurture a strong EU-to-EU funding environment, especially in the growth stage.
At Earlybird, we believe that whatever the coming year brings, a focus on people and purpose will allow us to make the most of both opportunities and challenges. If you share this vision, let’s get in touch.
