The European Seed Landscape: 2018 so far
Irrational exhuberance or the growth of an ecosystem?
(this was originally posted here for VentureBeat)
It’s August in Europe, so what better way to kick back then with some data intensive analysis of seed investment rounds on the continent. Let’s take a look at how the first half of this year has shaped up and analyse any threats or opportunities, whilst providing founders looking to raise with an understanding on how to best capatalise on the trendlines.
This analysis excludes Israel, which is covered by a number of much better informed individuals — there’s no better place to start then Gil Dibner’s H1 2018 presentation.
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1. Invested capital and volume
Volume on a dollar basis has increased, though the absolute number of deals has decreased
There were $665m of Seed deals completed in the first half of 2018, extrapolating this out to end of the year this is a $1.33bn annual run-rate, in-line with our 2016 high. This is a 44% increase on a dollar basis versus H1 2017, which came in at $463m. The first half of 2018 saw 789 seed deals done In Europe versus 873 in H1 2017, this is a 10% decrease in the number of deals done.
> Advice to founders: There’s more capital than ever at the early stages in Europe. Early stage investment volume has been trending upwards since 2012, though seems to be stabilising. With a healthy levels of capital being deployed at Seed, it’s ever more important to choose partners that will give your startup the best chance to grow — solve for growth of your company, not vanity fund raisings.
2. Deal Size
Rounds are getting bigger and might have reached a cyclical high
In H1 2018 the average Seed round was $1.17m.
Interestingly, this is a 33% increase in average deal size versus H1 2017 which saw an average round size $890k.
So evidently rounds have gotten larger but how does deal size compare with historicals?
> Advice to founders: More capital is going into fewer deals — the bar for raising Seed is getting higher. With increasing round sizes, generally come increased valuations. Whilst these heightened valuations might seem useful for purposes of controlling dilution —finding yourself too dilution sensitive at the seed stage may further hinder growth down the line. Do not forget that market terms are already fairly founder friendly. Semi-sensible valuations backed by aligned investors should be your key focus. Taking a lower valuation, from a better investor seems counter-intuitive but may well be difference between success and failure. Your startups’ growth can be propelled by value-additive introductions to talent, customers, etc. A higher valuation will not hire your next engineer or convert your next client.
3. Ecosystem dispersion
A crypto fueled new entrant has, for now, displaced Berlin as Europe’s third largest city by deal volume
49% of Seed funding (on a dollar basis) was allocated to startups within the top 4 cities, leaving a long-tail of European cities picking up the second half.
Let’s have a look at how this compares against H1 2017:
- Post-Brexit vote London continues to dominate seed funding, growing on an absolute and comparative basis (as per the above chart).
- Interestingly, Zug is now a significant in its own right, buoyed by the explosion of companies in Crypto Valley. Worth noting this chart only shows equity financings, you can expect that ICOs out of Zug would be outsized.
- Just off the podium, Cambridge is chasing Berlin in terms of size though disparate in terms of the makeup of companies. Cambridge continues to become important as it leverages its engineering and deeptech talent coming out of local academia.
>Advice to founders: London is still the best place in Europe to build a venture backed startup. The depth of London’s ecosystem (and nearby Cambridge-Oxford) continues to outpace other European cities even in light of the imminent #Brexit. The city has the highest concentration of Angels, VCs, accelerators and ultimately capital, this coupled with a 13 $1bn+ private tech companies out of Europe’s total of 34. This provides the most fertile environment for talent, funding and mentoring. The immediate threat to London’s dominance is a post-Brexit world where hiring of foreign talent is constrained and some near-term difficulties around UK companies ability to trade with foreign counterparts. Having said this, whilst talent wise London is significant, it’s worth bearing in mind that most European investors have coverage across the continent — great companies can be started anywhere, though you may hit a cap on hiring talent.
4. Age of startup at Seed funding
Currently, the average age of startups is 2 years and 3 month, at the time of their Seed funding.
Certainly contrasting companies to H1 2017, the average and median age of startups at the time of Seed funding has increased.
Let’s now look at whether Startup maturity has any bearing on the amount of capital raised:
The trendline is softly sloped upwards, which indicates a small relationship between increased age and capital raised at Seed. I would add caution, unless bootstrapped companies keep up with venture-scale growth targets, its likely that some investors might see a prolonged timeline to raising as a negative signal if ailments are present (faltering traction, inability to ship, strategic incoherence, etc).
> Advice to founders: Timing of funding rounds should be based on a combination of when you company requires capital and your metrics display an ability to translate that capital into further growth. Financings should be viewed as company inflection points to further accelerate growth, they are not the end game. Companies raising Seed rounds are no longer a founding team and a deck, with the lowering of barriers to company creation (AWS, freelancers, atomisation of startup stack, etc.), founders can now get further with less. Make sure that capital is your primary growth constraint before raising your Seed round.
5. The path to Series A
Series A funding continues to grow, with investor expectations of startup traction growing also
Whilst there’s clearly been a steady increase in seed fundings, one of the expected questions for any Seed-stage entrepreneur is:
How do we get to Series A?
Whilst looking at startup KPIs and revenue expectations might be over-bearing for this analysis, let’s look at the pace of Series A funding in the last 18 months as a proxy:
European Series A volume has been increasing markedly — without going into an analysis on ‘A’ rounds, we can deduce that the environment for raising is healthly at least.
Let’s now look at the average of amount of capital startups have raised prior to their Series A round. I would take this chart with a pinch of salt. All startups are unique and have their own unique capital requirements (hardware=high, software=low) to get to their next inflection point. The below is informational, not a goal or requirement.
Interestingly, the above chart when contrasted with Seed round sizes, shows there is a not insignificant amount of capital is being raised outside of the “traditional” seed round — this will be from angel, pre-seed, bridge and seed extensions (that’s a lot of terms! Can we number these?).
How long has it taken them to get there? Looking at a dataset of the last 2.5 years, its taken startups an average of 4 years to get to Series A.
> Advice to founders: The trend line is clear. There’s never been a better time to start a company and raise early stage venture funding in Europe, though the time it takes to get to Seed and Series A is increasing. Investors’ expectations of both Seed and Series A startups have increased, startups also likely to have more runway to achieve product-go-to-market-fit > product-market-fit > growth. A thoughtful and pragmatic approach to understanding the required KPIs to get to Series A is important. Startups through the Seed phase will undoubtedly go through a multitude of hiccups and roadmap shifts in order to gather sufficient data points to get to product-market-fit. Positive directional progress (and cash) will keep your startup going, and the ability to work with investors who can provide a better understanding of the markets requirements for an A round will be give you an advantage versus peers.
Commentary
Whilst a data driven approach to reading the early stage funding tea leaves provides directional context, it’s useful to give an anechdotal view. Venture is the dark arts after all 😈, just kidding.
- Europe is growing: This is self-evident. Europe saw nearly double the amount of IPOs than the US in 2016 and 2017 respectively. So far this year we’ve seen 27 IPOs totalling $32.5bn in Europe v the US’ 14 IPOs for a total of $25bn. Liquidity isn’t everything but it helps crystallises talent, repeat founders, fund returns and confidence — adding a new ring to the tree of Europe’s technology ecosystem
- Seed is the new ‘A’: This is not a trend which has emerged this year, though is increasingly the status quo. Historically, pre-traction startups were considered Seed — now many investors are looking to derisk by writing larger cheques which are coupled to traction.
- Series A funds doing late-Seed: We’ve seen a marked increase in A funds doing larger and/or later Seed rounds, blurring the lines between Seed and ‘A’. This is happening for a multitude of reasons; a) Seed companies are looking more like ‘A’ companies (as mentioned) b) Competition in ‘A’ Rounds is forcing some investors to write pre-emptive cheques as they look to get ahead of the competition c) Many VCs have raised larger funds, forcing them to allocate dollars in and around ‘A’
- Emergence of Pre-Seed: Whilst pre-seed has broken out as a defined category in SV and NYC — we’re starting to see a few dedicated funds, excluding incubators/accelerators, emerge in Europe and more Seed funds looking to cut smaller cheques earlier (these smaller pre-Seed cheques are to some Seed funds what Seed cheques are to larger Series A funds, optionality). Whilst previously, founders would be required to either raise ‘friends and family’, Angel or bootstrap their way to a Seed round. We’re now seeing institutional investors take a deliberate step into this stage, capturing economics and often saving founders from the perils of building technical product on constrained budgets
In conclusion, ignoring the repetitive rhetoric that ‘European tech is growing’ — the underlying data fundamentally backs this claim up.
🙏🏼 Big thanks to Crunchbase, dealroom.co and Atomico’s ‘State of European Tech’
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