US venture investors have been consistently present in later-stage European financings over the last decade. This has taken place for a number of reasons; companies are easier to source, access, diligence and the company itself needs less hand-holding as they look to grow — this may also be married with a US expansion narrative.
Conversely, early-stage investing, especially at Seed stage, has historically been considered a “ground-game”. VCs had optimised to allocate capital to local startups, where they can deliver maximum impact via support and mentorship.
But does the data continue to support this view?
Firstly, for a frame of reference let’s have a quick look at US investors participation in European late-stage rounds, which for this analysis I’ve limited to Series B, C and D. (*please note there is a likely data lag for 2018 numbers — with rounds generally being reported many months after closing)
It’s evident that at the growth stages, investment from US investors is persistent. Though, we’re unable to account for participation on a dollar basis — we can see that roughly half all European growth stage rounds have one or more US investors.
So what pattern is emerging at the early-stage?
Whilst I’m distinctly splitting out Seed from Series A, it’s worth mentioning that there is increasing overlap between the two. Let’s quickly cover Series A, whilst subsequently diving a bit deeper into Seed.
- US investors participation in European Series A has decreased since 2012, with a trough in 2015 and 2016 due largely to market dynamics
- Average Series A funding round size has increased from $4.9m in 2012 to $8.9m in 2018
- US investors generally invest in larger rounds, though the pricing premia variance through time has been up to 50%:
Why is this happening?
- A lot of US venture capital has gone “downstream”, a combination of larger funds having being raised and an industry-wide extension to the period in which companies stay private, this has created an impetus for some investors to partake in later-stage rounds, shifting capital from Series A to B and beyond — in 2018 62% of dollars were concentrated in late-stage rounds¹ in the US, in Europe this number is 76%²
- 2015 and 2016 saw an increased investor-led focus on fundamentals, managing company burn rates, extending runway and moving towards profitability instead of growth, this was in part caused by the hyper-inflation of late-stage valuations and persistent market sentiment of a new dotcom-style tech bubble. This is likely to have led US investors to double-down on local companies
Seed rounds have generally seen the most shifting sands in terms of not only their classification (read Hunter Walk’s ‘Seed is a Phase’), from round sizes, to the number of rounds pre-Series A (pre-seed anyone?) and objective measures of progress.
- Participation from US investors in Seed rounds has nearly doubled, from 10% in 2012 to 17% in 2018
- Seed funding rounds have been steadily increasing; from just over $500k in 2012 to $1.6m in 2018
- US investors tend to invest in larger rounds, this is likely occuring for two reasons; US investors might be less price sensitive than European counterparts and US investors are likely to be investing in more top quartile startups which often to raise larger financings. Rounds which have at least one US investor were on average 35% larger than European only rounds — in 2018 the average European only round was $1.6m, whereas the average round with a US investor was $2.3m
- Co-investors not leaders; the data backs up the anechdotal evidence that US investors have a preference for investing alongside a local lead investor, this means they rely on the lead investor for negotiations, pricing and due diligence (founder note: a lead investor is not necessarily the largest $$ investor in the round). On average these rounds have an average of 3+ institutional investors participating
Why is this happening?
- Round sizes have increased — Seed rounds now look more like Series A rounds of yesteryear. This doesn’t merely signify that companies are raising more money, it signifies that companies at Seed are often one or more of post-product, post-revenue and hopefully nearer to product-market-fit. This relative de-risking at the Seed stage makes companies more attractive to US investors
- Seed, is no longer a local game, similarly innovation and disruption is starting to diffuse away from key hubs. Over the last few years, Seed funds in the US have gotten markedly larger and the number of new entrants has increased. These larger Seed funds now have the management resources to deploy capital in farther geographies. Interestingly, many of these Seed funds are not differentiating through intangible local value-add but through thematic insights and specific domain expertise
- The European ecosystem as a whole is maturing, and startups’ growth potential is becoming increasingly attractive to US and international investors. This was demonstrated by a fertile European exit environment, which saw over 69 Tech IPOs in 201⁸² v 26 IPOs in the US³
>> Some considerations for founders:
Having spoken to 15+ European early-stage VCs about US investors participation in European rounds; they were some consistent findings:
- European founders still have a preference for local investors though our US counterparts clearly come with some reputational cachet, this is primarily due to positive signalling + future potential expansion opportunities in the US
- Having a US investor at the table in early-stage rounds is generally a positive to both founders and investors; as long as local investors aren’t getting scaled back (😇) and that there is no signalling risk from US investors not investing their pro-rata in future rounds
- Founders need to understand what support they will be receiving from US investors if they hit a rough patch
- Great Expectations: Be realistic about what to expect from a US based VC — whilst there are a multitude of factors in choosing the right investment partner, let’s concentrate on three specific points for founders to diligence:
- Operational and strategic support: Many of the comparatively more experienced US investors will have in-depth knowledge of specific business models, verticals or sectors — this wealth of experience can prove invaluable when setting out your strategy and experiments, whether in providing guidance towards product-market-fit or testing and scaling distribution channels. *Be warned, progress at the early stages can be a bumpy ride and it’s often the case that founders will look to lean more heavily on their investors for support. If raising early-stage capital from US investors, have an explicit understanding of how they will provide support to you. >> Ask; do they have partners on the ground locally? how often do they visit town? what support will they provide if the company hits some bumps in the road? Which investors are they closest to locally?
- US expansion: Around Series A many companies may want to make a push into the US, this is especially true of enterprise SaaS and certain consumer verticals. Having an established US investor will be helpful in further understanding this daunting prospect. Whilst they may not help with day-to-day challenges, they can provide you with a blueprint of dos and donts. >> Ask; What companies have you previously helped setup in the US? What business can we do in the US before committing bodies and resources? What customers can you help my company with? Which city might be best for us to open an office in? Who should be our first hire and how can you help us with them? Can you help us understand the cost of headcount in the US? How do we account for stock options in the US? Can you help us understand the competitive landscape better?
- Access to capital: This can come in two forms, either raising from US investors whilst remaining EU focused or raising from US investors with US expansion a key part of the round narrative. Either way, having a US investor on your cap table will give you an incentivised partner who will look to work for you on either front. >> Ask; Which investors can they provide intros to? Which investors would strategically make the most sense for my company, both as a lead and co-investor?
So who’s doing the damage?
Top US Venture investors in European Seed & Series A+
Top US Seed Investors:
Top Series A and beyond investors:
Thanks for reading, feel free to DM me on Twitter if you want to better understand scaling into the US.
- Sam -
¹ ‘Q4 2018 Closes Out A Record Year For The Global VC Market’ by Jason Rowley (Crunchbase News)
² ‘The State of European Tech: 2018’ by Atomico
³ Here’s who’s gone public in 2018 by Alex Wilhelm (Crunchbase News)
CYA: The nature of private investing means that company level data about specific amounts of capital deployed by investors in specific rounds is generally unavailable. Therefore, we will use the number of rounds which have at least one US investor as a proxy — this is far from perfect but will provide directional guidance on trends. Also, for ease of data manipulation I have used company level data from London, Paris, Berlin and Stockholm only.