Preparing for 2020: Our Predictions for European Venture Capital

Where are we headed in 2020?

Over the last several weeks, Speedinvest has been analyzing data to get a better understanding of the potential funding environment our companies will face in 2020. On a macro level, three current trends emerged that we believe will not only shape our industry in the year to come but the future of European venture capital.

Speed Read:

  1. US (and Asian) investors continue entering Europe
  2. There is A LOT of money to be made and spent
  3. A fight for late-stage winners

Trend #1: US (and Asian) investors continue entering Europe

We have all read the articles this year about American investors coming to Europe. Here’s a recent example from Forbes. It’s not just hype. Data suggests the overall percentage of deals with U.S. participation in Europe is rapidly increasing and reached record levels in 2019. At the same time, the percentage of deals with investors from Asia is on the rise too, despite more stringent regulatory barriers.

Number of Investments in Europe with US Investor Participation in % — Source: Dealroom
Investment Volume by Asian Investors in Europe — Source: Atomico, Dealroom

At Speedinvest, we’re experiencing these developments first-hand. As our portfolio companies raise Series A, B and beyond, prominent U.S. names are now often part of the funding conversation. But is that good or bad for business? To be honest, as a seed VC focused on European tech, we think it’s great for us, the ecosystem and our founders. It not only increases funding options as companies move into later rounds, but also forces European investors (us included) to step up their game due to the increased competition.

Trend #2: There is A LOT of money in the market

The second big trend we’ve noticed is the sheer amount of dry powder (capital available for fund managers to deploy) that venture capital funds are sitting on. It’s a lot! To better understand this, let’s take a look at the numbers.

The amount of dry powder in private equity is at an all-time high

The amount of capital in all private equity markets is at an all-time high — double the amount from 2007, before the last financial crisis. This includes all private equity categories (LBO, Growth, VC, etc.) and is, of course, mostly driven by investors’ appetites for yield in a low to zero interest environment. But that’s a different story. No matter the motivation, there is still around 2.1 trillion USD that wants to be put to work.

Private Equity Deal Environment — Source: McKinsey & Company

VC is the fastest growing asset class in private equity

When compared to all other private equity categories, venture capital is clearly on the rise. The growth rate of money raised is by far the highest over the last 5 years and is growing by nearly 18% YOY.

Funds Raised in Private Equity — Source: McKinsey & Company

Funds are getting bigger

So where is all of this money going? Existing funds are raising significantly larger (follow-on) funds, resulting in much larger average fund sizes. As seen below, while the overall number of funds has decreased, the total amount of capital raised has remained relatively stable.

Development of Venture Capital Funds — Source: Dealroom

There is a clear trend of existing funds raising larger and larger rounds — recent examples in Europe include Atomico, Lakestar and Balderton. But this is nothing when compared to the likes of Softbank or the new large funds by Sequoia, Lightspeed, NEA and others, which have raised 1bn USD and above — driving the share of +500m funds to 66% in 2018 (see below).

Relative Share of Venture Capital Fund Sizes — Source: Crunchbase

Trend #3: There is a (late-stage) fight for winners

In recent years, the number of first-time venture financed companies in Europe did not grow at the same pace as the amount of funds raised. In fact, it decreased tremendously.

First-time Venture Financed Companies — Source: Pitchbook

The takeaways? Firstly, early stage rounds in Seed and Series A are increasing and are much more competitive than in years past. But the great uptick comes at Series B and later-stage rounds. That’s where international investors with pockets filled with dry powder are fighting over deals. And remember, there are fewer new deals to fight over.

Development of Average Deal Sizes — Source: Dealroom

Currently, the average Series D round in Europe is around USD 76m. That was unheard of just a few years ago! This is (most likely) attributable to the rise of VC mega rounds (+ USD 100m) highlighted below.

Number of deals over USD 100m over time — Source: Crunchbase

As seen above, the number of companies raising rounds in excess of 100m (in Europe and globally) has been on the rise since 2016. In 2019 alone, mega rounds in Europe included Klarna, Flix Mobility, Get Your Guide, Deliveroo, UiPath, N26.

Overview of Investment Rounds Above USD 250m in 2019 — Source: Crunchbase

Can the industry maintain the current momentum?

A lot of people are now asking themselves the same question: Will these trends continue in 2020 and beyond? This is primarily fueled by fears of a global economic downturn and the fact that we’re all now living in a post-WeWork world.

But changes may not be as drastic as one might expect, largely due to the influx of money in venture capital. It has to be deployed somewhere. And in 2019, that cash continued to flow into unicorns, despite recent IPOs not performing as well as expected.

Valuation Development of Selected Companies (November 2019) — Source: Yahoo Finance

Will these disappointing performances be enough to slow down the current momentum? What new trends in 2020 will potentially change or disrupt venture capital in Europe?

If only we had a crystal ball. In reality, we can simply make educated guesses based on data and current trends. That said, here’s our take on 2020.

What’s ahead?

  • Mega fundraising rounds continue: Enormous amounts of capital will continue to flow into hyper-growth opportunities in 2020, and we will likely see additional mega fundraising rounds in Series B and beyond.
  • Strong seed-stage founders will benefit: The flow of capital in later stage deals will also trickle down to seed, specifically for the best teams. Successful serial founders will continue to find it very easy to raise solid rounds.
  • Increased competition in early stage: Competition in early stage rounds will intensify and sizes and valuations will go up — specifically, again, for serial founders.
  • VCs in Europe will step up their games: The overall increase in competition, specifically in response to more U.S. and Asian investors on the continent, will require European funds to grow their platforms, increase their support and services, and go all in to win the best deals.

In short, we believe it’s going to be an interesting (and transformative) year for European venture capital. What are your predictions for 2020?

Speedinvest

5 focused investment teams. 20 in-house, operational experts. 100% committed to your success.

Andy Schwarzenbrunner

Written by

Startup investor (@Speedinvest) / I like technology🚀, people with interesting ideas💡, cycling🚴 and a united European Union 🇪🇺

Speedinvest

5 focused investment teams. 20 in-house, operational experts. 100% committed to your success.

More From Medium

More on Venture Capital from Speedinvest

More on Venture Capital from Speedinvest

More on Venture Capital from Speedinvest

More on Venture Capital from Speedinvest

2019 Review: Our 2nd Year at Speedinvest x (3-Part Series)

Welcome to a place where words matter. On Medium, smart voices and original ideas take center stage - with no ads in sight. Watch
Follow all the topics you care about, and we’ll deliver the best stories for you to your homepage and inbox. Explore
Get unlimited access to the best stories on Medium — and support writers while you’re at it. Just $5/month. Upgrade