We are accustomed to hearing that European tech is perpetually in Silicon Valley’s shadow. Now there have been suggestions that the local tech scene is starting to feel Silicon Valley’s valuation woes.
If true, this should raise alarm bells, because if European technology startups struggle to raise money from wary investors, it could hit the brakes on Europe’s budding digital economy just as the EU begins ramping up its tech industry, preparing for a digital single market.
However, the data paints a more nuanced picture, one showing that, in the main, Europe is not as susceptible to the impact from a U.S. tech downturn, because it has now laid the foundations — talent, mentors, angel investors, local VCs, incubators, accelerators and communities — that are propelling Europe on its own, separate investment cycle.
The data about Series A funds raised, capital invested and $100+ million exits, gathered from Dow Jones VentureSource, CB Insights and S&P Capital IQ, shows that in relative terms, Europe is now starting to fire on all cylinders, much like Silicon Valley did in 2013.
Silicon Valley is indeed undergoing a chill, while tech in Europe is growing, purposefully, confidently and across a broad front of geographical hubs and industries. Currently, France is leading Europe in investments so far this year.
CB Insights shows that the absolute number of funding rounds for early-stage companies — what’s called Series A rounds — in the U.S. appear to have peaked in 2014 (2015 was down from 2014 by -4 percent).
We have the opportunity to both learn from the successes in the U.S. and pre-empt some of their issues.
Series A rounds are important because they are one of the best indicators of the health of an ecosystem in producing a solid pipeline of companies that have gained sufficient traction to raise an institutional round from venture capitalists.
In Europe, Series A investments only really started to ramp from 2014, and the number of local companies hitting this funding milestone continues to rise. 2015 was a record year for Europe — up 12 percent from the year before. In January and February so far this year, A rounds are up 38 percent year-over-year (versus 19 percent up in the U.S.).
Generally speaking, venture investing in tech companies in the U.S. has been volatile, with a large uptick in funds raised by venture capitalists since 2012, and big spikes in 2014 and 2015, according to Dow Jones VentureSource.
In Europe, we’ve yet to see any big jumps or dips in VC funding.
According to CB Insights, $100+ million exits — when startups are acquired by larger firms or IPO — started to ramp in the U.S. from 2011 onwards, reaching an eight-year high of 122 exits in 2014, but then declining again in 2015 to 83.
In Europe, the ramp in $100+ million exits only really kicked in from 2014 (18 exits), and reached a new high of 26 exits in 2015.
None of this is to say that the gung-ho spirit of Silicon Valley has dampened and that Europe has magically thrown off its yoke of conservatism. U.S. startups are still raising money, although, for some, the valuations are coming down to what some might say is a more realistic level.
European institutional investors — with some exceptions such as in the Nordics — could still step up their activity in late-stage funding, and a handful of activist EU data protection authorities are erecting barriers to the global free-flow of data. Investment pace in the Nordics is currently four times faster than just two years ago.
But tellingly, this year (so far), several fast-growing private tech firms in the U.S. have seen their valuations plummet. You can’t really argue with the numbers: For Silicon Valley, the hangover from heyday valuations has started. CB Insights has even created a Downround Tracker on companies that have raised money or exited at valuations lower than their earlier investment rounds. For now, it’s mostly populated by companies from the U.S. (83 percent of all companies on the list). This could, of course, spread to Europe, but so far the data does not show this to be the case.
Listed companies haven’t fared much better. The aggregate market cap of the 34 public Internet Software & Services companies that have IPO’d in the U.S. since January 1, 2013 was trading at 42 percent below their aggregate first-day market cap on March 16 this year, according to S&P Capital IQ. Here too, Europe has not seen the same impact. The 25 public Internet stocks that have listed in Europe in that same time period have been much more resilient, and are trading 9 percent above their initial first-day aggregate market cap.
Given all of the above, it seems that a more informed way to think about whether or not Europe will be caught in Silicon Valley’s downturn is to understand that the Valley has been on fire since 2008, and Europe has only really got going in the last three years.
So does Europe’s trajectory mean that we’re heading for the same kind of correction just a few years down the line? Not necessarily. Due to the relative scarcity of capital in Europe when compared with the glut in the Valley, Europe’s tech industry has also had less hype — and hopefully the conditions for more sustainable, long-term successes.
We have the opportunity to both learn from the successes in the U.S. and pre-empt some of their issues. That’s a great position to be in.
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