Recently, a wave of US venture capital investors entered the European startup ecosystem flooding it with money. Sequoia Capital, Bessemer Ventures and Accel are just three examples of many. This development has led to an upward shift in investment rounds. In 2021 alone, €10.1 billion have been invested by US American VCs into European startups. What is behind this, and what are the advantages and disadvantages of US versus European VCs?
The European startup landscape is very attractive for investors. Especially when it comes to B2B business models with software solutions, industry leaders increasingly come from Europe. Despite their excellence, software startups from Europe still have slightly lower valuations than US Startups, although the gap is reducing. These European hidden champions attract investors from abroad, especially from the US. Furthermore, compared to their US competitors, European B2B startups generate about 10% more value per invested capital. One decisive factor favoring investment momentum: The coronavirus pandemic. The pandemic enabled global access to investors, as everything went virtual anyway, and therefore it didn’t matter anymore whether you have a Zoom Call with New York or Berlin. This development is a big advantage for startups that want to expand their global network quickly.
What advantages can US funds offer European startups?
Regarding B2B startups, the US is the biggest market for software. As a startup active in the software sector, it certainly pays off to secure access to this large market – especially as most of the B2B companies think global right away. For companies that want to expand in the US, a US investor can also help with hiring abroad. When it comes to financing rounds, US investors spend more: The average funding for a B2B startup in the US is 2.4 times higher than in the EU. Furthermore, valuations of European startups by global investors are enormously high. The combined value of European unicorns almost doubled to more than $800 billion, compared to a value of $419 billion last year. High valuations by global investors are certainly attractive for founders, although they don’t necessarily translate into the public market, as recent IPOs have showed.
Nevertheless, the strengths of local investors should not be underestimated
For European startups, it definitely helps to have a local investor on your side. They can help with hiring, as they know the customer landscape in the local market better than any VC from abroad. And they can make use of their local network, helping companies grow faster. European VCs are more international: 90% of European VCs have a second office, 51% of which is outside Europe, while only 29% of US VCs have an international presence. Thanks to this decentralization of the startup and VC landscape in Europe, European VCs are better placed to help startups grow within Europe. In addition, the valuation and thus the exit opportunities are increasingly improving. Never before have so many startup unicorns been born in Europe – with a large share coming from Germany.
Europe’s VCs are about to close the gap
Having an international network, bigger financing rounds, a good valuation and interesting exit opportunities – European VCs are slowly catching up and provide those key parameters for startups as much as the US investors. More and more US venture capital firms will have a presence in Europe, and local presence will become less and less relevant due to the increasing digitalization and internationalization of the sector. Regarding the size of the rounds, recent data shows that for later stage startups, the difference between European and American financing rounds is shrinking. Looking at the median deal sizes, the difference in deal sizes was $7.2 million in 2016, while it shrunk to $5.1 million in the first half of 2021. European investors have become more and more aligned with their American competitors over the last years. This has led to an increase of the participation of European funds in global financing rounds from 22% in 2014 to 31% in 2020. The European venture capital ecosystem is maturing. The high speed at which European venture capital funds are internationalizing is resulting in an increasing alignment of the two markets.
Much more important than the different regional setups is the domain expertise, a potential VC has in the respective field. In order to revolutionize an industry, as many B2B startups intend to do, you need a profound knowledge of the respective industry. In this case, the advantage for startups lies in finding the VCs that have the strongest domain expertise in their market. In any case, stay tuned – Europe’s journey on the VC market is going to be an exciting one!