A few years ago, setting up shop in Europe was a no-brainer for North American venture capitalists. The market attracts companies of all sizes, from OMER and Lightspeed to Bessemer Venture Partners, and Spotify's IPO appears to have woken up North American VCs to the potential of creating a huge European exit. VCs wanted to make sure they didn't miss out on the next wave.
However, it is unclear whether they were able to catch it. The trend hasn't completely reversed since the happy days of 2021, but it's getting pretty close.
Still, Europe's startup market has grown rapidly over the past decade. According to PitchBook data, transaction volumes have more than doubled in that period, with numerous success stories including Klarna, Deliveroo and Arrival. It's no surprise that North American venture capitalists want to tap into that market, but developing a successful long-term strategy in the region is not easy.
Major companies like Coatue and OMERs have officially exited the region in recent months, and the remaining venture funds have seen a marked decline in activity. Nabina Rajan, senior analyst at Pitchbook, said the total value of European deals with at least one US investor fell 57% in 2023 from a year earlier, and the number of deals fell 39%. By comparison, over the same period the overall transaction value decreased by 46% and the number of transactions decreased by 31%.
The European startup market comes with nuances that make it a difficult market for North American investors. Each country in Europe has its own language and sometimes currency. Investing in both Romania and Italy is different than investing in both Texas and California. Additionally, startups and universities are building different networks for startups in Europe than in the United States.
All of these nuances add up to a difficult market even in the best of times, not to mention the downturn of the past few years. It's no wonder, then, that North American investors are struggling to find safe footing as they cross the Atlantic.
easier said than done
Another reason why North American VCs are struggling in the European market is that while North American VCs' interest in the ecosystem is increasing, so too is the European VC market. There is now a lot of competition for the best deals, especially in the early stages when prices are lowest and the potential for big profits is highest.
Sten Tamkivi, a partner at Estonia-based operator-led venture fund Plural, told TechCrunch that the startup market has changed dramatically since he started as a founder 10 years ago. Ta. Early-stage startups in Europe used to rely on the U.S. for funding by default, but that's no longer the case, he said. “Over the past decade, early-stage investments have shifted much more towards local companies. 80% of the capital being deployed in Europe is European,” he said.
Unless a startup plans to expand to the US soon, it makes more sense to work with local investors who know the nuances of the local market, rather than launching in other European countries first. explained Tamkivi. He added that there aren't as many European venture capital firms in late-stage and growth stages, so startups can focus locally in the early stages and bring in these investors later.
It probably doesn't help that most North American venture capital firms have a shop in London. London is no longer part of the European Union and is just one of the region's startup hubs. Having 'boots on the ground' in London is not the same as having 'boots on the ground' in other parts of the continent.
“A lot of American traffic stops in London,” Tamkivi says. “[The market] It's much more diverse. If you set up shop in London, you may or may not get to know Copenhagen. Once you arrive in the UK, you'll probably have to make a bit of an effort. ”
This focus on the UK has also increased competition for contracts in London, making it even more difficult for North American GPs to secure a stake. It also means they may be ignoring opportunities elsewhere.
These dynamics explain why companies like General Catalyst merge with European seed-stage companies. General Catalyst announced in October that it would merge with Berlin-based La Familia. General Catalyst was already investing in the region through its London office, but said the partnership would help it better invest in early-stage opportunities in mainland Europe.
Borys Musielak, a founding partner at SMOK Ventures, said the company has missed out on deals with US investors in recent years, but many of them are now walking away from deals. He hopes the exit will allow the company to take advantage of strong deals with new funds.
“I think they're waiting a little bit longer,” Musielak said. “So this is really an opportunity for me and my friends who have raised money for this region. We will be able to participate in all the top deals from the local ecosystem. American Players We'll probably be in Series A or B anyway.”
Reasons to keep trying
However, despite all these challenges, North American companies are still trying to establish roots in the region. While some companies exited in 2023, Andreessen Horowitz and IVP both opened offices in London.
There are good reasons why many companies still seek regulation. Hot startup categories, including AI and cryptocurrencies, continue to operate in a gray area of U.S. regulation, with no real transparency in these sectors. This makes it difficult for startups to form companies and for investors to know which companies are compliant and even whether they will be compliant in the future.
Europe doesn't know all the regulations. Regulators aren't as lenient with companies in these new areas as they might like, but at least they're clear about what they want. A16z's London office is primarily focused on blockchain and crypto, which is probably why.
US-based LPs are also increasing their interest in Europe. When Plural embarked on its first round of funding in 2022, Tamkivi and his team approached U.S. donors to start a relationship with the hope that it would lead to investments down the road. But surprisingly, many people decided to invest in the fund and wrote even larger checks for the company's recently launched Fund II.
David York, founder and managing director of fund of funds Top Tier Partners, said LPs have long been looking for ways to invest in managers who support European startups. With successes like Spotify, he said interest will only grow. He expects this price to continue to rise as large markets like China become less attractive.
“Europe has become more reliable as a country that delivers results,” Yorke said. “Originally it started with Spotify, but over the last six years it has gained a lot of liquidity. [to] 7 years. I think there are tailwinds as China turns inward and becomes more globalized. Erope believes that eventually he will become one of the international markets where people want to build business. ”
PitchBook's Rajan and Musielak both feel that the European ecosystem remains largely unpenetrated, despite its growth and the challenges faced by North American VCs. So there definitely seems to be scope for international VCs to set up shop and build their portfolios. All companies need to do is find a strategy that ensures their efforts are rewarded.