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A few years ago, it was an easy task for North American VCs to set up shop in Europe. The market attracted companies of all sizes, from OMER and Lightspeed to Bessemer Venture Partners, and the Spotify IPO woke up North American VCs to the potential for creating external exits in Europe. VCs wanted to ensure that they did not miss the next wave.
But it is not clear whether they were able to capture it or not. The trends haven’t completely reversed since the halcyon days of 2021, but they’ve come pretty close.
Nevertheless, the European startup market has grown rapidly over the past decade. Deal volume has more than doubled in that time frame, according to pitchbook data, and there have been many success stories like Klarna, Deliveroo and Arrival. North American VCs, obviously, want a share of that market, but establishing a successful, long-term strategy in the region has not proven easy.
Big names like Coatue and OMER formally pulled out The sector, and the venture funds that remain, have been significantly less active in recent months. The total value of European deals with at least one U.S. investor fell 57% in 2023 from a year earlier, and the number of deals fell 39%, said Navina Rajan, a senior analyst at PitchBook. To compare, overall deal value declined 46%, and deal number declined 31% in the same time frame.
The European startup market comes with nuances that make it difficult for North American investors. Each country in Europe has its own language and sometimes currency. Investing in both Romania and Italy is different from investing in both Texas and California. Also, startups and universities create different networks for European startups compared to the US
Overall, all these nuances make for a challenging market at the best of times, let alone the recession of the last few years. It is no surprise that North American investors have struggled to find a safe haven as they seek to expand across the Atlantic.
easier said than done
Another reason why North American VCs are struggling in the European market is that while their interest in the ecosystem has grown, so has the European VC market. Today, there is a lot of competition for the best deals, especially in the early stages, where prices are lowest and the potential for big returns is greatest.
Sten Tamkivi, partner at Plural, the venture fund led by the Estonia-based operator, told TechCrunch that the startup market has changed a lot since he started as a founder a decade ago. Early-stage startups in Europe used to look to the US for funding by default, but that is no longer the case, he said. “Over the past decade, early-stage investment has shifted more towards local players; “80% of the capital deployed in Europe is European,” he said.
Unless a startup is planning to immediately expand to the U.S. rather than launch in other European countries, Tamakivi explained, it makes more sense to work with a local investor who will know the nuances of local markets. . He said there is not nearly as much European venture capital in the late and development stages, meaning startups can bring in these investors later with a local focus.
It probably doesn’t help that most North American VCs are setting up shop in London, which is no longer part of the EU and is only 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 the rest of the continent.
“A lot of American traffic stops in London,” Tamakivi said. ,[The market] Far more diverse. If you open a shop in London, that may or may not give you visibility in Copenhagen. When you get to the UK, you’ll probably need to make a bit of effort.”
This UK focus also increases competition for deals in London, making it much more difficult for North American GPs to gain share. It also means they may be overlooking opportunities elsewhere.
These dynamics explain why a firm like General Catalyst would merge with a seed-stage firm in Europe. general catalyst In October said it was merging with La Famiglia, which is based in Berlin. General Catalyst was already investing in the region through an office in London, but said this partnership would help it better invest in early-stage opportunities in mainland Europe.
Boris Musilak, founding partner of SMOK Ventures, said he has been on the losing end of deals from U.S. investors in recent years, but many of them are now sitting out deals. He hopes the pullback will help his company leverage stronger deals with its new funds.
“I think they’re waiting a little bit longer,” Musilak said. “So this is really an opportunity for me and our friends to raise money for this area. We will be able to get all the top deals from the local ecosystem. The Americans will enter Series A or B either way.
reason to keep trying
However, despite all those challenges, North American companies are still trying to establish roots in the region. While some companies pulled out in 2023, Andreessen Horowitz and IVP both opened offices in London.
There’s good reason for many companies still trying to set up shop: regulation. Hot startup categories including AI and crypto continue to operate in still gray areas of regulation in the US, and there is no real clarity in these areas. This makes it harder for startups to build and harder for investors to know which companies are complying – or whether they will be in the future.
This does not mean that Europe has made all the rules; Regulators there are not as generous towards companies in these new sectors as they could be, but they are at least clear about what they want to see. A16z’s London office focuses on blockchain and crypto possibly for this reason.
US-based LPs are also showing increasing interest in Europe. When Plural set out to raise its first fund in 2022, Tamkivi and his team approached the US endowment to begin a relationship, hoping this would lead to future investments. But to his surprise, many decided to invest in that fund, and cut even bigger checks for the firm’s recent Fund II.
David York, founder and managing director of Top Tier Partners, a fund of funds, said LPs have long been asking how to invest in managers who support European startups, and after successes like Spotify, this interest has only grown. . He suspects it will continue to rise as big markets like China become less attractive.
“Europe has become more reliable as a producer of results,” York said. “It originally started with Spotify, but over the last six years we’ve had a lot of liquidity there [to] Seven Years. I think there is a tailwind as China looks inward and globalization occurs. I think Euroop will eventually become one of those international markets where people want to build businesses.
Both PitchBook’s Rajan and Musillac think the European ecosystem remains largely underpowered despite its growth and the difficulties faced by North American VCs. So it seems there is definitely scope for international VCs to set up shop and build portfolios. Companies simply need to formulate a strategy that will ensure that their efforts will be successful.
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