A Closer Look At European Investing

We’re bullish on Europe, and that strikes some folks in the U.S. as a bit strange. It’s not that Europe is all we know — we’re an investor in early venture stage funds (an “LP”) in the US, Europe and Israel. Our portfolio skews towards the U.S.; and within the U.S., to the Bay Area. But over the last 18 months or so, we’ve been crossing and re-crossing the Atlantic with increasing regularity, and in that time frame European venture funds constitute more than a third of the funds to which we have committed.

Specifically, in the last 18 months we have invested in 83North, Mosaic and Point Nine — and we are working on three additional funds yet to be announced. Given how early in their investing cycles these new funds are, as well as other funds we have invested in previously, it is too soon to be making any calls. To answer the question, then, as to what makes Europe so compelling, we have to take a more macro perspective.

The Burgeoning European Startup Ecosystem

Silicon Valley is a mature startup ecosystem — some 50+ years old. Europe, on the other hand, is younger, and has recently passed a few key inflection points. In our opinion, the European ecosystem is currently entering v 3.0, or maybe v 2.5 if you want to be more conservative, given the recent stock market rollercoaster and Grexit situation. In either case, it is ripening.

Some history to put this in perspective: v 1.0 started in the 2000s when things were getting off the ground. Then, v 2.0 in about 2008, whose poster child surely has to be Rocket Internet. Following their success, a wave of accelerators and incubators rolled out across Europe; at the same time, the number of startups spiked.

The net effect was a crash course in what it means to be part of a rapidly growing startup ecosystem. And with each company, successful or otherwise, the European startup ecosystem deepened and broadened, and entrepreneurship became an increasingly accepted career path, along with producing more experienced entrepreneurs, engineers, managers, marketers, investors, consumers and service providers.

Great ideas can — and do — start anywhere.

There are now some 40 European unicorns*, 24 billion-dollar exits over the last 5 years and some 641 companies have raised more than $6 billion in H1 2015 alone. This is up from 738 deals and $5.1 billion for all of 2011. Like in the U.S., Europe now boasts multiple hot spots for innovation, with London, Berlin and Stockholm leading the pack. In these cities you find a concentration of talent, dollars and lighthouse venture-backed companies.

We believe European entrepreneurs today are more experienced, think bigger, have global ambitions and are attracting capital at home and abroad. Leading U.S. funds (Sequoia, Union Square, Andreessen Horowitz and NEA, to name only a few) are investing in European companies, lest they miss out on all the fun.

Innovation Knows No Boundaries

We believe great ideas can — and do — start anywhere. Today’s entrepreneurial ecosystem is increasingly porous, with companies often starting in one European country, then moving to London, Berlin or the U.S. as they grow, attracting capital and teams.

Some European companies will come to the U.S. to scale and be closer to their U.S. customers. Others will stay in Europe, taking advantage of the ever-increasing local talent pools, lower cost of living and the flattening of the world. We also see U.S. tech companies moving to Europe in their own pursuit of European customers — both private tech companies and massive public ones like Google, Facebook, Cisco, eBay, etc.

There are three European ecosystems we watch, in particular, and have focused our fund investment activity: the U.K. (London), Germany (Berlin) and the Nordics (Stockholm). We track them because of their high levels of new company formation, value creation and exits. In 2014, the U.K. and Germany attracted the highest number of deals throughout Europe, 225 deals and 154 respectively, accounting for 44 percent of all European VC-backed tech deals. When you look at the Nordic region as a whole, you get some 113 deals.

As far as company valuation, the U.K., Sweden and Germany (in that order) are currently home to the most-billion dollar+ valued companies. Lastly, on the exit side of the equation, the U.K. has garnered the lion’s share of billion-dollar exits. Of the 24 companies achieving billion-dollar exits over the last five years, five were from the U.K., the highest number from any one region. Ireland and Germany were tied for second place, with four companies with more than a billion-dollar exit value each.

Competition. U.S. venture is a competitive sport, with many well-established brands battling to invest in the best companies, as well as an ever-increasing host of new emerging managers. Q1 2015 alone saw an additional 36 new U.S. funds come to market, on top of 87 new funds in 2014. While Europe is also seeing a rise in the number of new venture funds coming to market, there are significantly fewer; seven in Q1 2015 and 19 in 2014.

The Power Of The Global Observatory. By investing in multiple geographies, an LP has a front row seat simultaneously to numerous high-tech markets. Sapphire Venture invests in the U.S., Europe and Israel. If we pay attention, we can see patterns emerging, trends in company formation, customer traction, valuations and the corresponding responses by venture capitalists. With this perspective, we believe we can be a more informed investor, and that much more valuable as advisors to our GPs as they compete on an ever-globalizing stage.

The Future Does Not In Fact Always Look Like The Past. Multiple top venture funds today were just starting 10 years ago, some even more recently than that. Sapphire Ventures believes “emerging managers” play a pivotal role in refreshing the venture community. Not surprisingly, we also believe European venture firms are evolving, as well — with many new firms launching in the last three years alone — 83North, Connect, Felix Capital, Hoxton, Lakestar, Mosaic, Point Nine Capital and White Star … and the list goes on, complementing the existing established players.

There is a notable generational shift going on within European venture funds to a more founder-friendly, value-add perspective similar to their U.S. counterparts. The best entrepreneurs have their choice of investors, and will choose those that have cross-border networks, company building know-how and those that can act quickly.

*Data in this article comes from Pitchbook, GP Bullhound, CB Insights and online research. Exit data calculated looking at exits as of August 1, 2010 through May 31, 2015 using data from CapIQ, Pitchbook and online research. Exit count includes Yandex and Vkontakte. 

Author’s note: Thanks to Winter Mead, Eugene Chou and Colette Ballou for their help with this article.

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