Late-stage capital is having a ‘cascading effect’ on European VC activity


Image Credits: Nigel Sussman (opens in a new window)

Capping off our dig into the early-stage venture capital market, we’re taking a quick look at Europe this morning. Previously, The Exchange tucked into the United States’ early-stage market for startup capital, uncovering startups using abundant seed capital to get more done before raising a Series A, while others were using pedigree, team and market size to accelerate their first lettered raise.

For both cohorts, it appeared that a rapid-fire Series B could be in the offing, with VCs looking to get capital into winners early.

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The Latin American venture capital market for early-stage startups had a number of similar hallmarks. That shouldn’t have been surprising. According to Seth Pierrepont, a partner at London-based Accel, “fundraising dynamics are now no longer U.S.- or European-specific — they’re global.” Fundraising over videoconferencing services like Zoom has done more than make geographical distances less impactful inside of countries — it’s even made national borders and even oceans less meaningful.

Is the European startup market similar to what we’ve seen in Latin America and the United States — a cognate for the North American venture capital scene, given its outsized global weight by round count and amount invested?

Largely, yes, a trend that appears to be shaking up prices and the talent wars. This morning, we’re taking a final look at the early-stage venture capital market, this time through a European lens, with an assist from a few investors from the continent.

An influx of late-stage capital

Broadly, early-stage venture capital rounds in Europe are happening “earlier and are larger in size,” according to Draper Esprit’s Vinoth Jayakumar, an investor based in London. The correlate of larger rounds being raised while startups are younger is valuation expansion, according to Jayakumar, who said that prices are going up “because larger rounds are very dilutive to founders if done at normal — or in this case too low — valuations.”

Those larger valuations are stretching the resulting valuation multiples for hot startups. According to the investor, he’s seeing startups raise capital at $100 million pre-money valuations with less than $1 million in annual recurring revenue, or ARR. Europe, then, has reached something akin to Silicon Valley pricing parity for some rounds.

Why are rounds getting larger and earlier? As we saw in other regions, “there is scope creep across the board,” Jayakumar explained. This means that firms like Warburg Pincus are investing in the Series A and B range, while they “might have only looked at Series D onward” in different times, he said.

Other dynamics are at play, Jayakumar added, including more active private equity players and even some capital pools investing directly instead of pursuing LP relationships with venture capital firms. “In this competitive scene,” he noted, “all funds are going earlier to get into the good deals.”

This is what Sapphire’s Jai Das called a “cascading effect,” one in which formerly pre-IPO investors are reaching down to the Series C market, while Series C investors are also looking earlier.

More capital is making the early-stage market in Europe faster and more expensive. Intrainvestor competition is also playing a role. According to Pierrepont, “many rounds are catalyzed preemptively, and we’re seeing growth funds active at all stages, though Series B and beyond is more common.” So not only are there more players in the game, but also more players trying to score a goal before the whistle is blown.

The result of all of that is for “top [startups], rounds are being done in very quick succession,” Pierrepont said. “ In some cases, companies are raising next year’s round and even the round after that, today.” Europe is very risk-on.

Many factors are helping make Europe’s startup scene so active. But it’s not just more money in its local venture capital market. The global startup market is starting to look like just that, and Zoom takes part of the credit.

Zoom’s talent impact

The fact that deals can now be closed remotely helped create new opportunities for entrepreneurs outside of the U.S. “In the last 18 months, Zoom has flattened the world when it comes to the venture financing markets,” Pierrepont said. This also explains why the ARR range at the Series A stage seems all over the place: “In many instances, fundraising — especially at the earlier stages — has less to do with proof points and traction and more to do with the team, product and market opportunity,” he added.

What’s true in the United States is starting to become a reality everywhere. In Pierrepont’s words, “the size of rounds has grown and the timing between rounds has shrunk.” We confirmed this with Michael Tolo, Australia-based principal at Blackbird Ventures. “Our ecosystem has internationalized (and so too have pricing benchmarks),” he told The Exchange. Referring to the fact that Australian Series A rounds used to be smaller than their U.S. counterparts, he explained that “the ‘Aussie A’ round no longer exists for our best founders and businesses, who are raising larger rounds at higher valuations right from the very beginning.”

Tolo’s wording suggests that two realities still coexist in Australia, but not in the same way that it does in Latin America. As we’ve seen there, capital tends to benefit a certain class of founders pursuing proven business models, oftentimes copycats. In contrast, Tolo sees the growing raised amounts as an opportunity for risk-taking: “It has enabled founders to build in sectors that are more capital-intensive [to] launch services, synthetic biology, and other frontier technologies — and to take bold first steps toward reimagining foundational markets from inception,” he said.

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This is better news than we expected for entrepreneurs around the world. “More capital does not necessarily ensure better outcomes, but it can provide founders with options that do not exist in a capital-constrained environment,” Tolo noted. And capital is about to become even more readily available to European entrepreneurs, with Accel today announcing that it closed a new early-stage fund of $650 million for Europe and Israel. Combined with the 15th U.S. early-stage fund of $650 million and the sixth growth fund of $1.75 billion it jointly unveiled, this brings the total in new funding to a staggering $3 billion.

Accel closes on $3B across three funds as it ramps up global investing

The rise in global capital provides an explanation as to why all markets increasingly follow the same trends when it comes to Series A and B rounds. As Accel and its LPs double down on their strategy to bet on “the most innovative companies, wherever they may originate,” it is easy to see how founders who manage to attach themselves to the “world-class” label can leverage this trend to their advantage.

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