The startup market is having a moment around the world, but few regions can brag as much as Europe when it comes to venture capital investment. Yes, the United States is putting up impressive numbers and Indian startups are booming. But Europe is such a bright spot in the larger world of private startup investment that it deserves more solo attention.
The data coming out of the continent is staggering: According to a Dealroom report, some €49 billion was raised by European startups in the first six months of 2021. That’s 2.9x as much as was raised by the region’s technology upstarts in the first half of 2020 and easily crests previous full-year records set in 2020 and 2019.
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The epic start to 2021 for European startup fundraising crushes any preceding year that The Exchange has data for, erasing concerns that the continent simply won’t be able to create breakout tech companies that compete globally.
There are other signals that things are red-hot in Europe, including the recent direct listing of Wise on the London Stock Exchange. The company was valued at a huge $11 billion price when it did so.
Rapid investment and big exits are now the norm out of Europe. Naturally, we wanted to learn more about where venture dollars may point in the future. What follows is a synthesis of market data and notes from Diana Koziarska, a partner at SMOK Ventures; Vinoth Jayakumar, a partner at Draper Esprit; Simon Schmincke, a partner at Creandum; and Javier Santiso, a partner at Mundi Ventures.
The picture that emerges is one of sustained optimism, an expectation that venture investment is going to blast through traditional lulls and sustain a rapid-fire cadence during the rest of 2021. Records shall be smashed. But inside the various superlatives, a few sectors may do better than others. And Europe’s comparative gains in the venture capital world aren’t without impacts. Let’s explore what data says about the first half of 2021 in Europe’s startup market, and what its in-crowd expects for the rest of the year.
Inside Europe’s epic start to 2021
The European startup market is putting up notable results for both early-stage and super-late-stage funding. Dealroom reports that in the first half of 2021, some €18.1 billion was raised by European startups in the form of rounds greater than €250 million. For reference, the entire European startup market raised €16.7 billion in the first half of 2020.
But there’s also solid data indicating that Europe is doing a better job than ever in getting smaller companies off the ground. The same Dealroom report indicates that while Europe has created 15% of new global unicorns since 2020, it created 20% of new Series-A-stage startups and a huge 35% of seed-stage tech upstarts.
China, in contrast, is the opposite; the country has 8% of new unicorns since 2020, 6% of Series-A-stage startups and just 3% of the world’s seed-stage tech upstarts.
The interesting China dynamic is repeated in other statistics. Dealroom reports that Latin American venture capital is up 5.5x on a year-over-year basis in H1 2021. Asia excluding China is up 2.3x, as is investment in the United States. In China, a far smaller 1.6x growth rate was seen in the half-year period. But inside that data is the fact that every region we just listed set records in H1 2021, while China posted a figure that was sharply down from prior peak results.
This shows that regions that see a boom in investment can later see declines. But at least in the near term, that doesn’t seem to be in the cards.
What slowdown?
There’s little indication that what we’ve seen thus far from Europe in 2021 will slow in Q3 or Q4. Even though Europe has a reputation for lengthy summer vacations, investors don’t expect much — if any — slowdown to come in Europe during this sun-drenched quarter.
Creandum’s Schmincke said that “prior to the pandemic, most companies made sure to finish their fundraising at the end of Q2 — and then fundraise again at the end of August.” However, that “iron law,” as he put it, “no longer holds true in the post-pandemic world.”
Why? Because the “exceptionally active quarters” that Europe saw to start the year aren’t going to slow. “The deal flow in the last four to six weeks of this quarter [doesn’t] look like it’s slowing down in any way,” the investor said, adding that his firm doesn’t “expect a slowdown in Q3.”
Mundi’s Santiso, asked the same question, simply stated that 2021 “will be a record year in all aspects” in the startup world, including capital deployed, venture fundraising and exits.
The only response to our question regarding Q3 startup investment that wasn’t as enthusiastic came from Draper Esprit’s Jayakumar, who said that things have “slowed down somewhat in Q3 from an anecdotal perspective as more funds now figure out managing face-to-face versus Zoom meetings.” This implies that a return to IRL deal-making could prove a near-term retardant to deal volume.
Regardless, Jayakumar went on to say that “there are a significant number of investors now getting onto planes and traveling across Europe, enduring quarantines, to meet founders. I expect Q4 to be a hot one.”
If there is a slowdown in Q3 2021, it will prove temporary. Or in other words, the H2 2021 venture capital market in Europe is going to scorch. Indeed, early Dealroom data for the second half of the year so far indicates that some €5.7 billion has already been deployed on the continent. Doing some simple run-rate calculations, H2 2021 could beat the first half of the year in terms of capital deployed in Europe.
Where will the money go?
One of the most salient points in the global Q2 data we reviewed is how much fintech accounted for. CB Insights reported that “One of every five venture dollars in Q2 went into fintech,” for a total of $33.7 billion. This trend is also present in Europe, and there is no reason to think it will change in the near future.
“We struggle to see an end to innovation within fintech,” Schmincke said. “It will remain a strong theme in Europe.” As to why, he told TechCrunch that “the vast majority of financial products globally is still run on outdated infrastructure, managed by offline back-end processes provided in less-than-optimal product experiences.” That creates an opportunity for better “consumer, SME, enterprise and infrastructure-facing products.”
If you ask VCs where else the money will go, it’s only natural for them to predict that it will go into whatever they are investing in. So we weren’t surprised when Santiso flagged insurtech as “the next big thing” — after all, Mundi manages a €100 million ($118 million) fund called Alma Mundi Insurtech. But he also had data to back up his prediction: Per a report co-authored by Mundi and Dealroom, “insurtech has been so far underinvested compared to other sectors but is now growing much faster” in terms of global VC investment. This trend is also the same at the European level, as “2021 has already broken every record for European insurtech, surpassing the all-time high in 2020.”
According to this report, the second hottest sector is health, with $62.6 billion VC dollars invested globally in 2020, compared to $24.2 billion in 2016 – a 2.6x multiple. This also aligns with what we heard from VCs about health tech: “We remain bullish on the digitization of the healthcare space — which has many similarities to fintech when it comes to outdated infrastructure and suboptimal user experience,” Schmincke said. SMOK Ventures’ founding partner Koziarska agrees, adding that “it’s not just about the quality of health but also about lowering thresholds for access to better healthcare.”
While definitely not leaders in terms of dollars invested, there are other sectors to pay attention to, we were told. For Schmincke, that’s green tech, “because it’s necessary for the world, and because the consumer demands it.” As for Koziarska, she is betting on the growth of esports, “not only as entertainment but as a way to reach and interact with Gen Z.”
It may seem a bit scattered, but Jayakumar provided us with a form of synthesis when he highlighted deep tech. Although it is a sector of its own, it is also transversal, because AI can and does impact various verticals, including the above-mentioned ones like fintech, insurtech and health tech. It is also a theme that both the U.K. and the European Union are keen to tackle.
“A lot has been said about the ‘Cambrian explosion’ in deep tech hubs in the U.K. in particular, such as Cambridge,” Jayakumar said. He noted that Draper Esprit itself belongs to the “patient capital funds” that are backing this trend, and is an LP in some of the dedicated deep tech funds that have emerged both in the U.K. and in continental Europe.
Indeed, the latter doesn’t want to be left behind: Jayakumar noted that government grants are contributing to the acceleration of deep tech in the U.K., but a Scale-Up Europe report also recently insisted on the importance of this sector for the European tech’s roadmap, as we previously reported. “Creating appropriate funding mechanisms that bring together the science and business worlds to channel research efforts are appropriate levers for Europe to become the world’s deep tech powerhouse.”
We were also curious to hear VCs’ take on post-Brexit U.K. and whether it would change the playing field for startups, especially fintech ones, but it doesn’t seem to be the case. This might not even be a surprise: “Few people in the venture world were truly worried that the technology sector would be heavily hit by Brexit,” Schmincke reminded us. “So yes, we do not see any slowdown in innovation from U.K. fintechs so far.”
However, Schmincke still described one aspect of the post-Brexit environment as worrisome: “The utter unpreparedness of visa and work regulations for non-U.K. workers already in the U.K., and those who are still interested in coming to the country. … It’s hard to imagine that it will not have a negative effect on tech companies in Britain across sectors.” While Jayakumar separately highlighted the COVID-induced rise of remote hiring and onboarding as mitigating factors, it remains to be seen whether this will be enough to alleviate founders’ concerns about attracting talent. Could London just be one hub among many?
If that happens, it won’t be bad for the larger EU scene even if it isn’t great for Londoners. Let’s see what Q3 data shows, but if the quarter ends as it started, expect more big numbers and perhaps even some new records.
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