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Across every metric, Europe’s capital markets are maturing. There are more investors of every type, at every funding stage, and from international as well as domestic funds.
Insights
More investors than ever - the pool is broadening as well as deepening
The count of unique institutions participating in rounds of $100B+ increased nearly 7x in the past five years. Although 55% of rounds involve a venture fund, other types of investors are active in a meaningful share of deals such as corporate, private equity, but also LPs, corporate venture funds, angels and crossover funds.
The rise of the crossover investor
Crossover investors, who are typically public equity asset managers that also invest in privately backed companies and include the likes of Tiger Global and Coatue Management, have made a very visible and noteworthy foray into European tech in 2021. The top 12 most active crossover investors alone participated in 32% of rounds of $100M+ in 2021 versus just 12% of rounds between 2017 to 2020.
2021: the year of megarounds
Megarounds over $100M+ now count for a growing share of capital invested in European tech in 2021 while international investors are more active at later stages of funding.
More investors are venturing into European tech
The number of investors participating in the European tech scene has increased steadily, with close to 3,000 institutions investing in at least one deal in 2021. And we have continued to see the expansion of the depth and breadth of the investor base - from angels and scouts to venture debt, private equity and crossover investors. Even public pools of capital are now coming into the private markets. What this data does not show (but we will explore further in this article) is the increased "convergence of interests" amongst these different types of investors as their appetite to access European tech in the private markets grow.
Number of unique institutions that have participated in at least one and five deals in Europe per year, 2017 to 2020
- At least one deal per year
- At least five deals per year
- Notes
- All Dealroom.co data excludes Israel and the following: biotech, secondary transactions, debt, lending capital, and grants. 2021 figures show data up to September 2021.
The size of the European market is far more mature and larger than it was pre-pandemic, attracting a new set of investors as potential returns from VC backed businesses become more attractive than lower risk opportunities.
We’re seeing greater inflows of capital coming from non-traditional investors and a more diverse range of capital sources. At the late stage, investors are willing to pay a premium to participate in pre-exit rounds which are boosting valuations.
Beyond traditional equity capital, over $11bn of venture debt has been raised across Europe in the year to date; almost $4.5bn of that has been raised by innovation businesses in the UK alone, as European businesses embrace a hybrid approach to financing growth. Also, entrepreneurs who are on their second or third venture are more comfortable with using venture debt to reduce the cost of capital and ownership dilution, while the number of providers of debt has grown substantially. US investment entering the UK is also a factor as venture debt is used in nine out of ten rounds in the US. As US participation grows, levels in Europe will change.
Venture debt continues to chart its own path
Venture debt is an important source of alternative funding in the European capital markets and plays a highly complementary role alongside equity-based venture capital. The absolute value of total venture debt funding in 2021 has already set new records in just the first nine months of the year. On an annualised basis, total venture debt funding will approach the $3B level, growing more than 2.5x over the past five years. On a relative basis compared to equity financing, the growth of venture debt has not kept pace and, as a consequence, has fallen as a share of total funds raised across equity and debt financing.
Total venture debt financing and as % of venture financing in Europe
- Absolute venture debt funding ($B)
- % of venture debt of all funding
- Notes
- All Dealroom.co data excludes Israel and the following: biotech, secondary transactions, debt, lending capital, and grants. 2021 figures show data up to September 2021.
Select angel networks in Europe
$1B+ alumni angels joining forces to supercharge early stage private markets. This is an interesting trend that complement the VC led initiatives covered in the article: VC Disrupt or be Disrupted. Whether started by VC funds or by operators themselves, these programmes participate in building out the depth and breadth of the investor landscape to re-invest into the next generation of companies.
Founded by Truecaller founding team
Sweden
Founded by Fortumo founders
Estonia
Founded by Spotify operators
Germany
Founded by Pipedrive operators
Estonia
Founded by Wise and Teleport founders
Estonia
Founded by Revolut operators
United Kingdom
Founders care less about physical proximity to investors
Beyond the strengthening of the talent base and the quality of companies started in Europe, another factor that is broadening access to more investors is the decreasing importance of physical proximity to investors. A large share of founders - in some cases the majority of founders - from Pre-seed to Series A said they now place less importance on physical proximity to investors compared to 12 months, building on a trend already highlighted as meaningful in last year's report.
International capital more important at later stage
As Europe's private capital markets supporting the tech ecosystem mature, they're have become more international, both in terms of cross-border flows of capital within Europe, as well in terms of the flow of overseas investment into the region from outside Europe, especially from the United States. The importance of international capital from outside Europe is particularly prevalent in later-stage funding rounds of $50M and above. International capital is more easily deployed at these stages, but this dynamic also speaks to the relative lack of depth and, arguably, perceived sophistication of the European investor base targeting those stages.
Share of capital invested (%) in Europe by round size and geographic source region, 2017 to 2021
- Domestic
- Cross-border
- Asia
- North America
- Rest of World
- Notes
- All Dealroom.co data excludes Israel and the following: biotech, secondary transactions, debt, lending capital, and grants. 2021 figures show data up to September 2021.
The geographic sources of capital invested vary significantly across countries
There are some similarities across markets: domestic funding is the main source of capital in the United Kingdom, Germany and France at the early stages and international capital plays a large role at late stages. But there are some nuances across these markets. France, for example, remains the most 'domestic' amongst Europe's largest markets, including at the later stages. Multi-stage funds such as Eurazeo and Partech are very active local growth investors in France, and more are coming - like Revaia, a newly raised growth fund of 2021. But it's also clear that the dynamics in the French market are evolving thanks to a healthy appetite from international investors from inside and outside Europe to deploy capital in France.
Share of capital invested (%) in the United Kingdom, Germany and France by round size and geographic source region, 2017 to 2021
- Domestic
- Cross-border
- Asia
- North America
- Rest of World
- Notes
- All Dealroom.co data excludes Israel and the following: biotech, secondary transactions, debt, lending capital, and grants. 2021 figures show data up to September 2021.
Internationalisation of European tech investment
The share of funding raised by European tech companies from domestic investors has changed rapidly - in the case of France and the UK it has halved over the past five years. The capital markets for European tech companies have become more and more international over time. This is healthy for the overall ecosystem from the perspective of founders as it brings increased liquidity, optionality and sophistication to the capital markets. But different stakeholders, such as policymakers, might have different perspectives, depending on their objectives and incentives.
Share of domestic capital invested (%) in the United Kingdom, Germany and France, 2017 to 2021
- United Kingdom
- Germany
- France
- Notes
- All Dealroom.co data excludes Israel and the following: biotech, secondary transactions, debt, lending capital, and grants. 2021 figures show data up to September 2021.
US and Asian investors are increasing their allocation to European tech
2021 saw a jump in involvement of US and Asian investors in European fundraising activities. While an increase has taken place across deal sizes, the step up is most profound in the largest valued. For example, in 2020 73% of rounds of $250M+ in Europe involved either a US or Asian investors, but the 2021 figure has now risen to 95% of all deals.
Share of deals with participation of at least one US or Asian investor by round size
- United States or Asia
- United States
- Asia
- Notes
- All Dealroom.co data excludes Israel and the following: biotech, secondary transactions, debt, lending capital, and grants. 2021 figures show data up to September 2021.
Better and bigger ideas attracting greater numbers of world-class investors
There has been a significant increase across the largest rounds ($100M+) where now close to 400 unique institutions were involved in a deal this year versus just 50 in 2017, or a 7x step up over the past five years - a significant development for the ecosystem. This expansion is in many ways the articulation of the virtuous cycle that is feeding the European tech flywheel: Europe now has a greater supply of high-quality companies with better and bigger ideas which in turn attracts world-class investors. Europe currently has the deepest pool of investors we have ever seen: there has never been a better time to try and raise capital as a founder; but this has led to competition intensifying. Amongst the smaller round sizes of less than $10M, the count of unique investors has grown from a drop in 2019, but remains lower than in 2017. It should be noted, however, that these numbers are likely still impacted by the reporting lag that means that not all activity in these earliest-stage rounds has been tracked and reported in the most recent totals for 2020 and 2021.
The European start-up ecosystem has arguably reached a level of maturity this year, but we are still barely passed the starting line.
Thanks to the rapid tech acceleration catalysed by Covid-19 there’s never been a better time to build and scale a technology company. Whilst the supply of companies has grown exponentially as a result, the supply of capital, particularly into new and emerging managers hasn’t grown anything like so quickly. There’s enormous headroom for expansion; for example, there are still fewer than 50 European pre-seed funds and far fewer dedicated fund of funds or endowments investing in European Venture. I’m hopeful that in 2022 this will catch up and we will see many more new emerging and diverse funds with differentiated strategies successfully raise.
Megarounds account for a growing share of capital invested in 2021
Not surprisingly, the large growth in the volume of investors in megarounds is reflected in the increasing concentration of capital invested in these large-scale rounds. In 2020, megarounds of $100M or more accounted for 1.6% of all deal activity, while raising 33% of total capital invested. This year, these numbers have risen to 4.2% of all deal activity and close to 60% of the total capital invested. For additional context, it is noteworthy that the share of rounds raised that are sized between $100-250M have doubled and those over $250M have seen a sixfold increase in their share of total rounds.
The rise of the crossover investor
To illustrate the breadth and depth of the investor pool, we looked at the list of active institutions participating in rounds of $100M or more in 2021 and compared their activity to prior years. Crossover investors, who are typically public equity asset managers that also invest in privately backed companies and include the likes of Tiger Global and Coatue Management, have made a very visible and noteworthy foray into European tech in 2021. The top 12 most active crossover investors alone participated in 32% of rounds of $100M+ in 2021 versus just 12% of rounds between 2017 to 2020. Private equity investors, corporate investors, dedicated corporate venture funds, and family offices (5%) are also active at these stages in differing levels of participation.
Disruptive new investors force incumbents to evolve their product
By now much ink has already been spilled on the foray of crossover investors into European tech, as we explored in the previous article. Tiger Global, in particular, has been the 'talk of the town' for much of 2021 with their disruptive approach to accessing and winning high profile opportunities. The influence on the ecosystem goes beyond the immediately obvious. There are clear second-order effects that their presence brings to the market. The increased competition forces all investors to innovate on their core 'product' and to develop strategies to stay competitive. This should, in theory, benefit the founder community in terms of access to a greater pool of more sophisticated and evolved products.
Just as has been the case for private tech, a deep and sophisticated investor pool is a necessary feature of a liquid and stable public tech market.
Many of this year’s European listings were priced and traded at a discount to US peers with significant dispersion in public performance. While clearly some of this was idiosyncratic, in the main it was also a reflection of the currently more limited appetite and analyst coverage of European public markets for high growth technology listings. Nonetheless, the latest volley of IPOs also attracted some of the highest interest yet from international investors.
As with any dislocation, this capital demand and supply gap is a huge opportunity for the right investor base. This should increasingly include sophisticated private investors adding crossover vehicles to go full stack given their informational advantage on the public pipeline, as we have already seen, as well as global public technology investors expanding capital allocation in Europe.