Speedinvest, an Austrian venture capital fund, teamed up with Prof Reiner Braun, an expert in entrepreneurial finance at Technical University Munich, to study how European VCs invest in startups and compare the European ecosystem to the more established US market.
Together, they surveyed over 430 European venture capitalists to learn about their views on the European startup scene. The findings were released in the “Inside the Minds of European VCs” report by Speedinvest on June 6, 2023.
While many investors and founders often share common ideas and stories, there’s not much solid data to back up these ideas or where they fall short.
According to Speedinvest, the survey focused on better understanding how European VCs make investment decisions, operate, and view the European market, making it one of the largest-ever surveys of European investors.
They asked these venture capitalists how they make investment decisions, work, and think about the European market. They also collected their comments and opinions to come up with some solid findings about the state of European venture capital.
Here are a few key takeaways:
The European VC ecosystem is still young
The European VC ecosystem is relatively young compared to the US. The average European VC firm has operated for just over a decade.
Meanwhile, US firms started around 1998 on average, giving them a 20-year advantage in experience and maturity compared to Europe.
European VC firms are growing and maturing
European VC firms are growing and maturing with recent fund generations averaging €120M and the top 25 per cent starting at €267.5M. Some firms are raising funds exceeding €500M.
This amount is still less than the multi-billion dollar US venture funds, but it’s a positive step forward. This growth is also reflected in the total assets managed by European firms with a median of €300M and the top 25 per cent starting at €750M.
European firms favour early-stage investments
Around 65 per cent of European VC firms primarily target Seed and Early-Stage (Series A) investments. This trend aligns with the perception that most growth capital in Europe comes from sources outside the continent.
While there has been a slow shift towards more European participation in substantial Series C to pre-IPO rounds in recent years, it remains to be seen if this trend will continue, particularly in the face of macroeconomic challenges in the VC industry.
European VC’s regional hubs
Around 53 per cent of European VC firms are located in strong economies like France, Germany, and the UK, with emerging hubs in places like the Netherlands, Spain, Switzerland, and the Nordics. Luxembourg mainly acts as a regulatory centre.
Unlike the US where Silicon Valley dominates, Europe’s VC scene is more distributed. The data shows that the European VC market is dispersed across more than ten countries, each with its own focus areas.
European VC’s market fragmentation
Nearly 90 per cent of surveyed investors acknowledge the existence of multiple regional ecosystems rather than a unified European market. This perception is attributed to several factors:
- 70 per cent cite cultural differences
- 68 per cent point to varying maturity levels among regions
- 65 per cent mention the impact of regulatory differences
- 55 per cent highlight language barriers as a contributing factor
The data shows that the geographical distance and talent accessibility seem to matter less to investors. Investors also note significant disparities across regions and sectors regarding tax laws, capital market depth, bureaucracy, and regulations.
London stands out as an exception. It is often cited for its advanced status compared to other regions due to its talent pool, favourable regulatory environment, and strong ties to capital markets.
Despite Brexit, many European VCs still view London as the closest hub to matching the US in terms of venture capital activity.
European VC’s strengths
The report shows that most participants agree that the European startup scene has been getting better, especially in recent years. When European investors were asked about Europe’s strengths compared to the US ecosystem, they pointed to these areas:
- Educational system and universities
- Access to great talent
- Technological know-how and IP
These strengths have attracted increased interest from US investors, with 76 per cent noticing more US involvement in European startups.
Public funding, including grants, is also a plus. But it comes with mixed views. Some investors believe governments shouldn’t directly act as venture capitalists but instead, support professional VC funds and create favourable regulations.
Investors feel public funding should be more catalytic as some regions and sectors rely too heavily on it. Nevertheless, public funds play a crucial role in financing research and innovation at universities and elsewhere.
European ecosystem’s weakness
The state of European capital markets and the exit environment pose a significant risk to the ecosystem.
According to the survey, 75 per cent of respondents highlighted this as a longstanding and substantial barrier. The absence of a robust IPO market in Europe also exacerbates these challenges.
This issue, which has persisted for over two decades, continues to hinder European innovation. However, survey participants are eager to propose solutions, such as establishing a European NASDAQ to create a dedicated capital market segment.
Immaturity of the ecosystem
Since Europe’s venture capital ecosystem started later than the US, it faces criticism for its relative immaturity. In the survey, 62 per cent of respondents pointed to a lack of experienced executives in Europe who have successfully scaled companies, particularly when compared to the US.
While the ecosystem may not be as mature as desired, the talent pool is growing in experience and expertise. Individuals from larger, successful companies are now venturing out to start their own companies after gaining experience in scaling.
The Private LP market must grow
Survey results show that Europe’s private limited partner (LP) market lags significantly behind the US with 59 per cent of respondents noting its immaturity and smaller scale.
The underdeveloped private LP market in Europe needs greater reliance on public funding. Participants suggested modifying pension fund investment regulations to enable greater allocation to venture capital.
This adjustment could attract more LP investment to the European venture capital sector.
Read the orginal article: https://siliconcanals.com/news/startups/speedinvest-survey/
