SEATTLE — July 20, 2017 — European venture capital activity slowed once again in the second quarter, pacing 2017 as the third consecutive year showing overall declines, according to PitchBook’s 2Q 2017 European Venture Report. So far this year, venture capitalists invested €6.61 billion across 1,244 deals, the fifth straight quarterly decline. With political and economic tensions from Brexit and other critical elections beginning to cool, VCs faced new challenges in 2Q as they worked to revive dealmaking in the region. Despite the healthy fundraising environment, deal flow declined across most stages in the second quarter, particularly angel and seed financings, which mirrored U.S. deal flow over the past year. Also similar to the U.S., exit activity slowed in the second quarter with just 157 deals, following four years of strong exits from both completed transactions and exit value.
“While the quarter-over-quarter declines in the European venture capital markets are concerning for some, it’s important to remember Europe’s VC ecosystem is much smaller than its U.S. counterpart, and faces a slew of geopolitical challenges that can have a heavy impact on dealmaking,” said Kyle Stanford, analyst at PitchBook. “Given the recent steadying of Europe’s political climate and healthy fundraising, we expect to see VCs put their capital back to work in the coming quarters and thus, eventually a return to normal.”
Fundraising Trail Offers Fewer, Larger Funds
VC fundraising remained strong in the first half of the year with €4.2 billion in funds raised, pacing 2017 to potentially meet or exceed the decade-high €9 billion raised last year. In Q2, the average VC fund size reached €182 million, which is up from €153 million last year. While fund sizes increased, the number of funds declined for the sixth straight year. Only 24 funds have closed in 2017, down from 44 during the same time last year. Of the 16 funds closed in Q2, 10 were over €100 million and just four raised under €50 million, further underscoring the global trend of smaller funds falling out of VC favor. Now more than ever, VCs are raising fewer, larger funds to put towards late stage companies.
Deal Flow Slides, Hitting Angel and Seed Stages the Hardest
Continuing its downward trend, European VC financings have fallen for five consecutive quarters. In Q2 2017, there was €3.24 billion deployed across 540 deals, down from €3.37 billion invested across 704 deals in Q1. Despite the role Europe’s political and economic uncertainty has played in its VC market slowdown, the decline in angel and seed financing can also be seen around the world. The increased presence of incubators and accelerators has fundamentally changed how startups approach these early stages of financing and when combined with the cheaper cost of doing business, it delays the need for traditional VC.
Although slow moving, Europe’s VC pendulum is expected to swing in the right direction. Its healthy fundraising environment, coupled with a more stable political landscape and various government-backed initiatives is creating a more business-friendly environment. This is especially the case in France, where President Macron is planning to cut capital gains taxes as well as the French wealth tax, and designate an €11.2 billion public fund to invest in startups. Station F, the world’s largest startup campus located in Paris, has also helped attract VC interest to the city.
Political Uncertainty Still Haunts VC Exit Market
Much like the US, VC-backed exits were few and far between in the first half of 2017. There were just 157 exits totaling €5.4 billion, with the majority of exit value generated by four M&A exits (Ogeda, CMC, Biologics and Ziarco) and one IPO (Delivery Hero). Acquisitions continued to be the most popular exit ramp for VC-backed companies, accounting for 71% of completed exits in the second quarter.
Since 2013, Europe’s exit flow steadily climbed, reaching a peak in 2015 with 539 exits totaling €14.9 billion. The drop off in exits can be traced back to uncertainties hovering over the continent. Public markets have become less enticing and corporations are tightened their purse strings as they await a market shakeout. However, as the region’s economy continues to show signs of stability, exit activity is expected to normalize.
Additional findings in this report include:
- VC deal flow/total capital invested
- Median fund sizes and time to close
- Median deal sizes by financing stage
- Most active industries for investment
- VC exit flow
- VC fundraising
Download the full report here.
Founded in 2007, PitchBook is a data provider that tracks every aspect of the private and public markets, specializing in venture capital, private equity and M&A. More than 10,000 professionals access PitchBook’s data through the company’s award-winning software products. PitchBook is a Morningstar company with offices in Seattle, New York and London.