A turning point or peak for European VC industry?

February 4, 2016

European venture capital numbers exemplify both the issues facing the U.S. venture industry as well as the continent's own particular challenges. Much like the U.S., although in relatively greater scale, European venture financing activity plunged between 2014 and 2015 even as overall value boomed, the former down by 29.5% and the latter soaring close to 40%.  Such dramatic disparities, as well as the steeper slide in early-stage investment compared to the late stage, highlight how VC investors began to pull back some time ago, yet continued to ply the companies perceived to be less risky with large sums. But as quarterly totals reveal, overall, European VC invested began to slide in the back half of 2015.

European VC activity by year

Source: PitchBook

The slide came too late to affect median round sizes overly much, thus resulting in massive inflation at the late stage in particular. A preponderant amount of VC from U.S.-based sources contributed mightily to those medians, more telling of how U.S. firms began to diversify their financing efforts to perhaps more attractively valued European startups than anything else. Yet it must be noted that the fact mature European companies can garner such sizable sums from non-domestic investors speaks to how the continent's entrepreneurial ecosystem is not lacking in the production of viable businesses, rather, it is lacking sufficient European funding.

For additional analysis on VC activity in Europe, including a U.K. spotlight, deal flow by region and more, download our latest European Venture Industry Report.

European median VC round size (€M)

Source: PitchBook

Granted, the steady decrease in the percentage of Europe financings with U.S.-based investor participation indicates the situation has improved since the past, and it's not necessarily a bad thing for European entrepreneurs to receive their funding from abroad, but for a truly vibrant European VC industry, hurdles for local fundraisers must be cleared.

% of rounds with U.S.-based investor participation

Source: PitchBook

In an encouraging sign that could whet investor appetite, the past two years have seen over €21 billion in total venture-backed exit value across 856 exits. The boom in M&A over the past couple years has been the primary driver of such increased liquidity, with a bevy of large pharma & biotech buys by giants such as Amgen and Roche accounting for much of the recent surge in value. 

European VC exits by year

Source: PitchBook

What we have found is that in Europe, as opposed to the U.S., the decline is not so much due to the severity of a funding hangover of sorts after an overexuberant period—although certain niche industries have become overheated—but more a pullback by investors apprehensive of risks centered around growth potential. Consequently, the dip in activity is and will be largely dependent on perceived stability, which, given the heightened volatility persisting throughout financial markets worldwide, is in short supply.

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