Duet Partners
Tel: +44 (0) 20 7416 6630 / Email: partners@duetpartners.com

Newsletter

Weekly Briefing Note for Founders

9th December 2021

This week on the startup to scaleup journey:
  • The State of European Tech in 2021
  • Understanding a VC's true investment thesis
  • Are unicorns draining the talent pool?

1. Insights of the week

The State of European Tech in 2021

European tech is on track to exceed $100B in capital invested in a single year for the first time, according to the latest State of European Tech report. This is close to three times the level recorded in 2020 and 10x the level when the report was first launched back in 2015. This catapults the total value of the European tech ecosystem beyond $3T. It took decades to reach a value of $1T in December 2018, but the next two were reached in record time. If growth follows that projected for global public markets this value will exceed $10T by 2030. Investment growth in 2021 has largely been driven by bigger rounds ($250M+) and they now represent a whopping 40% of the total capital invested in Europe. There have already been 57 rounds of this size, which is close to double the number achieved in the previous three years combined - a new record in European tech history. $100M+ rounds are now a regular occurrence with rounds of this size being announced every other day through 2021. So far this year, the top 10 funding rounds alone have accounted for more than 10% of all capital raised.

At the other end of the scale, the number of funding rounds of $5M or less – a proxy for pre-seed and seed level companies – will be similar to that of 2020, after trending downwards for the past 5 years. Interestingly, European startups account for 33% of all capital invested globally in rounds of up to $5M, compared to 35% for the United States. But, according to a recent McKinsey report, graduation rates to Series A and beyond continue to lag well behind the US. Almost one-fifth of European founders say it has become harder to raise capital in 2021, while a further 40% or so believe the environment remains unchanged from the past year, which itself was a year that saw a record number of founders claim that fundraising had become harder. For women and non-white founders, the situation has been even more challenging, with over one quarter of respondents saying it has become harder to raise capital in 2021. When asked to cite the biggest challenges founders have faced, securing access to capital was more likely to be cited by founders of consumer-oriented companies (B2C) than by those with a B2B focus. This is marked shift over recent years.

Europe continues to produce more tech IPOs than the US. $1B+ IPOs are becoming the norm with record-breaking exit activity reaching an astonishing $275B in deal value this year. This is fuelling an increase in the investor base across Europe. In total, the number of unique institutions active in Europe in 2021 increased by more than 25% from 2020. The most significant changes were evident in the growth stages, where the number of unique institutions participating in rounds of $100M and up more than doubled in the last year, and increased by more than 6x since 2017. Over the past five years, funds raised from pension funds by general partners (GPs) more than doubled in Europe, with a peak of $1.8B in 2019. Interestingly, only around 50% of total funds raised by VCs from pension funds have come from European pension funds specifically. Indeed, European pension funds invested less than $700M in total into European VC funds in 2020. With over $3T in total assets, their yearly investment in European venture represents less than 0.018% of their total. Raising that to 1% would have a seismic impact on the European startup ecosystem.


Understanding a VC's true investment thesis

One of the biggest challenges founders face when raising capital is which investors to approach. The VC category covers a very broad spectrum of different fund types with diverse needs and interests. Experienced founders know that most VCs operate under a clear investment thesis. This is essentially a set of top-level investment criteria used to filter deals that will be a match for their fund. By understanding these criteria, founders can target funds that are relevant and not waste time chasing after funds that will never invest, no matter how compelling the investment proposition. These criteria usually encompass the sector or sectors they focus on (such as Fintech or Biotech) and the stage of the companies they will invest in (such as Seed or Series A). Other common factors are geographic location, the typical cheque size, and the business model (such as B2B or B2C). By developing a focus around a clear investment thesis, investors develop a much deeper appreciation of the risk/reward profile of the companies they target. VCs will only invest in that which they understand.

The investment thesis is also a key selling point for those investing in the fund (the LPs or Limited Partners). LPs will have preferences too and they try hard to align their needs with those of the VC funds seeking capital. But whilst VCs will strongly signal to LPs what they are looking for, they can be quite vague when 'marketing' the fund to founders. This is quite intentional. Even though they will signpost the major criteria (such as sector and stage), most want to leave themselves scope to invest 'on the margins'. If they are heavily attracted to one aspect of a proposition such as the team, they may be more flexible when assessing other criteria. In other words, whilst the investment thesis provides a broad guide to their investment preferences, there will be additional factors that will sway their decision when assessing individual investment cases. When researching investors that might be a fit, the most telling insights therefore come from a detailed analysis of what they have invested in before, rather than just looking at the headline criteria they talk about publicly. The major investment research platforms allow ever increasing levels of filtering on even the most nuanced criteria, revealing the 'true' investment patterns of a VC. This enables much of this research to be done using automation, with only the finer details requiring a degree of more traditional detective work to arrive at a final 'short list'.

One of the more fascinating aspects of the past 2 years has been the speed with which the hottest deals have been done. VCs have been relying more than ever on the strength of their networks to ensure they get invited into the best opportunities before they disappear off the table. Managing high quality deal flow is one of the constant anxieties of even the most prominent funds. For founders looking to syndicate large rounds, understanding who the potential lead investors could be and who they regularly co-invest with has increasingly become a key factor in bringing a timely deal together. Funds that tend not to lead but are active co-investment partners with other higher profile funds are more likely to bend the rules of their core investment thesis on those occasions. And the latest trend is for large growth stage funds - who have not been part of the courting process during the round - to step in and make preemptive offers not long after deals are inked. More money on the same terms can potentially be very appealing. This in itself is a radical new type of 'investment thesis' and is helping fuel record growth in venture capital deployment.


Are unicorns draining the talent pool?

Europe is producing unicorns at a faster pace than ever before. Over 100 new unicorns have been created since the beginning of this year, according to the 2021 State of European Tech report. As the herd grows, followed by an expanding cohort of other maturing scaleups, the talent pool is compounding. An increasing number of mature $1B+ valuation companies are parents to many new founders, creating ever higher degrees of talent recycling. Spotify, for example, has contributed 95 alumni founders across Europe. But while 43% of repeat founders believe the depth of the talent pool has improved over the past year, 21% of all people surveyed still see talent as one the greatest challenges facing the ecosystem, second only to funding. The more experienced the founder the more inclined they are to think that the talent pool has improved. This correlation is perhaps not surprising. Leaders with previous experience are more likely to value their ability to access deep networks, operate at scale, and hire effectively.

In order to better understand the talent pool in the European tech ecosystem, this latest report studied 5,000 private tech companies headquartered in Europe that have raised at least $2M of capital from venture investors since 1 January 2020. This encompassed 38,000 founders and leaders. This revealed that 38% had experience at two or more tech companies and 19% had gained experience working at a European unicorn. There is also a remarkable degree of mobility in this senior workforce: 42% are currently based and working in a different country to where they completed their academic studies. The median operating experience in Europe is 7.5 years for founders and 5.7 years for leaders. UK and Swedish founders stand out for their greater overall years of experience (median of 8.8 years). The UK stands out for having the largest share of highly experienced (20+ years) founders and leaders - around twice as high as its two main 'rival' countries, France and Germany.

The war for talent is heating up, with more than 50% of founders in several countries saying it has become harder to acquire new talent in the past year. Interestingly, this was most frequently highlighted by founders of Seed and Series A stage companies. As more companies have entered the scale-up stage this year, this has put further pressure on companies upstream, often less able to compete aggressively on compensation packages. Equity is becoming an ever more critical factor in attracting and retaining people, with ESOP stock option pools in Europe still playing catch-up with other regions like the US. All eyes are now on the newly established European Startup Nations Alliance to try and wrestle down this ongoing problem. On a more positive note, European founders have been slightly more aggressive in defending their ownership though funding rounds in 2021. Median founder equity is currently 31% at Seed, 18% at Series A, and 14% at Series B - all now very comparable with US founders.


2. Other pieces really worth reading this week: 

What is your superpower?
From the highly creative pen of Yannick Oswald, early-stage VC at Mangrove Capital Partners. "Great questions raise an issue and force everyone in the room to think differently. Many people and companies do things right but don’t do the right thing. Taking the observation one step further, doing the right thing the wrong way can actually result in something meaningful, whereas doing the wrong thing the right way rarely does... So that begs the question, '"What should we work on?"

9 Ways to Engineer Viral Products & Growth 
Actionable insights from growth adviser Matt Ward in this latest article. "When it comes to producing hockey stick growth and exploding valuations, virality and word of mouth are the holy grail. A product that markets itself without spending a dime on customer acquisition (CAC)… That is the stuff of legends that every company strives for, but few ever achieve..."

How to Hire, Onboard & Manage a High-Impact Design Org
From the First Round Review a great playbook for building a high-impact design organization. What to look for in designers, design managers and directors. Plus, interviewing tips for both hiring managers and designers. 

Happy reading!

back to newsletters

Subscribe to our Newsletter

Stay informed. We will email you when a new newsletter is published.

* indicates required

To subscribe to our Blog Articles click here

search