Record valuations at home are pushing overseas investors to look abroad
1H19 investment into European Tech was an all-time high, but analysis of reports from key industry researchers reveal some important new trends as overseas investors shift focus. Entrepreneurs should factor these insights into their fundraising plans.
According to Dealroom’s July 2019 report, €9.3B was invested in European Tech in 2Q19 beating the previous record from the first quarter. An incredible 45% (€4.8B) of VC investment in Q2 was in so-called ‘mega rounds’. These are rounds over €100M and investment in this category was up 3-fold from €1.5B in 2Q18. Unsurprisingly, these were all Growth stage rounds.
It seems that whilst mega rounds are on the rise in Europe they have now peaked in the US and Asia as valuations have hit their high points and investors seek value elsewhere.
As a result, overall VC investment across the US and Asia showed signs of cooling in 2Q19 whilst Europe continued to rise right through 1H19.
More big funds drive up average deal sizes
Over 70 new VC and Corporate VC funds were launched across Europe in 1H19, with a combined firepower of over €7B and many must now seek larger deals to drive money out of the door in the investment period. As we have observed on several occasions through 2018 and 2019, average deal sizes therefore continue upwards. According to Dealroom figures, deal sizes >€2M across Europe have increased 22% in 2019 YTD compared to same period in 2018.
Nearer to home, Beauhurst report that UK deal numbers have not kept pace with the growth in absolute investment. Deal numbers across all stages were up 10% in 1H19 compared to 2H18, whilst the amount invested rose by 15%, reflecting the overall trend in average deal size inflation. The increase in deal numbers was strongly influenced by a continued uptick at Seed stage and Growth stage in particular.
US VCs turn to Europe
Interestingly, in 1H19, a record 29% of all VC investment in Europe was from US VCs. Dealroom shows investment from Asian investors was also at a high (17%). Over 1 in 5 investment rounds now include either a US or Asian investor.
This is a clear indication that overseas investors are playing an increasingly important role in the tech sector. Although this is primarily at Growth stage (Series B and beyond), evidence suggests that US VCs are increasing their activities at Series A also.
In the $8M to $20M Venture range where Series A tends to sit, 14% of deals through 2018 included a US investor, according to a recent report by Angular Ventures, shown in the chart above. We await 2019 figures with interest.
Over recent months we have seen increasing evidence of US VC’s making enquiries into UK advisers and early stage companies, looking to develop relationships for 2020 deals. This will increase competition for quality Series A opportunities in particular and spur companies to prepare diligently for this welcome interest.
US VC market indicators
This increasing activity by US investors could in part be explained by the fact that US funds have been significantly bolstered by recent exit gains, according to a report by Pitchbook.
2Q 2019 represents the largest quarterly exit value to date at a staggering $138B as companies including Uber, Slack, Beyond Meat and Zoom went public. IPOs account for more than 80% of total exit value in 2019.
US sectoral trends are also worth observing in the data as they have historically provided leading indicators for European markets. Whilst Software remains the largest sector its share of deal count is dropping as other sectors, notably HealthTech, strengthen.
Deal count for female founded companies is also on the rise in the US, standing at over 301 deals by mid-year. Funds invested are as already as high as for the whole of 2017. Angel networks, accelerators and other industry groups are playing a key role in driving up awareness of female founders.
ASTIA is a global not-for-profit organization built on a community of experts whose goal is to ensure the success of women in high-growth start-ups. Headquartered in the US, ASTIA has built a strong international presence and is very active in facilitating cross-border investments at early stage. Along with their co-investors, they have moved more than $240 million into companies with women in positions of equity and influence, including several in the UK.
VCs seeking more mature businesses at early stage
On a more sobering note, one trend that we have observed in the US market that has also been clearly evident across Europe in the last couple of years, is that VCs continue to seek out more mature businesses, especially at early stage. As Pitchbook states in its US market report, "At the seed stage, startups historically have been pre-product, but today's investors tend to prefer a more mature company at this stage, which typically means the startup should at least have a minimum viable product." This sentiment is reflected in the median age of companies at each stage. A typical US startup raising seed financing today is on average 3.1 years old, the same age as a typical company raising Series A in 2014. Meanwhile, US companies raising Series A are now on average 4.2 years old.
Commenting on the US market, Sulu Mamdani, Managing Partner, SVB Capital says "Seed is the new Series A...While there is plenty of capital available for the best companies, VCs remain discerning with the types of companies they fund. The total number of VC deals has actually been falling for the past several years."
In summary, some very encouraging headlines in VC investment activity across Europe in 1H19. As interest from overseas investors continues to ramp, entrepreneurs may find new sources of capital emerging in the months ahead. Those businesses that have been planning diligently and are mature for their stage will stand the biggest chance of success.
About the author: John Hall is CEO and co-founder of Duet Partners. His 30-year tech career began with major US semiconductor and software companies, and was based in the Valley during the late '90's. Before Duet he was CEO of a VC-backed consumer electronics company, sold in 2009 following several rounds of capital raising. In the past 10 years since starting Duet he has advised dozens of founders on the startup to scaleup journey and is a retained Board advisor to a number of UK technology companies.