European VC Market: No Summer Slowdown?

European Startup Investment: A Period of Unprecedented Growth

Globally, the startup ecosystem is experiencing significant momentum. However, Europe stands out as a particularly vibrant region for venture capital investment. While the United States and India demonstrate strong growth, Europe’s performance merits focused examination.

Recent data reveals remarkable figures. A Dealroom report indicates that European startups secured approximately €49 billion in funding during the first half of 2021.

Record-Breaking Funding Rounds

This represents a 2.9x increase compared to the same period in 2020. It also surpasses all previous annual records established in both 2020 and 2019.

The exceptional fundraising activity in early 2021 effectively dispels doubts regarding Europe’s capacity to foster globally competitive technology companies.

Further evidence of this thriving environment includes the direct listing of Wise on the London Stock Exchange.

The company achieved a substantial valuation of $11 billion during this public offering.

Insights from Industry Experts

Increased investment and successful exits are becoming commonplace in Europe. To gain deeper insights into future trends, we consulted with leading venture capitalists.

Our analysis incorporates market data and perspectives from Diana Koziarska (SMOK Ventures), Vinoth Jayakumar (Draper Esprit), Simon Schmincke (Creandum), and Javier Santiso (Mundi Ventures).

These experts anticipate continued optimism and sustained high levels of venture investment throughout the remainder of 2021.

Looking Ahead: Expectations for the Future

Existing records are expected to be broken. However, certain sectors are projected to outperform others. Europe’s growing prominence in the venture capital landscape is also creating notable effects.

Let's delve into the data from the first half of 2021 concerning Europe’s startup market, and examine the expectations of industry insiders for the year ahead.

• Sustained Optimism: Experts predict continued strong investment.
• Record-Breaking Growth: Existing funding records are likely to be surpassed.
• Sector-Specific Opportunities: Certain industries are poised for greater success.

A Look at Europe’s Strong Performance in 2021

The European startup ecosystem demonstrated significant growth in the initial six months of 2021, achieving impressive funding figures across various stages. According to data from Dealroom, European startups secured €18.1 billion through funding rounds exceeding €250 million during this period.

To provide context, the total funding raised by European startups across all stages in the first half of 2020 was €16.7 billion.

Beyond substantial late-stage investments, Europe is also excelling in nurturing early-stage companies. Dealroom’s analysis reveals that Europe accounted for 20% of newly established Series-A startups and a substantial 35% of seed-stage tech companies globally since 2020.

This contrasts with China’s performance, where only 8% of new global unicorns originated since 2020.

Furthermore, China’s share of Series-A startups was 6%, and seed-stage tech upstarts represented just 3% of the worldwide total.

A similar trend is observed in other regional venture capital data. Latin American venture capital experienced a 5.5x increase year-over-year in the first half of 2021.

Investment in Asia (excluding China) and the United States also saw growth, increasing by 2.3x each.

However, China recorded a comparatively modest growth rate of 1.6x during the same period.

Notably, all regions mentioned previously achieved record funding levels in the first half of 2021, while China’s figures were lower than its previous peak performance.

This suggests that periods of rapid investment growth can be followed by subsequent declines.

However, current indicators do not foresee such a downturn in the immediate future.

European Venture Capital Momentum

Current data suggests that the robust growth observed in the European venture capital landscape throughout 2021 is unlikely to diminish in the third or fourth quarters. Despite the traditional summer holiday period in Europe, investor sentiment remains strongly optimistic.

According to Creandum’s Schmincke, a previously consistent pattern of fundraising completion at the end of Q2, followed by renewed efforts in late August, is no longer prevalent. This established “iron law” has been disrupted by the evolving post-pandemic environment.

The exceptionally high levels of activity witnessed in the initial quarters of the year are continuing unabated. Deal flow over the past four to six weeks demonstrates no indication of deceleration, and the firm anticipates this trend will persist into Q3.

Mundi’s Santiso predicts that 2021 will establish new benchmarks across all key metrics within the startup ecosystem. This includes the total capital invested, funds raised through venture capital, and the number of successful exits.

Draper Esprit’s Jayakumar offered a slightly more nuanced perspective, noting a “somewhat” reduced pace in Q3. This is attributed to the logistical adjustments required as funds transition from virtual meetings to in-person interactions.

However, Jayakumar also emphasized the commitment of investors to re-establish direct engagement with founders. A significant increase in travel across Europe, despite quarantine requirements, signals strong confidence and anticipates a particularly active Q4.

Any potential slowdown experienced in Q3 2021 is expected to be short-lived. The European venture capital market is poised for continued strong performance throughout the second half of the year.

Early data from Dealroom indicates that approximately €5.7 billion has already been invested in European startups during the latter half of the year. Based on this current rate, H2 2021 has the potential to surpass the investment volume recorded in the first half of the year.

Allocation of Venture Capital Funding

Analysis of global venture capital data from Q2 reveals a significant trend: a substantial portion was directed towards fintech companies. CB Insights reported that one in every five venture dollars, totaling $33.7 billion, was invested in the fintech sector. This pattern is also evident across Europe, and projections indicate its continuation in the foreseeable future.

Schmincke expressed confidence in the ongoing innovation within fintech, stating it will “remain a strong theme in Europe.” He explained to TechCrunch that the majority of global financial systems still rely on outdated infrastructure and inefficient processes, creating opportunities for improved products and services for consumers, SMEs, enterprises, and the underlying infrastructure.

When questioned about future investment areas, venture capitalists naturally highlighted sectors aligned with their current portfolios. Santiso identified insurtech as “the next big thing,” given Mundi’s management of a €100 million ($118 million) insurtech fund, Alma Mundi Insurtech. Supporting this prediction, a report by Mundi and Dealroom indicated that insurtech has been historically underfunded compared to other sectors but is now experiencing accelerated growth in global VC investment.

This growth trend extends to the European market, with 2021 already surpassing previous investment records for European insurtech, exceeding the high achieved in 2020.

The same report pinpointed the health sector as another area of increasing interest, with $62.6 billion in global VC funding in 2020, a 2.6x increase from the $24.2 billion invested in 2016. This aligns with feedback from VCs regarding health tech, with Schmincke noting similarities to fintech in terms of outdated infrastructure and suboptimal user experiences.

Koziarska of SMOK Ventures concurred, emphasizing the importance of improving access to quality healthcare.

While not leading in terms of investment volume, other sectors also garnered attention. Schmincke highlighted green tech as essential due to both global necessity and consumer demand. Koziarska, meanwhile, is optimistic about the expansion of esports, viewing it as a means of engaging and connecting with Gen Z, beyond mere entertainment.

Jayakumar offered a unifying perspective by emphasizing the significance of deep tech. While a distinct sector, it’s also broadly applicable, as artificial intelligence influences various verticals, including fintech, insurtech, and health tech. Both the U.K. and the European Union are actively prioritizing this area.

“A ‘Cambrian explosion’ of deep tech hubs, particularly in the U.K. – such as Cambridge – has been widely discussed,” Jayakumar stated. Draper Esprit, as a “patient capital fund,” is actively supporting this trend, investing in dedicated deep tech funds across both the U.K. and continental Europe.

The European Union is also focused on fostering deep tech development. While government grants are accelerating deep tech in the U.K., a Scale-Up Europe report underscored its importance for the European tech roadmap, advocating for funding mechanisms that bridge the gap between science and business to establish Europe as a global deep tech leader.

VCs were also asked about the potential impact of Brexit on the U.K. startup landscape, particularly within fintech. However, concerns appear limited. Schmincke noted that few in the venture capital world anticipated significant disruption from Brexit, and so far, no slowdown in innovation from U.K. fintech companies has been observed.

Despite this, Schmincke expressed concern regarding post-Brexit visa and work regulations for non-U.K. workers, both those already in the country and those seeking to relocate. He anticipates this could negatively affect tech companies across various sectors. Jayakumar acknowledged the rise of remote hiring and onboarding due to COVID-19 as a potential mitigating factor, but the long-term impact on talent acquisition remains uncertain.

Should London’s dominance diminish, it wouldn’t necessarily be detrimental to the broader EU tech scene. The data from Q3 will provide further insights, but if the current trends continue, we can anticipate further substantial investment figures and potentially new records.