The State of European Venture Capital

The State of European Venture Capital

          
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The State of European Venture Capital

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    Performance and Investment Flows Trend Upward, but Fund-Raising Slows

    Our analysis of the European VC market revealed that contrary to conventional wisdom, it is in good shape. (See “A Snapshot of Europe’s VC Market.”) Returns on European VC investments are on a healthy upward trend. Returns on the EIF grew at a 7 percent compound annual rate from 2011 through 2014. Money multiples have increased continually since 2011, with a strong rise in 2015. (See Exhibit 1.)

    exhibit

    A SNAPSHOT OF EUROPE’S VC MARKET

    These are the facts.

    • VC performance is trending upward, and there is a steady increase in money multiples.
    • VC investments are up—driven by high U.S. investments in EU ventures—yet VC fund-raising in 2014 was at a multiyear low.
    • Because of the absence of private investors, government investors—with roughly 30 percent of the market—have become the largest LPs in Europe.
    • The average fund size of Europe’s more than 800 VCs is typically small, and smaller, nationally focused funds, in particular, underperform.
    • Venture hubs are emerging, and the deal flow is trending upward, benefiting serial entrepreneurs.

    Again contrary to conventional wisdom, VC investments in Europe are at a secular peak. They surged strongly from 2012 through 2014, growing by 73 percent, nearly matching the growth rate of VC investments in the U.S., which increased by 78 percent. (See Exhibit 2.) Investment levels now stand at their highest point since the bursting of the dot-com bubble: since the third quarter of 2013, each quarter has surpassed the year-earlier period.

    exhibit

    The main source of growth is investment in Internet-specific and software ven-tures. Investments in these companies account for more than half the current VC investment volume in Europe and the U.S., doubling in volume from 2013 to 2014 alone.

    European fund-raising has traced a path that is the opposite of the growth in investment. According to Thomson ONE, since 2012, European fund-raising has plunged by 33 percent, while U.S. investment has increased by 45 percent to approach a ten-year high. In consequence, the gap between U.S. and European investment widened to about €21 billion. (See Exhibit 3.) However the momentum in 2015 is encouraging. Each of the top ten funds raised more than €100 million, and three of them raised more than €300 million.

    exhibit

    Experts we interviewed mentioned that the strong uptrend in U.S. fund-raising has produced a highly competitive U.S. market. Now, U.S. managed capital is starting to spill over into a comparatively undervalued European VC market, offering large opportunities as the fund-raising gap widens. U.S. outbound venture investment in Europe has more than tripled in the past ten years, accounting for more than a quarter of total VC investment in Europe in 2014 and posting disproportionate growth during the past few years.