What You Need to Know About European VC in 2020

Venture capital had a good year in Europe in 2020. Not just a good year considering there was a global pandemic, but a good year compared to the long run of successful years for venture capital firms and investors. As is always the case, the numbers only tell part of the story. The number of venture capital deals declined slightly in 2020 from 2019. But, the value of those deals increased by 11.7%. Despite a global pandemic, European venture capital had a strong 2020, and indications are that 2021 will be even better. How Pandemic Affected European VC Investor Activity Some market watchers worried that the pandemic would lead to a freeze in VC activity. Despite a slow first quarter due to COVID-19, investors quickly pivoted to industries that were pandemic-proof and to pandemic-induced opportunities. Many investors in biotech and pharma companies used the pandemic’s favorable market conditions to seek a strategic exit. In many cases, VC firms then poured those profits back into other ventures. VC firms and other stakeholders in most places had little difficulty adjusting to remote working conditions. The existence of a variety of powerful technologies allowed firms to continue to deliver capital to growth-ready companies, even with severe travel restrictions in place. Remote working conditions made it even easier to take more meetings with founders. The pandemic also led many existing and non-traditional investors to invest more money with VC firms, looking to target pandemic-induced opportunities specifically. This new influx of capital more than offset any pull-back from investors skittish about the pandemic. Technology and Software Led the Way While many sectors, such as recreation and travel, saw catastrophic market collapses, many industries flourished during the pandemic. Healthcare, biotech, and pharmaceutical industries had financially robust performances and drew a fair amount of VC interest and activity. Technology and software companies in the biotech sector saw the most VC action. In general, software and technology enjoyed healthy growth, with investors deploying €14.5 billion into the non-biotech software sector alone. Part of this boom was because these sectors were seen as both pandemic-proof and positioned to benefit from specific market conditions created by the pandemic. Increased demand for remote technology and tools also drew VC interest. Even as the pandemic eased in many countries, the trend towards remote working conditions continued to grow, making these companies attracting even more VC money. Brexit and VC Investment Before the pandemic, VC market watchers’ biggest worry was what effect Brexit would have on investors. In 2020, VC firms continued to invest heavily in the UK. The deal value in the UK and Ireland recorded a record value of €14.3 billion. While Brexit will continue to make headlines for the next several years, there is no reason to think that VC investment will slow down in the UK, even as the Brexit details are finalized. The only change in the coming years may be stronger competition from Asian and North American VC firms in the UK. Activity by Region The growth of VC deal values was widespread across Europe. Israel, UK and Ireland, Southern Europe, Germany, France, and the Nordic countries all saw healthy increases in deal values in 2020. Only Central and Eastern Europe reported lower deal values. However, even these regions enjoyed healthy levels of VC investment. Compared to past years, the disparity in VC deal counts and deal values between different regions was negligible. The pandemic did have some different regional effects on VC investment. It took some investors longer to adapt to travel restrictions and online due diligence processes. This led to a sluggish start to the year but was largely offset by the fourth quarter. As the pandemic continues to fade and economies settle into a post-COVID world, investors are poised to continue investing heavily throughout Europe. U.S. Investor Involvement in European Ventures There was reason in the first quarter of 2020 to be skeptical of U.S. VC investment levels in Europe. There was considerable uncertainty relating to Brexit and the U.S. presidential election. The arrival of the pandemic and severe travel restrictions gave skeptics even more reason to worry. However, those fears proved to be unfounded. U.S. VC deal counts and deal values in Europe both increased in 2020. The total number of European deals with U.S. investor involvement was 1.149, and those deals had a combined value of €23 billion. This marked a year-over-year increase of 19.4% for U.S. investor involvement. Outlook for European Venture Capital in 2021 All of the early indications are that 2021 will be an even stronger year for European VC investment than 2020. The arrival of several vaccines on the market should help beleaguered travel and hospitality sectors have a robust second half of the year as pent-up demand floods the market. Startups in these sectors that survived the pandemic will be attractive to VC investors. Most other sectors, including biotech, software, and technology, will continue to grow. New ventures will be looking for capital just as VCs who made profitable exits last year will be looking for new opportunities to invest. Many investors will also be eager to invest additional capital in companies that thrived during the pandemic and that perfected their business models and offerings. While there is always a cloud of uncertainty over the future, it seems likely that deal values and deal counts will increase for every region of Europe this year, as even softer areas like Central and Eastern Europe increase economic activity.