The European Venture Capital Ecosystem Is Booming

With venture capitalists worldwide searching for innovative products and service companies, they are increasingly turning to Europe, which has seen many eye-catching venture capital deals lately. Venture capital firms invested nearly EUR 40 billion in European companies in 2020 through funding a wide range of sectors and countries across the continent. This boom has occurred despite the pandemic that began in the early spring of last year, demonstrating the strength and appeal of this market.

A growing market

With more investors recognizing the potential of the European start-up market, both the number and size of deals have been robust. In 2020, Europe recorded more than 8,000 venture capital deals for the third year in a row. As a whole, Europe captured a larger share of the global venture capital market as well, accounting for a fifth of venture capital investments, up from around 13% in 2019. At all stages, the total value of deals increased to an unprecedented EUR 49 billion in the first half of 2021. This figure is nearly three times as high as the first six months of 2020 and is expected to exceed EUR 100 billion for the first time by the end of the year.

Increase in outsized deals

The European market has also seen an increase in the number of deals and deal sizes as well. Investors are committing higher levels of funding to innovative companies at all stages of development. In the second quarter of 2021, each of the top five deals in Europe topped EUR 650 million. Outsized deals are no longer outliers either, with EUR 25 million or more deals accounting for over 75% of overall deal value in the first half of 2021. Currently, Europe sees more unicorns and more dragons than ever – companies with EUR 10 billion or more valuation.

Looking for unicorns and dragons

One of the European companies generating the most buzz at the moment is UiPath. Founded in 2005 by Daniel Dines and Marius Tirca, the company offers robotic process automation (RPA) software that monitors users’ activity to automate repetitive front and back-office tasks. An early backer of the company was Earlybird’s Digital East venture fund, which led a USD 1.6 million financing round in what was then a little-known Romanian software company. Earlybird, alongside Seedcamp and Credo Ventures, took a 10% stake in the company, now valued at USD 35 billion, resulting in a 220,000% increase, or a 2,200x return. UiPath is an excellent example of a “fund returner” – a single deal where the exit proceeds pay back the entire fund. While it may be an extraordinary example, it’s far from being the only one.

Following several funding rounds from venture capital firms like Sequoia, Silverlake, and Atomico, Klarna Bank AB is now Europe’s most valuable start-up. With the latest round of investments, the Swedish company is currently valued at USD 45.6 billion, making it the world’s fourth-largest unicorn after Bytedance, Stripe, and SpaceX. The Swedish fintech provides online financial services, such as payments for online storefronts and direct payments along with post-purchase payments, making it a direct competitor of other well-known companies like PayPal. The “buy-now, pay-later” (BNPL) space is seeing substantial interest from retailers and investors due to its integrated approach. Klarna has expanded rapidly into new markets with each new round of funding. The company has more than 60 million users, with nearly 100,000 merchants counting on it to run their checkouts. Klarna believes it has only tapped a fraction of its potential with its technology innovations.

Another technology seeing a lot of hype these days is non-fungible tokens (NFTs). These are unique digital assets that are traded on the blockchain, which serves as a digital ledger. Their value derives from their uniqueness. French company Sorare has taken this idea and combined it with fantasy sports. The company allows players to buy, sell and trade a virtual team using digital player cards, which are collectibles in their own right. Sorare has gone through several smaller funding rounds but has now secured USD 500 million, which would be the most significant financing round on record in France. Its backers include venture capital firm Benchmark and current and former soccer stars like Rio Ferdinand, Gerard Pique, and Antoine Griezmann. With a reported valuation of USD 3.8 billion, the company has secured a return of nearly 8x.

A bright outlook

Once thought of as a stodgy place for companies and venture capital investments, Europe is showing it can compete with other highly innovative regions, like the US and Asia. European start-ups are emerging in areas that are not as highly known for venture capital deals, signaling that there continues to be significant innovation across the continent. Such deals represent more than just follow-ons for flagship portfolio companies. First-time deal activity remained strong in the first half of 2021, and there’s a robust pipeline of new start-ups. With all this activity, unicorns and dragons are not as rare as they once were. With the right investment strategy and venture capital fund of funds, the chances of finding one are now more likely than ever.