While venture investing outside the US has come a long way in recent years, our analysis shows it remains an entirely different industry than US venture..
While venture investing outside the US has come a long way in recent years, our analysis shows it remains an entirely different industry than US venture capital. And when we say different, we mean totally different.
We looked at venture investment trends in 2007-2011 from PitchBook and compared them with VC exit results in 2012-16, to very roughly compare investment in one 5 year period with exit results in the ensuring next 5 years, roughly matching VC investment cycles.
INVESTMENT TRENDS SHOW ‘WHAT YOU WOULD EXPECT’
Over 2007-11, European venture started to accelerate. Of course the industry remained a fraction of the US in size, but by 2011 there were 1400+ European investments made vs just under 4,000 in the US, a healthy jump in activity. And average round size was nearly $5 million vs, $7 million for the US. All indicative of a European VC industry developing rapidly from a much smaller base.
EXIT TRENDS POINT TO ENTIRELY DIFFERENT INDUSTRIES
The subsequent 5 years, 2012-16, show entirely different exit profiles. Its encapsulated in a single number on the bottom right of the chart below:
The average US venture capital exit is nearly $200 million, versus $70 million for Europe.
The number of $250 million exits during this 5 year period? 22 across all of Europe, versus 166 in the US. That’s a huge, persistent disparity, especially given the evolution of European venture over the past decade.
WHAT’ S GOING ON?
While European venture has come on leaps and bounds, it remains a ‘smaller round, smaller exit’ market.
It is extremely dangerous for European earlier stage VC’s to raise ever-larger funds, or early stage European companies to take very large A or B rounds. The European exit market is still far less developed, and putting more into companies can only damage returns.
The above has nothing to do with ambition, it simply reflects a current reality slowly changing; to make significant returns CEO’s and investors need to invest less into more capital efficient businesses that can return enough in a smaller, though successful exit.
A ‘good’ exit in Europe is $100 million or more, while a ‘good’ exit in the US is at least $250 million.
WHAT IS TO BE DONE?
The key is to fill the Series C ‘black hole’ that currently exists for European tech. This will give the most ambitious CEO’s and investors the opportunity to tap late stage capital to accelerate beyond the $100 million exit mark, in turn creating more future ‘unicorns’ in Europe; currently Europe has 1/10 the US number.
Here are specific, feasible actions that can address this gap in a reasonable time-frame:
Without specific actions, the industry will need 20-30 years to evolve towards US levels. With specific actions, we think this can be cut to perhaps 10.
Shortening this time horizon could perhaps create 10-20 more future tech unicorns, adding perhaps $50-100 billion of future aggregate economic value to European tech.
Now that is an attractive return on investment.
