A few years ago, setting up shop in Europe was the soup du jour for North American VCs. From OMER and Lightspeed to Bessemer Venture Partners, the market attracted companies of all sizes, and Spotify’s IPO seemed to awaken North American VCs to Europe’s potential to create big exits. VCs wanted to make sure they didn’t miss the next wave.
But it is not clear that they managed to catch it. The trends haven’t completely reversed since the happy days of 2021, but they’ve come pretty close.
However, the European startup market has grown rapidly in the last decade. Deal volume has more than doubled in that time frame, according to PitchBook data, and there have been many success stories such as Klarna, Deliveroo and Arrival. North American VCs understandably want a piece of this market, but creating a successful, long-term strategy in the region has not proven easy.
Big names like Coatue and OMER have officially left the region in recent months, and the remaining venture funds are significantly less active. Navina Rajan, senior analyst at PitchBook, said the total value of European deals with at least one US investor fell 57% in 2023 compared to a year earlier, and the number of deals fell 39%. By comparison, the total deal value fell by 46% and the number of deals fell by 31% in the same time period.
The European startup market comes with nuances that make it difficult for North American investors. Each country in Europe comes with its own language and sometimes currency. Investing in both Romania and Italy is different than investing in both Texas and California. Additionally, startups and universities produce different networks for European startups than in the US
Taken together, all of these nuances make for a challenging market at the best of times, let alone the nastiness of the last couple of years. It’s no wonder then that North American investors are struggling to find a secure footing as they try to cross the Atlantic.
Easier said than done
Another reason why North American VCs are struggling in the European market is that while their interest in the ecosystem has grown, so has the European VC market. Today, there is much more competition for the best deals, especially in the early stages, where prices are the lowest and the potential for great returns is the highest.
Sten Tamkivi, a partner at Estonia-based venture fund Plural, told TechCrunch that the startup market has changed drastically since he started as a founder a decade ago. Startups in Europe used to look to the US for funding by default, he said, but that’s no longer the case. “In the last decade, seed stage investment has shifted much more towards local players. 80% of the capital used in Europe is European,” he said.
If a startup doesn’t plan to expand to the US right away, instead of starting in other European countries first, Tamkivi explained, it makes more sense to partner with a local investor who knows the nuances of local markets. He added that there isn’t nearly as much European late-stage and early-stage venture capital, which means startups can attract these investors later while focusing locally early on.
It probably doesn’t help that most North American VCs have set up shop in London, which is no longer part of the European Union and is just one of the region’s startup hubs. Having ‘boots on the ground’ in London does not equal ‘boots on the ground’ in the rest of the continent.
“A lot of American traffic stops in London,” Tamkivi said. “[The market] it is much more diverse. If you set up shop in London, that may or may not give you visibility in Copenhagen. When you get to the UK, you probably have to make a little effort.”
This focus on the UK also increases competition for deals in London, making it much more difficult for North American GPs to gain share. It also means they may be overlooking opportunities elsewhere.
This dynamic explains why a company like General Catalyst would merge with a company in the manufacturing stage in Europe. General Catalyst in October said it was merging with Berlin-based La Famiglia. General Catalyst was already investing in the region through a London office, but said this partnership would help it better invest in early-stage opportunities in continental Europe.
Borys Musielak, the founding partner of SMOK Ventures, said that in recent years he has lost deals with US investors, but now many of them are pulling out of deals. He hopes the withdrawal will allow his firm to take advantage of strong deals with its new fund.
“I think these guys are waiting a little longer,” Musielak said. “So it’s really an opportunity for me and our friends who raised funds for this area. We will be able to tap into all the top deals from the local ecosystem. The Americans will go into Series A or B anyway.”
Reason to keep trying
Despite all these challenges, however, North American companies are still trying to plant roots in the region. While some firms pulled out in 2023, Andreessen Horowitz and IVP opened offices in London.
There’s good reason many companies are still trying to set up shop: regulation. Hot startup categories, including artificial intelligence and crypto, continue to operate in the still gray areas of regulation in the US, and these areas lack real clarity. That makes it harder for startups to build and for investors to know which companies are compliant — or even if they will be compliant in the future.
This does not mean that Europe has found all the regulations. Regulators there aren’t as big-hearted about companies in these new areas as they could be, but they’re at least clear about what they want to see. A16z’s London office is heavily focused on blockchain and crypto, probably for this reason.
US-based LPs have also shown increasing interest in Europe. When Plural went out to raise its first fund in 2022, Tamkivi and his team approached US Donations to start a relationship, hoping it would lead to an investment down the line. But to their surprise, many decided to invest in this fund and cut even bigger checks for the company’s recent Fund II.
David York, founder and managing director at Top Tier Partners, a fund of funds, said LPs have long been asking for a way to invest in managers who back European startups, and after successes like Spotify, that interest has grown. . He suspects it will continue to rise as big markets like China become less attractive.
“Europe has become more reliable as a result maker,” Yorke said. “It originally started with Spotify, but we’ve had a bunch of liquidity there over the last six [to] seven years. I think there is a tailwind as China looks inward and globalization is happening. I think Europe will end up being one of the international markets where people want to set up businesses.”
Rajan, of PitchBook, and Musielak both feel that the European ecosystem remains largely inadequate despite its growth and the difficulties faced by North American VCs. So it seems there is definitely room for international VCs to build markets and build a portfolio. Companies just need to find a strategy that ensures their efforts pay off.
