European venture has come a long way over the last decade.

In 2014 a report from EVCA (now Invest Europe) showed the asset class delivering a dismal net pooled IRR of 1.63 per cent in the vintage years from 1980 to 2013.   

Things, however, have changed dramatically since then. In its latest private equity performance report financial software developer eFront found that venture capital now provides one of the most attractive risk-reward profiles for investors, with western European funds significantly outperforming their historical average returns.

According to eFront, all-time European VC returns come in 1.43x, versus 1.63x for the US. But when looking at active VC funds only, the numbers are much closer with 1.55x for western Europe and 1.57x for US. Over the past 10 years Europe and the US are pretty much at parity on VC returns.

But what has prompted this turnaround in the asset class’s fortunes? At a recent invitation-only dinner a group of European venture dealmakers sat down for an off-the-record debate on what European venture has done to change its fortunes and the challenges and opportunities it faces in the future.

There was a broad agreement in the group that after a difficult period, investors have recognised that there is high quality technology and talent to back in Europe.

Companies like iZettle, Last.fm, Skyscanner and Spotify have shown that Europe’s start-up scene simply can’t be ignored, irrespective of historical bumps in the road.

These deals have brought more players into the market, which has supported more funding rounds and more success stories.

“One of the biggest things that has changed is that we now have more fellow travellers. I remember how difficult it used to be to pull together an early stage funding round, but now I never worry that we won’t be able to get a series A round together,” one venture dealmaker said.

As more European firms have emerged, US players have also come back into the market, providing a further boost to liquidity.

“You will see firms like Sequoia coming into deals and that is a really positive sign. What it also means for European managers investing in earlier rounds is that the range of exit options has opened up too. The IPO isn’t the only option anymore and that gives investors much more confidence that value can be realised,” one partner at a venture
firm said.

It was also observed that Europe now led the way in certain technology categories.

“There are areas where Europe leads the way globally. Look at the London fintech scene, for example. It is way out in front,” one deal partner said. “All the talent and technology is available to build companies that can establish global leadership.”

A support ecosystem for venture managers, particularly with respect to debt financing, has also thrived as momentum across the European venture space has built.

In a study on what is needed to support UK scale-ups, Sherry Coutu listed venture debt as a crucial enabler of rapid company growth. Provision is improving, with new market entrants coming in fund venture deals. Lenders are also becoming more attuned to what managers need, rather than making funding packages conditional on borrowers signing up to onerous reporting requirements and unwanted, and costly, ancillary banking services.

Go your own way

Scaling a business in the same way as Silicon Valley, however, remains a challenge for the European scene.

“Europe is not a massive homogenous market in the same way as the US and China, so you simply can’t scale as quickly,” one guest said.

By way of example, one speaker compared designing a digital checkout page for a UK online shopper to designing one for a German-based consumer.

“In the UK the user journey is ‘product, price, buy’. In Germany that journey is ‘product, delivery details, terms and conditions.’ People across Europe are different. It is not as simple as writing your algorithm and then conquering a continent,” the investor said.

There was consensus around the table, however, that European venture firms and the companies they backed needed to find their own pathway to creating value rather than trying to mimic what happens in Silicon Valley all the time.

“You can absolutely scale a business in Europe, but it happens in a different way. I do not think it is deliverable, or indeed desirable, to aspire to the kind of mass reproduction you see in Silicon Valley,” one guest said.

Another added: “It does get frustrating when everyone asks why Europe doesn’t replicate the US. Why does Cambridge have to become Silicon Fen? The focus should be on supporting start-ups that can grow and deliver a return on exit, not obsessing about creating these massive decahorns that consume everyone else.”

After years on the sidelines it seems that European venture finally has the confidence to start asserting its identity.

Real Deals would like to thank Shawbrook Bank for making this discussion possible.