Insights series / 29 July 2021
Why US VC investors are looking to Europe
By Alex Di Santo & Mark Collins
The European VC space saw unparalleled growth in 2020 climbing to €42.8bn, with €19.6bn raised for new venture funds in 2020 and adding a further 17 unicorns to its cohort. The largest single factor contributing to these all-time highs was the free-flowing sums of capital from US VC investors.
With the US market looking saturated, growth in German, Nordic and Eastern European venture capital markets has expanded the opportunity set offered in Europe to international investors.
Since 2020, the EU has attempted to foster smart, sustainable, and inclusive growth to overcome structural challenges. EU support to businesses in start-up stages has made it an attractive region for VCs, for example, the European Investment Fund (EIF) directly invests in Venture Capital Funds, spurring further growth. European financial infrastructure has also become more sophisticated in recent years, a by-product of Brexit as jurisdictions like Luxembourg, Jersey and Ireland expand their offering.
Growth of the European Opportunity Set
The deluge of capital deposited into larger EU rounds did not halt during the pandemic as VC tech and healthcare funds grew significantly, especially those weighted towards Cleantech and Biotech. Similarly, Corporate VCs (CVC) have flourished in remote-working and e-commerce sectors, these changes are structural not cyclical and will likely continue post-pandemic.
Whilst growth was seen across Europe in 2020, it was particularly strong in three specific regions: Germany, Nordic countries and Eastern Europe.
Germany has become a hub for overseas investment, especially from the US. German start-ups raised $7.5bn in VC funding in 2020, up 20% from 2019.
Germany experienced large rounds from companies such as GetYourGuide (€114m) and Auto1 (€255m) and yet local German investors were noticeably absent from the process. Farallon Capital Management, based in San Francisco, co-led the latter’s round with Boston based The Baupost Group. The former saw its financing led by New York based Searchlight Capital.
These examples are part of a wider trend of US investor participation in German VC rounds. In 2020 alone there were 150 deals worth over €4bn in Germany, compared to only 76 five years before, worth €784m.
Nordic-based start-ups raised a record €5.1bn in venture capital funding in 2020 - a 20% year-on-year growth, yet another record.
The Nordic region has seen enormous rounds for VC backed companies including Northvolt and Klarna, as well as direct listings like Spotify. The Scandinavian VC space offers US investors a refreshingly diverse and creative opportunity set predominantly focused on music, mobile gaming and digital health, without the hefty price-tags associated with Silicon Valley tech firms.
These big rounds and even bigger exits have shown US investors that there are many regions around Europe offering attractive returns and that Europe as a continent has a fertile and ripe VC landscape full of potential for origination and sourcing.
According to the European Capital Report 2021, Eastern Europe remains the most underfunded region in Europe, however, there are examples of large allocations encouraged by low fees and the need for geo-diversity. HIVentures, headquartered in Budapest, made over 200 deals in 2020 and currently has over €700m AuM, investing in Future Mobility Fintech, PropTech, eCommmerce, Life Sciences & Healthcare and AgriTech & FoodTech.
PortfoLion Capital Partners (€220m AuM), also based in Budapest and EnerCap (€450m AuM), based in Prague offer US investors investment opportunities into Eastern European B2B, SaaS and Energy & Sustainability.
European domiciles and financial ecosystems
Post Brexit many US investors are looking towards domiciles in the EU to set-up their funds, specifically Ireland, Luxembourg and Jersey. These financial jurisdictions have developed ecosystems of expertise including administrative services, accounting, director and compliance services to corporate structures of all types.
Domiciles, such as Dublin, offer US investors ease of access to the European market with cross-border distribution both to EEA and global markets. The IFSC is one of the world’s premier Financial Services institutions and plays host to over 250 of the globe’s biggest financial firms, making Ireland the third biggest fund domicile on the planet.
With this size and experience, US managers know that they are in the best possible hands to domicile a VC fund focusing on European nascent companies. With the supply of investable companies growing in Eastern Europe, Germany and the Nordics, alongside the more traditional regions, US investors can now invest with the confidence of a European base. This allows for steady and long-term investment strategies in a less saturated and more reasonably priced market.
Last year saw a record of 61 companies valued at $1bn or more in Europe with an aggregate valuation of €110bn. The large volumes of dry powder in the US at the beginning of the pandemic found their way over to the European market where investors saw a chance to diversify away from the US.
Whether this was in Nordic music start-ups, Eastern European Life Sciences or German second-hand car platforms, the abundance of thriving companies and VC funds attracted vast sums of US capital, leading to one of the strongest quarterly VC showings ever in Europe during Q4 2020.
What made much of this possible was the ease in which US investors could execute their investment strategies, once domiciled, knowing all other facets of administration, accounting, law and tax were being effectively managed by an outsourced service provider.