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The State of European Tech 2021 is now live.Read it here
Venture Capitalist Profiles
Over 400 venture capitalists ('VCs') responded to the survey this year and shared their perspective on the underlying dynamics of the market as well as their experience since the start of the pandemic.
This first section provides an overview of the VCs that took part in the survey, segmented by their latest closed fund size, their preferred investment stage and their firm's journey to date.
Survey respondents at first-time funds are most likely to be focused on Seed as their preferred stage of investment, followed by Series A. This is also true of emerging fund managers. More established fund managers that have gained experience and built institutional knowledge over multiple funds are much more likely to be focused on Series A and beyond stages of investment.
The question of focus is one that is often asked of VCs. Do you take a focused, narrow view on your target entry zone, or are you more agnostic? The survey results outline how Europe’s venture capital landscape is composed of both stage specialists and multi-stage agnostic funds. Just over one in three respondents indicated a single preferred stage of entry, while 42% stated a preference across two stages. When drilling down deeper into those results, the two most commonly cited dual-stage preferences are for Pre-Seed/Seed and Seed/Series A, which accounted for 84% of investors with a dual-stage preference. 21% of respondents stated a preference across three stages, while 4% stated that they are stage-agnostic and open to investment across all stages.
The recycling of entrepreneurial and operator talent is a well-known accelerator of the flywheel that drives value creation and positively transforms the mindset of the best talent within start-up communities. The recycling of investor talent is also an important component in helping to broaden and deepen the pool of investors ready to back new generations of founders. As the European ecosystem matures, it’s now increasingly evident that this important component of the European tech flywheel (hyperlink to flywheel imagine) is also spinning faster and faster - to the benefit of founders and LPs all across Europe.
VC Fund Strategy
Similar to founders, VCs had to adapt quickly to the pandemic. From sourcing investment opportunities to evaluating deals, investors had to rethink and reshape their internal processes.
There are some interesting differences between fund managers. On the one hand, first-time fund managers have prioritised diversifying their network as well as responding to cold inbounds. On the other hand, established fund managers have both focused on leveraging data-driven sourcing. Meanwhile, initiatives to foster a more diverse pipeline of founders were pushed into the background.
The vast majority of investors across all fund sizes have stayed consistent in their preferred investment stage of entry, but it is interesting to note that around 20% of investors stated that they have started to become more active at earlier stages since the onset of the Covid-19 pandemic - a change that was stated consistently across fund managers of all fund size cohorts.
Despite the period of uncertainty caused by the pandemic, it is important to note the resilience of VCs. Very few have made a change to their deployment target since the start of the pandemic.
Of the 30% who revised their deployment pace, most have decided to make fewer investments. When looking at investors split by their preferred stage of investment, it is interesting to see a higher proportion of those playing at the earliest and latest stages making more investments.
Despite the enforced change in circumstances as a result of the lockdown measures imposed across Europe during 2020, close to 25% of respondents stated that they had made “no changes” to their evaluation process for new investment opportunities in the last 12 months. Looking at the remaining 77% of VCs, the most frequently cited areas, where VCs have spent more time when evaluating new investment opportunities, have been spending more time with the founder(s), followed by referencing.
In the last 12 months, which areas, if any, have you been spending more time on when evaluating new investment opportunities?
- Note:
- VC respondents only. Numbers do not add to 100 as respondents could select as there was no limit on the number of options selected. Excludes respondents who selected "no changes made".
As companies mature through their funding journey, the risk underwritten by investors changes as well. It is, therefore, interesting to note the differences in the due diligence process based on an investor’s' stated preferred stage of investment. There is a clear divergence between earlier and later-stage investors on how they’ve chosen to adapt their process. The differences are intuitive: Pre-Seed, Seed and Series A investors stated a shift to spending more time getting to know founders, while investors at Series C and beyond were most likely to have shifted to spend more time in due diligence on data analysis and reference calls.
In the last 12 months, which areas, if any, have you been spending more time on when evaluating new investment opportunities?
Legend
- Time with founder
- Market research
- Reference calls
- Customer calls
- Data analysis
- Product due diligence
- Note:
- VC respondents only. Numbers do not add to 100 as respondents could select as there was no limit on the number of options selected. Excludes respondents who selected "no changes made".
At the start of the pandemic, investors focused on their portfolio of existing investments to help founders weather the storm and manage their runway. It is interesting to see that one in four investors has seen their fund revise their follow-on allocation. For investors at Series C and beyond, close to 40% have made changes to their follow-on reserves allocations.
Follow-on investments
- 40%
- of Series C+ investors made changes to their follow-on reserves allocations
This is also visible in the data for 2020 already - with a larger share of capital invested in follow-on financing. The same is also true on a deal count basis.
The inherent differences in approaches to portfolio construction and risk/return profiles of investors at different stages are reflected in the varying levels of sensitivity to entry ownership targets. Later-stage investors are, perhaps intuitively, much less likely to have stated ownership targets versus those investing at the earliest stages. Just 13% of Pre-Seed/Seed investors stated that they do not have specific ownership targets versus 33% of investors with a preferred stage of entry at Series C and beyond.
Although most investors have not made any changes to their target since the start of the pandemic, Pre-Seed/Seed investors were more likely to push for more ownership than others.
Competition and Market Dynamics
One driver of increased competition continues to be the rising number of active investors deploying capital into European tech. Europe benefits from a deep and active pool of about 3,000 investors, making at least one investment per year. The pool of more active investors making at least five new investments per year has also grown to more than 200 unique institutions. The delta between the scale of the two investor cohorts based on level of activity is noteworthy. While there are many sources of capital that are placing a small number of bets, the number of funds investing at a reasonable scale on a consistent basis is far smaller.
Number of unique institutions that have participated in at least one and five investment deals in Europe per year
- Note:
- Number of unique investors (incl. investment funds, corporate investors & accelerators, but excl. angel investors) that have participated in at least one investment round per year. 2020 is annualised based on data to September 2020.
A small, but clear majority of fund managers from firms of all types (first-time, emerging, established) stated that the Covid-19 pandemic has altered the competitive landscape for new investment opportunities at their preferred stage of entry.
It’s fascinating to note that the pinch in terms of increased competition is more likely to have been felt by investor respondents from established fund managers. It is not possible to ascertain from the survey data, but it would be reasonable to infer that competition has heated up in certain parts of the market only, in other words around certain types of founders and companies.
What is also very interesting to note is how much variance exists between respondents from different countries. Based on the survey responses, it would appear that an increase in competition has played out more significantly in the UK and Germany compared to other markets, such as Spain or the Netherlands.
Slicing the data based on an investor’s preferred stage of investment also yields interesting results. While a majority of investors from all cohorts based on stage of entry preference stated they had observed changes in the competition at their stage sweet spot, investors at the later-stages of Series C and beyond were materially more likely to have done so.
And looking at those that saw a change in the competitive landscape at another level of detail reveals that the perceived change is most likely to be one of increased competition. That being said, it’s still notable that a large number of investors stated a view that the competitive dynamics had become less competitive. It makes sense that stage, geography, company type and other factors all influence the level of competition.
The European investor base has been growing in absolute terms across all stages of investment and round sizes over the past five years. But importantly, for a region that has lacked depth at the later stages of investment. Europe is now seeing the maturity of the ecosystem through a growing pool of investors capable of leading larger growth rounds.
Indeed, there has been an influx of investors to these later stages. Compared to 2016, there have been 3.3x as many investors active in rounds of $100M+ during 2020 and a remarkable 8x as many investors active in rounds of between $50-100M. This compares to an increase of 1.1x in the number of investors of rounds of less than $10M.
According to VC respondents that stated they had experienced an increase in competition, the main consequences stated by the largest number of fund managers has been valuation inflation. Looking specifically at respondents from established fund managers, their responses indicated that the main impact of increased competition has been a shortening of the fundraising processes and an increase in pre-emptive rounds in market, though these respondents also frequently cited valuation inflation too.
The perceived increase in valuations is reflected in the actual data. According to data from Pitchbook, valuations have been increasing in Europe consistently over the past years across both early and later stages and now stand at record highs in 2020.
Last year, the survey posed questions around the evolution of the underlying market dynamics and VCs overwhelmingly agreed with the rise in competition between local VCs as well as with top tier US VCs. This year, the survey returns to this question, but posed it to founders. The arrival of US investors on European shores has certainly not gone unnoticed; 57% of all founders agreed that US VCs seem to have been more active in Europe over the past 12 months.
I've seen a complete 180 when it comes to [US investors'] attitude. As long as founders have a global mindset, they actively are looking to invest in Europe. Besides: on Zoom, nobody knows you're a European.
Europeans are still too locally focused. Launching a company focused on just one European country is sure to make you vulnerable to your US competitor. This was as true for social networks a decade ago as it is for delivery or mobility startups today. I'd encourage all European startups to think globally from day one. I've raised money in the US in 2008 and in 2018, while being based in Europe. I've seen a complete 180 when it comes to [US investors'] attitude. As long as founders have a global mindset, they actively are looking to invest in Europe. Besides: on Zoom, nobody knows you're a European.
Again, this is supported by data. A record number of US institutions, more than 550, have participated in at least one investment round in Europe in 2020. This has increased by 36% since 2016.
Number of unique US institutions that have participated in at least one investment round in Europe per year
- Note:
- Number of unique investors (including investment funds, corporate investors and accelerators, but excluding angel investors) that have participated in at least one investment round per year. 2020 is annualised based on data to September 2020.