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04.1

Seed to $1B+

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Methodology

Together with our partner Dealroom, we set out to find out what proportion of Seed-funded startups make it to a $1B+ valuation in Europe. This was inspired by an excellent analysis for the US market shared by CB Insights.

Our first step was to create a clean dataset; this involved creating filters that may exclude certain companies. These filters were used to exclude: crowdfunding rounds, rounds with no investor, and rounds involving companies without a founding date. This left a clean, standardised cohort of 1,064 companies that raised a qualifying Seed round between 2010 and 2013. The lifecycle of these companies has been tracked until November 2020.

The dataset quantifies their fundraising journey, path to exit and, ultimately, shows whether the companies reached a $1B+ valuation. We can see what rounds the companies raised, how much they raised and how long it took them along each step of the journey. For those companies that exited, we can explore when those exits happened and, when disclosed, at what valuation. The data also distinguishes companies that fail to raise further rounds of funding or make it to an exit. These companies are either out of business or have become self-sustaining companies. A key limitation of this analysis is the inability to specifically separate those that are out of business with those that are self-sustaining.

Dealroom's analysis for Europe is presented alongside the US data from CB Insights for illustrative benchmarking purposes. It should be noted that there may be minor differences in the underlying methodology, although we do not believe these would materially distort the findings.

Journey of a European VC-backed tech startup

Journey of a European VC-backed tech startup

Let's get straight to the punchline. Dealroom's analysis found that a Seed-funded company building from Europe has the same probability of scaling to a $1B+ valuation as the average Seed-funded company building from the US. According to the funnel analysis, 13 of the 1,064 companies in the starting cohort have gone on to achieve a $1B+ valuation, equivalent to 1.2%. In other words, a company raising a Seed round of funding in Europe has about a 1-in-a-100 shot of becoming a unicorn.

Becoming a unicorn


1 in 100
company raising a Seed round have a shot of becoming a unicorn

Share of companies in initial cohort that reached a $1B+ valuation or higher, by region

Legend

  • Europe
  • United States

Selected European $1B+ Companies

This cohort included breakout companies such as Supercell, TransferWise, Auto1 Group, GetYourGuide, Doctolib, HelloFresh and others that all scaled to a $1B+ valuation. As the cohort continues to mature, the actual number of $1B+ companies will likely continue to grow.

The unicorn conversion rate is a helpful measure to project the expected number of new $1B+ companies being started across Europe each year, using the total number of companies that raise a first round of funding in Europe in a given year as the denominator. Based on the current volume of around 1,500 first rounds of funding per year in Europe, it's reasonable to expect Europe to produce 20+ $1B+ companies per year, every year.

Projected number of $1B+ potential companies started per year in Europe by conversion rate and by volume of first rounds

Legend

  • 1.10%
  • 1.20%
  • 1.30%

The reality is, however, that most companies do not make it to becoming a unicorn. In fact, 43% of companies do not make it past the first round of funding. Eventually, 77% of companies end up out of business or self-sustaining, i.e. not raising any further rounds of funding and also not finding a path to exit either via M&A or IPO.

Cumulative share of companies (%) that do not raise again after each specified round of funding, by region

Legend

  • Europe
  • United States

The probability of making it through to later and later rounds of funding drops precipitously following the Seed Funding round. While 49% of the starting cohort succeed in raising a second round of funding, only 3% of companies progress through to a sixth round of funding. The drop-off rate by round is broadly similar across Europe and the US, though there are intriguing differences for companies raising their third and fourth rounds of funding, which are raised by fewer companies in the European cohort than in the US cohort. This adds more fuel to the fire that there is a funding gap at the post-Series A, in-between phase of growth around the Series B and Series C stage.

Share of companies (%) that raise each subsequent round of funding, by region

Legend

  • Europe
  • United States

These interesting differences in the relative probability of raising a subsequent round of funding are more easily represented by looking at the share of companies at each stage that goes on to raise the next sequential round. The most significant divergence is for companies seeking to raise a third round of funding (Series B), though it is also clear that the probability of successfully raising a fourth (Series C) or fifth (Series D) round of funding is also somewhat lower in Europe versus the US. Interestingly, if companies do succeed in making it through these later growth stages, the probability of then raising a sixth round is very high. It is important not to overreach in analysing the data, but one theoretical argument could be that Europe's strongest companies survive the funding gap at Series B/C and that, when they emerge, they are then able to tap into more readily available pools of capital at the Growth Equity stage (Series D+) where the funding market is more liquid.

Share of companies (%) that raised the specified round that went on to raise a subsequent round, by region

Legend

  • Europe
  • United States

It's often said that European companies sell out earlier, but the cohort analysis would suggest this isn't the case. In fact, US companies are actually more than 50% more likely to exit after a first round of funding. This should not be seen as a negative; in fact, it could be interpreted as evidence of both a willingness to "fail faster", and a healthy exit environment. Arguably, Europe stands to benefit from more liquid and earlier recycling of talent and capital. In fact, it could be argued that Europe's challenge is not that European tech companies exit too early, but that they don't exit early enough.

Share of companies (%) that exit after the first round of funding by region

The probability of an exit after each round is funding is lower for the European cohort at every step of the journey compared to the US cohort.

Share of companies (%) that exit after the specified round without raising again by region

Legend

  • Europe
  • United States

Early exit


50%
US companies are actually 50% more likely to exit after a first round of funding than European ones

Source:Dealroom_Colour

Looking at the cumulative development of the share of companies within each cohort that exit after each successive funding round shows how the delta in terms of exit likelihood starts with a meaningfully large gap from the outset and grows increasingly larger over time.

Cumulative % of companies that have exited after each specified round, by region

Legend

  • Europe
  • United States

While exit valuations are undisclosed most of the time, it's interesting to look at the relative volume of exits at different exit value thresholds. The European cohort includes one exit of $1B+, four over $500M, and 13 at $100M or more. Unsurprisingly, the vast majority of exits are small in scale and it's a reasonable assumption to make that the vast majority of exits with undisclosed valuations are also on the smallest end of the exit range (i.e. less than $50M). Nonetheless, exits of any size are crucial to the ecosystem given the role that they play in driving liquidity to enable the systematic recycling of experienced talent and capital to help build and fund new generations of companies. Several companies in this cohort that exited meaningfully, but perhaps not with giant outcomes, such as Quandoo ($219M), Wunderlist (<$200M) and La Nevera Roja (~$100M) have gone on to have an outsized impact on their local ecosystems through their alumni network, leading to new generations of startups (e.g. Pitch, Superlist) or VCs (e.g. Cherry Ventures, Samaipata Ventures).

Number of exits by exit value and by region

Legend

  • Europe
  • United States

Looking at the distribution of exits by exit value as a percentage of the initial starting cohort further demonstrates that the US market is more liquid at every scale of exit, whether for large $1B+ exits or for smaller exits in the sub-$50M range.

Share of companies (%) that exited at different exit values, by region

Legend

  • Europe
  • United States

The cohort analysis also allows us to compare the funding journey of the average company. The median amount raised across six rounds with the cohort is $90M, very similar to the funding journey of the median US company.

Cumulative amount raised ($M) (based on median) by companies after raising each subsequent round of funding by region

Legend

  • Europe
  • United States

Taking the mean, however, shows a big difference. The mean funding raised across six rounds increases to $137M in the European cohort, compared to $216M for the US cohort. This implies that a smaller number of companies raise significantly larger amounts that distort the average. One possible explanation for this could be that US founders and investors double down much more aggressively as they scale and emerge as potential category winners, thereby succeeding in raising significantly greater sums of capital.

Cumulative amount raised ($M) (based on mean) by companies after raising each subsequent round of funding by region

Legend

  • Europe
  • United States

The development of the cohort over time is also interesting. The median company took 90 months (7.5 years) to raise six rounds of funding from initial founding. The trajectory is very similar to that of the median US company, except that US companies tend to raise their first and second funding rounds much faster. There are a few possible explanations. Could it be that US companies are much faster to execute? Or could it be that US investors are happier to invest earlier? Or, perhaps most likely, is it because more companies exit the funnel faster in the US - and therefore do not drag down the average time taken to raise the next round?

Cumulative number of elapsed months (based on median) between each subsequent round of funding by region

Legend

  • Europe
  • United States