Allegro. Visma. Sinch. Infobip. Idealista. Freepik. Silae. Adevinta. I can keep going. There are two common threads that run along these [non VC-backed] companies – they are incredible businesses and they are underreported.
On one end, they show us that building and scaling a software company is doable without VC money. We’ve gotten ridiculously good at celebrating press releases but tech is not just TechCrunch. On the other end, these companies usually lack what makes VC-backed tech companies great for European tech.
Going back to Allegro: their IPO was an incredible success story but it won’t recycle capital or talent into the Polish or European tech ecosystem in any way whatsoever. The IPO was great for the C-suite and lenders, but not for employees to go on and start or fund new companies.
Both worlds have a lot to learn from each other – but what gives me a dose of optimism is that they are getting increasingly closer, with the Pipedrive / Vista Equity Partners long-term partnership being the perfect example.
Whilst Europe has originated more than a third of the world’s startups, it accounts for disproportionally smaller count of unicorns globally. This gap is in many ways attributable to a previously limited supply of large, late-stage risk capital pools. Fortunately, this is changing rapidly. Driven by the growth in recent years of European funds writing bigger checks at larger valuations and an influx of U.S. and Asia-based funds looking for quality and value – the stable of European unicorns is growing - with an additional 14 in 2019 and 18 in 2020. A sizeable portfolio of European startup giants now stand ready to capture the IPO landscape and meet pent up demand.
Additionally, the SPAC or Special Purpose Acquisition Company, an exit of choice right now in the U.S., is beginning to find its way across the Atlantic. These are not novel structures, but the latest batch is backed by top-rate financial institutions and serial investors seeking highly sought-after targets. Orrick has helped navigate companies through a string of these deals and we expect to see SPACs become a driver of European exit planning. As a result, we’re optimistic that next year’s IPO metrics will tell a quite different story.
Several Dutch startups are now unicorns or getting closer to it, which makes the Netherlands a more obvious choice for worldwide talent to start or grow their career. But homegrown startups and more US tech companies have called Amsterdam home in the last few years. This also puts a career in tech on the map for talent from traditional educational backgrounds, agencies, or corporates. For founders, there is a serious lack of capital from investors with operational experience. Most capital is also being invested beyond the seed stage. More established founders and operators have to start writing checks. (And by checks, I just mean wire transfers. What are we, Neanderthals?)
We grew MessageBird to a €100 million business, with no outside funding or investors whatsoever, until 2017 when we secured our first VC financing. Since then, MessageBird’s team has been focused on building a world where we can talk to businesses the way we talk to our friends, through all the same channels like WhatsApp and SMS. We’ve achieved incredible results, but we still have a long way to go. This year, we were able to raise additional capital through private markets, and people ask me when we’re going to IPO. We are operating at the highest level of financial integrity, run as an IPO company, but we will ring the bell when it makes sense.
That being said, Europe-based venture firms should be able to improve exit prospects over time. M&A is the most frequent exit route for VC backed companies. In a low interest rates and low growth environment where technology is key for every business, strategic acquirers are likely to be active in the coming years and attractive VC-backed companies from Europe could be on their shopping list. The best companies will also expand internationally and have access to capital from global investors. They could eventually qualify for IPOs in Europe or in the US. The development of more active secondary markets is another possibility. Whatever happens, if the European ecosystem keeps producing an increasing density of emerging companies with sustainable business models and enduring growth prospects, I trust liquidity opportunities will follow. It is still early days compared to the US and we need to be patient.
This is mainly because top platform companies are missing in the European ecosystem and because there is a different historical experience with investing in the public stock market.
Another challenge is fragmentation. Europe is not a single, unified market; it is an aggregation of 27 markets in the EU, and 51 markets across the continent, each with its own language, entrepreneurial culture, ecosystem, regulation, and sometimes even currency. While this of course is one of the factors that makes the market so vibrant, Europe is much more complex compared to the US when it comes to scaling a company as it involves operating across multiple geographies.
Finally, diversity and inclusivity are sizable challenges, but that is something that all geographies face! On the whole, the European startup scene is emerging from the shadows of Silicon Valley, successfully developing globally-known innovations and businesses for consumers and enterprises alike. This is inspiring a new generation of founders and entrepreneurs and fuelling this growth in years to come.
An important question for the European ecosystem is what happens to the value created by its leading tech companies. Do they stay independent and transition into the public markets? And, if so, where do they choose to list? Do they end up being acquired? If so, by whom?
These questions matter as they help to understand where and by whom future value created by these companies will be captured. To try to answer this, and working in partnership with Horsley Bridge, this analysis sets out the exit route of every VC-backed European company that has exited at a billion-dollar valuation or higher covering more than 50 companies.
The majority of value has transitioned to the public markets with the IPO exit route accounting for 74% of exit value. Importantly, from the perspective of retaining value in Europe, the US accounts for the largest share of exit value at a combined 52% of the total across both IPOs that listed in the US and acquisitions by US buyers.
The past few years have been really exciting for European tech. People used to wonder if Europe could create $10 billion companies. Now the question is: what will be the first $100 billion company? We’re seeing more and more world-class tech companies being formed across the region, by ambitious founders who want to win on a global scale. That’s why Sequoia is doubling down in Europe and building our local team, to meet these founders as early as possible and be a stronger partner for our portfolio companies on the ground.
The rich pool of technical talent means Europe isn’t just catching up, it’s leading the way, particularly across sectors like enterprise software, deep tech and fintech. At Sequoia, we’re excited to grow our presence in the region, privileged to have received such a warm welcome from the ecosystem and looking forward to partnering with many more market leaders with roots in Europe.