Investment in UK-based tech start-ups exceeded £10bn for the first time last year, jumping 44 per cent over 2018, as Europe finally starts to close its longstanding funding gap with the US and China.
The research, prepared by Dealroom and Tech Nation for the British government’s Digital Economy Council, was published as the London-based venture capital firm Felix Capital, an investor in European breakouts Farfetch and Deliveroo, announced a new $300m fund.
Felix’s new firepower follows a lucrative conclusion to 2019 for European venture firms. In November alone, a trio of European VCs together raised more than $1.5bn: Northzone, an early Spotify investor, announced a $500m fund; Balderton, a backer of Revolut and Darktrace, raised $400m; and EQT Ventures, part of the Swedish investment group, raised €660m ($730m).
“The pace of change in the last couple of years has really compounded,” said Sonali De Rycker, general partner at Accel, who called it a “golden time” for Europe.
“In Europe in general, there is now a valuation of the investment opportunity in tech which for many years was dismissed by investors,” said Frederic Court, founder and managing partner at Felix Capital.
Multibillion-dollar initial public offerings by Spotify, Adyen and Farfetch in 2018 were “exceptional outcomes at a global scale”, Mr Court said. “Each of those companies were a top leader in its segment. Every fund that was involved early on with those companies has done extremely well.”
Both start-ups and VCs themselves are also benefiting from an influx of capital from the US and Asia, as concerns grow about inflated valuations in Silicon Valley and China.
Silicon Valley-based firms such as Sequoia are investing more in European start-ups, while US and Asian pension funds, “funds of funds”, family offices and endowments are showing more interest in becoming the “limited partners” that provide VC firms with capital to invest.
“Really, for the first time, there has been significant inbound interest from the US and Asia,” said Paul Murphy, partner at Northzone, which raised $100m more in November than in its previous fundraise. “Silicon Valley is still the epicentre of our industry but it has lost its monopoly.”
Johan Svanström, partner at EQT Ventures, said the same applied to his own fund’s financing, predicting that high-profile blowouts in the US such as WeWork and the poor performance of Uber’s IPO could help Europe, which has long been criticised for being too conservative in its entrepreneurial ambitions.
“While it’s great that Europe is starting to have a bigger risk appetite, maybe the base of saneness actually helps,” he said. “We are a little more self deprecating and logical about things.”
Despite some investors fearing that uncertainty surrounding Brexit would dampen UK tech investment, London continued to outperform other European capitals in start-up financings last year. UK-based tech companies raised £10.1bn of investment in 2019, up £3.1bn from 2018, more than France and Germany combined, according to research firm Dealroom and Tech Nation, a government-backed organisation supporting UK entrepreneurs. .
But that could change after the UK leaves the EU at the end of this month, especially as many founders in London have come from abroad and recruitment from Europe becomes more difficult for British companies.
“The irony of Brexit is it just means there will be a reinforcement of the local ecosystems,” said Mr Court, whose firm has also backed US ventures including Gwyneth Paltrow’s lifestyle brand Goop and fitness company Peloton. “There will be less polarisation to London and less of an urge for talent to leave Paris, Berlin or Stockholm.”
However, some sceptics of the current state of European tech fear that after years of a relative funding shortage, the market has quickly swung to having too much cash — without enough high-quality businesses in which to invest.
“There are a lot of things getting funded that shouldn’t be,” said one venture capitalist, who requested anonymity. That could cause problems when these companies need larger, later-stage investment, the investor added. “The debate will rest on the volume of supply [of capital] versus the volume of demand [from entrepreneurs]. The supply of cash has increased much faster . . . It’s unclear if [VCs] can deploy it effectively.”
But other investors remain more bullish.
The new VC funds raised last year are “not even scratching the surface of the opportunity in Europe”, said Northzone’s Mr Murphy. “There is a shortage of capital and a shortage of start-ups.”