Imagine somebody else was paying nearly half your mortgage and steadily gaining equity in your home.
That’s the scenario for the European venture capital landscape. So far this year, US firms have contributed a whopping 42% of the funding for European startups — and their physical footprint on this side of the pond is growing steadily.
For some, this American financial influx might seem a cause for concern. But, actually, couldn’t it be European startups’ golden ticket?
The current landscape
Earlier this year, amid a global market slowdown and with the US VC market cooling substantially from its 2021 peak, many pundits in Europe predicted a major retreat by US investors. This would have spelled doom for European startups, who have leaned on American capital year after year, particularly at later stages.
On the contrary, 2023 has seen US funds intensifying their focus on Europe, establishing bases, and in relative terms, augmenting the venture capital they funnel into European businesses.
A double-edged sword?
There’s a growing debate surrounding this reliance on American capital, especially considering its potential influence on strategic European technologies like deeptech. There are fears that an influx of investment might encourage European startups to pivot westward, adopting a strategy of “build in Europe, sell in the US”.
While lucrative, this approach could alter the accountability dynamics of successful companies.
Furthermore, from the UK Brexiting to France boycotting the NATO Innovation Fund (NIF), European countries always seem eager to throw a spanner in the works of a truly united startup market. This fragmentation might be a significant factor behind the sluggish development of cross-border European investment as an alternative to foreign capital.
But let’s not demonise this overseas capital influx when it validates the potential of European startups and fosters innovation and expansion of local hubs.
[Lack of] Unity in Europe
As I’ve previously highlighted, fostering a united European tech and VC market through a supra-national strategy could be the key to nurturing innovation and growth — especially in sectors critical to national security, such as energy, climate, defence and advanced computing technologies.
This strategy should encompass government funding and a supportive cross-border legal and tax framework to encourage pension funds and affluent individuals to back pan-European VCs and startups.
While this transformation won’t occur overnight, it is not as far-fetched as sceptics might believe.
After all, collaborations extending beyond EU borders are already manifesting, with the UK rejoining Horizon and the NIF showcasing that European investment collaboration doesn’t have to end at the EU border.
Looking ahead, a shift in the balance of power is on the cards.
The increasing US investment in Europe, although beneficial in many ways, could also alter the dynamics of the European tech sector.
In the grand scheme of things, this might not be entirely negative. As US VC firms increase their stake in Europe, it’s plausible that American Limited Partners (LPs) might follow suit, bringing a fresh wave of investment and possibly fostering a symbiotic relationship between the two regions.
In my anecdotal experience, launching my first fund, I noticed a difference in risk appetite between US and European LPs — with the former generally more knowledgeable about venture capital, less bureaucratic and more receptive to companies in sectors such as defence or hardware.
Moreover, their investment doesn’t generate geographical or sectoral restrictions, which fund managers often self-impose when taking on board European government LPs or risk-averse wealth holders. Lastly, as demonstrated by Israel, selling or listing startups in the US can reciprocate benefits to the local economy.
However, navigating this relationship demands caution. If European investors continue to rely heavily on the US for funding and also become increasingly backed by foreign capital, Europe’s aspirations for tech sovereignty might remain a distant dream.
A wake-up call?
All in all, the Yanks seem to love European tech even more than Europeans themselves. I don’t see why the situation would change going forward.
At least from the US end. As we stand at this crossroads, it’s time to shed the apprehensions and adopt a more balanced yet assertive stance on European startup funding.
While Europe needs to maintain its unique identity and nurture home-grown innovation, the influx of US investments offers numerous benefits.
Not least as it may act as a wake-up call for individual governments to foster a more unified tech market and for local investors to take bolder bets — particularly in critical national security areas such as energy, climate, defence or advanced computing technologies.