Venture Capital/Analysis/

European investors can’t write big cheques for startups. That’s a problem

Some investors say that Europe still does not have enough late-stage capital to fund its own biggest tech successes.

By Eleanor Warnock

Elina Berrebi from Revaia

Despite European tech’s record-smashing 2021, investors and regulators say there’s still work to be done. Their worry? Foreign investors, and not local ones, are reaping the benefits of European successes by investing at the later stages.  

A case in point: Europe’s second most valuable startup, Checkout.com, has only two European investors on its cap table. They are Blossom Capital, which has backed the company since its $230m Series A in 2019, and the University of Oxford’s Endowment Fund, which joined for the company’s most recent $1bn round

Some investors and regulators say this is due to a lack of European investors who can provide large amounts of capital at later rounds. Indeed, US investors invested 29% of all total capital raised in rounds between $50 and $100m in 2021, versus only 5% for all deals under $2m, according to Dealroom. 

“It’s really important that Europe has the potential to finance its own ecosystem”

“In terms of absolute funding numbers, [the funding gap] not an issue, but in terms of who’s financing the growth, and where’s the value is going to accrue, it’s a big risk for European players,” says Elina Berrebi, founding partner at growth-stage fund Revaia. “It’s really important that Europe has the potential to finance its own ecosystem.”

In other words, if more of European tech is owned by non-Europeans, potential returns won’t go to European investors or pensions and tech companies will be more likely to list elsewhere to continue to tap non-European investors. Given that government is a major investor in European tech, it also means EU taxpayers are financing innovations making US and Chinese investors richer. 

Institutional investors as part of the problem

In the UK, the “funding gap” — the amount of capital local startups would want to raise from local investors under ideal circumstances but can’t  — has been estimated at about £1.2bn a year. VC Lakestar estimates the gap in Germany alone is set to be €100bn a year through to 2040. The European Innovation Council says the gap is about €5bn-10bn a year for only AI and blockchain startups. 

Part of the reason for the funding gap, investors say, is the fact that European institutional investors — backers of the region’s VCs — haven’t upped their allocation to European VC in line with the growth of the ecosystem. 

In 2021, for every dollar that pensions invested in European VC, they put $19 in buyout funds, according to Atomico’s report. That ratio was one to 49 for sovereign wealth funds, although they have shown increased interest recently. 

“The innovations we see today are around technologies that carry a high share of intangible assets. Banks and pension funds can no longer finance such ventures as historically they have been determined to be too risky,” says Klaus Hommels, founder of Lakestar. “It’s become evident that Europe is missing out in the financing of some of the most successful and forward-thinking startups.”

Can policymakers plug the gap?

Policymakers are concerned about European scaleups relying on too much capital from non-European investors, given the geopolitical importance of future technology and the sheer amount of public money already in European tech. In 2020, government funding represented 30% of total VC funding in Europe, according to the Atomico report. 

In April 2021, a group of 31 founders and CEOs of European tech companies proposed that the European Commission create a €100bn+ fund to fill the late-stage funding gap. 

“It’s become evident that Europe is missing out in the financing of some of the most successful and forward-thinking startups”

The European Commission’s Joint Research Centre, which provides research for the Commission’s policymakers, has since released a report about the feasibility of such a fund. While the report said that the EU has a “significant” scaleup financing gap, it also steered away from recommending a big public fund to solve the issue. 

“Public funding should contribute to leverage private capital, rather than being the unique vehicle,” the report said. 

Academics and researchers say that there are still lots of policy tools that the Commission could leverage without creating a completely new fund. For example, the European Innovation Council (EIC) Accelerator provides up to €15m in capital to innovative companies, a cap that could be stretched. 

Solutions 

So what comes next? There will certainly be some sort of policy response at the regional level, and local exchanges are trying harder to keep European companies at home when they list. 

Revaia’s Berrebi says that Europe could think of establishing itself as a listing hub for purpose-driven companies with robust sustainability goals. 

“This is an area where European companies stand out versus their US peers, and which is something that over time, maybe public market investors are likely to buy increasingly,” she says. 

Other investors think it is only a matter of time before European VCs will be large enough to back local successes. 

Sofinnova Partners, a Paris and London-based VC firm that closed a €445m fund specifically for later-stage healthtech companies in 2021, says Europe shouldn’t worry too much about non-European investor participation. 

“Europe is on a trajectory that’s very positive but it’ll take a long time before companies are able to fundraise without going to the US,” Antoine Papiernik, managing partner at Sofinnova, told Sifted when the fund closed. 

“If you have to list a UK company in Hong Kong or a French company on the Nasdaq, it doesn’t mean you have to become an American or Hong Kong-based company. Remain who you are, get the right set of investors, be that the Nasdaq or elsewhere.”

Eleanor Warnock is Sifted’s commissioning editor. She tweets from @misssaxbys. Amy O’Brien also contributed.  

Update 24/01/22 — This article was updated to correct the size of the proposed European Commission scaleup fund from €100m to €100bn.

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James Gavigan
James Gavigan

Hello, I just want to point out that in the sentence above:

“In April 2021, a group of 31 founders and CEOs of European tech companies proposed that the European Commission create a €100m+ fund to fill the late-stage funding gap. ”

the proposal by the group of firms in question was to create a €100 billion fund not one of €100m+.