European founders who build IT infrastructure, development tools and cybersecurity products struggle to raise money in Europe because very few venture capitalists have a relevant background in software.
Most Silicon Valley venture capital funds have partners who specialize in these categories. US venture capitalists often hire experienced operators from companies like Microsoft, Cisco, VMware and Amazon. European venture capital funds rarely do the same. As a result, two of the hottest European startups in this market, Elastic and Gitlab, have no European investors in their cap tables.
Europe does not lack software startups. We now have a multitude of very well-funded startups in the category like Darktrace, Snyk, and MariaDB. We also have growth-stage companies that started in Europe but are now headquartered in the US like Instana, Contentful, and Devo. Then there are Series A stage companies that, despite being based in Europe, have attracted Silicon Valley investors, some examples being Netdata, Prisma & Sqreen. Finally, there is a growing list of homegrown hot companies like Lenses.io, Weaveworks, Codacy and Ververica (acquired by Alibaba).
It’s no secret that founders in the space make frequent trips to the Bay Area. After all, their early adopters are there, but also a multitude of investors who have built or have invested in such products in the past. Several companies even use a San Francisco address.
European investors can be hesitant to back open source projects that might not generate revenues immediately.
But European investors can be hesitant to back these companies, especially when it comes to open source projects that might not generate revenues before establishing thought leadership dominance.
A good example is NetData, a monitoring company that started in Greece and is already being used by millions of IT professionals around the world. Where Europeans held back their US colleagues entered a race to acquire a stake in the company. A few months after the seed round, Bain Capital Ventures led a $17M Series A round for Netdata, a company generating nothing in revenues but spreading like fire across datacenters.
Silicon Valley investors have noticed the quality of European development tools and infrastructure and companies are now leading Series A rounds even before the company relocates to the US. Venture capital fund Benchmark led Series A rounds for Duffel (London) and Sketch (Netherlands & Portugal), Greylock led the Series A round of Paris-based Sqreen and Kleiner Perkins did the seed round of Berlin-based Prisma.io.
It’s not only the US-based investors that are flooding into Europe. Israeli investors have been investing increasingly in the EU market. 83 North, Pitango and the Israeli outposts of global firms like Battery and Bessemer are leading Series A rounds across the continent. Even Chinese investors are ramping up their activity, with the most prominent example being the investment and subsequent acquisition by Alibaba of Apache Flink creators, Ververica.
The new crop of European software companies like Datadog, Dataiku and Adyen could be a recruiting ground for new VC partners.
So where does this leave European investors? Big names like Accel and Index have led activity so far, but are now being joined by a few others. Some examples are Imran Ghory of Bloom, an engineering leader turned investor, Patrik Backman at OpenOcean — formerly of the MySQL and Sun Microsystems fame — and Adrian Colyer at Accel, who held the role of chief technology officer at companies like VMware & Pivotal.
But there is much more to be done. There is a new crop of highly successful European software companies: Elastic, Datadog, Dataiku, Gitlab and Adyen. Not only can these lead to multi-billion euro exits, but they could also be the hotbeds to recruit new partners for European venture funds.
Then, maybe we will near a time when European early-stage startups stop using San Francisco as their headquarters.
Panos Papadopoulos is a partner at Marathon Venture Capital.