Over the past few years, investment into European startups by North American venture capital and venture debt firms has taken off. US investment in Europe hit an all-time high in 2021, with more equity and venture debt providers entering the market.
But given the current economic uncertainty in Europe, what do European founders need to know about North American investors? We spoke with three North American investors to understand what’s behind the growing interest in Europe and what European companies should know about working with US firms.
Will Hutchins, head of originations at Espresso Capital, a venture debt provider with a presence in the UK, US and Canada, says the growing interest reflects the intersection of two key trends: strong growth in the European technology ecosystem in recent years — providing more investment opportunities — and North American investors becoming increasingly open to investing in different markets.
Falling valuations and longer fundraising cycles are making venture debt an attractive financing option for companies in both Europe and North America
Despite volatility from an array of factors, including Russia’s invasion of Ukraine and rising inflation, the European startup ecosystem remains strong. Europe is home to 130 unicorns — 84 of which were created in 2021 — that have collectively created over 135k jobs and have a combined valuation of more than €370bn.
“The past decade saw a number of US investors expand their investment focus to less covered “secondary markets” outside Silicon Valley,” says Hutchins. “Venture debt providers are also responding to a cyclical increase in demand as falling valuations and longer fundraising cycles are making venture debt an attractive financing option for companies in both Europe and North America.”
When it comes to VC, Annalise Dragic, a partner at US and UK-based venture capital firm Sapphire Ventures, says the increase of North American investment is a reflection of the “innovation and brilliant entrepreneurship coming out of all corners of the continent — a trend which has been building steadily for many years now”.
The fact that the US tech ecosystem is oversaturated with peaking valuations could also be driving investors to enter the European tech market where valuations are more “reasonable”, says Vaibhav Nalwaya, cofounder of Wavecrest Growth Partners, a Boston-based growth equity firm.
Sustainable growth and product-market fit
In an environment where equity fundraising is tougher, European startups have increasingly turned to debt as a way to accelerate growth, extend runway, avoid flat or downrounds, or bridge to their next equity raise. While equity investors take an ownership stake when they invest, debt financing is non-dilutive, allowing founders to maintain a greater stake in their business.
The lack of growth equity providers in the UK has also led to increased interest from US debt and equity providers who’re keen to fill the gap
Europe has raised record amounts of debt already this year — and it’s nearly all coming from US investors.
“The lack of growth equity providers in the UK has also led to increased interest from US debt and equity providers who’re keen to fill the gap,” says Nalwaya.
As a venture debt investor, Hutchins says Espresso Capital is focused on partnering with companies that have achieved product-market fit and are looking to scale their businesses.
“We're focused on companies that want to grow, but are biased towards growing efficiently and building large, sustainable businesses,” he says, pointing out that this is especially true in a downturn when companies typically take longer to raise funds.
Nalwaya agrees. He looks for founders who “have a great product and product-market fit — so they’ve got paying customers and the products are sticky — but have never scaled companies before".
"They need capital and partners who can help with recruitment, develop sales and marketing strategies and professionalise all the different functions of the company as it grows.
“At the end of the day, what we’re looking for is the sustainable competitive differentiation the product has that can be proven against its competitors. What is the value of the product, why do customers want it and why would they not replace it after a year?”
A hands-on, interpersonal approach
For investors, building strong relationships and engaging with the local ecosystem are constant priorities when investing in companies globally. Nalwaya says Wavecrest Growth Partners works on the ground in Europe almost every month, meeting new companies and making connections. Espresso Capital and Sapphire Ventures also have offices in Europe.
When a company is at a distance, it’s harder to manage. So there needs to be much more trust when investing in a European entrepreneur as compared to an American entrepreneur
For founders, Nalwaya says it’s key to have a relationship with the US. “Spend time in person here in the US with investors — do not try to raise money over Zoom; having executives in the US and a commitment to building a presence here is really important,” he says.
Hutchins says that it is also key to consider what the North American investor is bringing to the table. “You should be doing your homework and due diligence to understand the value an investor can bring in terms of network and operational expertise to ensure that it's a good fit. Does that investor have a track record of delivering the value you are looking for?”
A slower approach driven by the economic uncertainty is allowing for more due diligence, says Dragic, “for both founders and VCs to ensure they are the right match, and for founders to make sure that the VC is well-placed to add value long after the cheque has been written”.
Nalwaya adds that US-based investors also value a “sense of urgency” — such as faster decision-making — which is integral to North American tech culture.
“When a company is at a distance, it’s harder to manage. So there needs to be much more trust when investing in a European entrepreneur as compared to an American entrepreneur,” he says. “We have a very high degree of interest and conviction in investing in the European market, and especially where there is a connection to the US market.”
Impact and diversity
What sectors are North American investors interested in? Hutchins says there is an increasing focus on areas like health, environment and supply chain issues.
Going forward, we believe all investors will become increasingly mindful of the diversity of the teams they are backing and the environmental impact of their business models
According to Dealroom data, North American investment in impact jumped from $15bn in 2020 to $38bn in 2021.
“In recent years, we’ve focused a lot of time on the future of work, investing in companies which are enabling hybrid and remote-first operations. Going forward, we believe all investors will become increasingly mindful of the diversity of the teams they are backing and the environmental impact of their business models,” says Dragic on the future of US investments.
In 2021, 3% of startup funding went to all-female teams. In Germany, all-female teams raised 1.3% of total funding, while all-female teams in the Nordics ended up with 1.1% of the capital.
Nalwaya agrees, pointing out that he has not seen much diversity in European tech companies so far. He argues that this could also be because the companies are often early-stage bootstrapped startups that have not yet optimised for diversity.
“Like the global tech scene, Europe still has a long way to go on diversity. Change is happening too slowly and the investment ecosystem across Europe needs to work harder to address this,” Dragic says.
On the flip side, the different nationalities, languages and cultural diversity in Europe is a strongpoint for its tech ecosystem. “It's incredible to see that over 65 different cities across Europe are now home to at least one unicorn. To me, this proves that the benefits of the diversity of the European ecosystem are strong and makes it an exciting geography to invest in,” Dragic adds.
“Ultimately, having more North American investors doing business in Europe is a good thing,” says Hutchins. “It gives companies greater choice and allows them to seek out the financing solutions and partners best equipped to meet their needs.”