Faraday In The News

The new era of European Venture Capital

By 26 October 2021 July 14th, 2022 No Comments

Since the financing of Christopher Columbus’ ground-breaking initiative by the Catholic Monarchs, for some an early and successful example of Venture Capital, private investment in bold, innovative companies with great potential for value creation and profitability (and thus with high associated risks!) has undergone significant development.

The Small Business Investment Act of 1958 was the first step towards the professionalisation of the sector in the United States, and shortly afterwards the still current remuneration structure for managers was established, consisting of a management fee and a success fee, or “carried interest”, on results. Current industry benchmarks such as Kleiner Perkins or Sequoia Capital were founded in 1972, even then focused on young computer and programming companies. It was only in the 1980s, however, that the number of specialised investment firms grew from a few dozen to more than 600 by the end of the decade, with a tenfold increase in assets under management to USD 30 billion.

The adoption of the Internet in the early 1990s, and the enormous returns obtained by Venture Capital funds that participated in companies such as AOL, Netscape, Compuserve or Amazon, gave a new and strong boost to the industry, this time at a global level, and the first independent firms also began to appear in Europe, although the bursting of the dotcom bubble in 2000 caused the bankruptcy of many Venture Capital funds and dramatically reduced the volume of the industry, which stagnated in the following 4-5 years. Since then, the Internet itself and its much higher speed (bandwidth) and penetration (% of households and businesses connected), new tools such as Smartphones or technologies such as Artificial Intelligence, have served as catalysts for the launch of new products and services on a global scale, causing an unprecedented acceleration both in the emergence of new innovations and in the growth of the value generated by these companies for their shareholders and for society.

It is indeed in the last 15-20 years that the Venture Capital industry has really started to develop in Europe, with a strong increase in the number of funds, assets under management, deals, etc. An often-used proxy for the health of the industry is the number of “unicorns” in an ecosystem, defined as innovative/tech companies reaching a billion-dollar valuation. With just 3 unicorns in Europe in 2011, the increase of this proxy over the last 4 years has been spectacular, and a conclusive result of the investments made in 2005-2015, as well as in particular in the first quarter of this year, where about half of the total number of European unicorns have reached this mark. Incidentally, most European unicorns reached this status in less than 8 years.

Noº of unicorns and aggregate valuations post-money
Noº of unicorns and aggregate valuations post-money

Source: Pitchbook

This is not only the result of technological adoption by consumers, households and businesses and catalysing new innovations. In Europe and globally, the great financial crisis of 2007-2011 resulted on the one hand in: (i) many skilled professionals losing their jobs and needing to generate alternative income. Entrepreneurship therefore became a much more attractive option than in previous crises, thanks precisely to technological penetration, and of course, the increasing number of success stories. On the other hand, it also resulted in: (ii) a much stronger push for innovative entrepreneurship by local, national and supranational governments, which led to an explosion in the number of accelerators, incubators, public-private programmes and Venture Capital funds, and hence a notable increase in the number of European startups launched and financed annually.

Capital invested via Venture Capital and number of operations closed per year
Capital invested via Venture Capital and number of operations closed per year.

Source: Pitchbook

Thanks to these developments and public and private initiatives over the last two decades, we are currently at possibly the best moment for Venture Capital investors in Europe with: (i) a still young ecosystem and little competition from international/global funds, particularly in the “Early-Stage” sector, (ii) a significant critical mass of ready entrepreneurs and investable projects thanks to the efforts made and experience gained, among others, but perhaps above all (iii) a major exogenous shock to the global economy and society due to the Coronavirus crisis.

Indeed, this shock is causing major changes in the behaviours and circumstances of consumers and businesses, revealing new needs and ways of working and relating that will result in new markets. Bold entrepreneurs focused on these new needs are already launching solutions fully adapted to an increasingly digital, global and connected world, in which they can grow their businesses faster than ever before. It is now up to us, private, institutional, public investors and Venture Capital professionals, to provide the confidence, funding and support needed to take the most ambitious business projects forward, taking advantage of the short (but intense!) road already travelled and the great opportunity to participate in the creation of value in a new era for entrepreneurship, innovation and private investment.

Media sources: Revista Gestores, 6th edition, pages 32-33 (Spanish only!)