2019 was Europe's strongest year ever from a funding perspective.
In late 2018, I interviewed one of Europe’s top venture capitalists, Pär-Jörgen (PJ) Pärson of Northzone, and published an article detailing his 2018 takeaways and 2019 predictions for European tech. This year, I’ve expanded the year-end European tech survey to feature the insider perspective of not only Pärson, but several of Europe’s most notable investors, including Harry Briggs, Managing Partner at OMERS Ventures based in London, and Simon Schmincke, Partner at Creandum based in Berlin. These investors operate at the forefront of venture capital in Europe, and represent a trust of decision makers shaping the state of European tech. Additionally, their respective firms had landmark years in 2019, with Northzone launching a new US$500 million fund, OMERS launching a €300 million fund, and Creandum closing a US$300 million fund, all of which focus on European startups.
Each investor presented his European tech takeaways from 2019—what happened and why—and what’s next in 2020—where to focus.
What Unifies The European Tech Ecosystem?
Before diving into the takeaways and predictions, it’s important to briefly define the term “European tech.” The question of whether European tech can be analyzed as a single entity is complex. In reality, the region is less a single entity and more a collection of hubs, each with its own culture and regulatory environment. That said, these hubs are connected based on their close proximity by a migration of talent and capital. While details such as the product design and development process or work attitudes vary between hubs, European startups, now more than ever before, think of Europe as a single market.
Key Takeaways From 2019
The slowdown of funding didn’t happen...yet (Pärson & Schmincke): Many anticipated a macro-level market correction and a slowdown of VC funding in 2019. On the contrary, European startups raised a record US$34.3 billion in venture capital since the start of 2019, according to a recent report from VC firm Atomico. This figure far surpasses the US$24.6 billion raised in 2018. Furthermore, the European VC industry is extremely well-capitalized. A large number of funds were raised this past year, and the gaps in the funding chain from angels to late growth, which have hampered the European ecosystem in the past, have shrunken. Also, there are emerging hubs that manage to give birth to great tech companies outside of regional leaders the UK, Germany, and France in cities like Lisbon, Bucharest, Belgrade, Warsaw, and Dublin. Despite the grim macroeconomic outlook, Creandum’s Simon Schmincke doubts we will see a slowdown looking ahead to 2020, while Northzone’s Pärson is less optimistic, and cautions that founders should prepare to have more cash burn flexibility in their operating plans.
European Series A rounds continue to get larger.
The Americans are coming (Schmincke & Briggs): US funds have finally discovered Europe. While Series C rounds, and sometimes Series B rounds have historically seen the eventual American participation, Series A and Seed rounds in Europe were historically reserved for European investors. This trend changed in 2019. With Dealroom reporting a €60 billion pipeline of European unicorn exits to come, it’s no wonder investors from beyond Europe’s shores are coming in to take a closer look. This is compounded by the fact that intense investor competition in Silicon Valley emphasizes the value of European opportunities relative to local opportunities. With large multi-hundred million dollar West Coast venture funds like Sequoia and Lightspeed Venture Partners exploring the European Seed and even Pre-Seed landscape, European entrepreneurs have an abundance of funding providers to pick from. As Schmincke noted about this development, “we are excited and skeptical at the same time. Excited about a massive group of friends who we can work with early on. Skeptical about what it means for some of the entrepreneurs who raise too much too early, or get left behind if a Seed investor from San Francisco doesn’t put the same attention into his European investments as he does into his local ones.”
European companies are going global faster (Briggs, Pärson, and Schmincke): European companies have always had to think global sooner than their US-counterparts, because of the size of their local markets. But this past year, European startups reached new heights when it comes to the pace of scale and global growth. Seed companies chose the Asian or the American market as their second market right away; Spanish companies skipped Europe to take on Latin America; Swedish companies expanded to the US right away. Moreover, the European ecosystem has companies with nine-figure-revenues that are still growing at breakneck speeds—companies like N26, Transferwise, UiPath, Monzo, Revolut, Klarna—with founders who have ambitions to rival the most successful Silicon Valley based companies. 2019 was the year of bigger markets and bigger opportunities driven by larger aspiration and more guts.
Regulations must evolve to enable continued growth (Pärson): This is a point PJ Pärson introduced in last year’s survey of European tech post, and it still holds true. Many European markets have yet to implement stock option incentive schemes geared towards startups. This limitation continues to make the playing field for top talent uneven versus the United States. Moreover, immigration rules for skilled workers need to be updated. Europe needs access to great global talent and must be able to effectively attract that talent.
Industries To Focus On In 2020
Healthtech (Briggs, Pärson, and Schmincke): Healthtech startups will reach a tipping point in many markets in 2020 as reimbursement models are getting clearer and treatment efficiency starts to show. Europe has 3 of the world’s top 5 health research universities. The “magic triangle” between London, Oxford and Cambridge has a unique combination of research, talent and technology—with an increasingly mature funding ecosystem around it–and it’s starting to pay off. A principal challenge to growth is university spin-out rules. Namely, universities are still demanding too much equity from startups, and companies get bogged down in negotiations with university tech transfer offices.
Pitchbook
Machine Learning (Schmincke, Pärson, and Briggs): Artificial intelligence has become inextricably tied to machine learning, and pureplay AI will become increasingly commoditized in 2020. Machine learning is becoming the core of most successful business models, while funding into standalone AI applications will diminish. This trend is natural for almost all new significant technology trends, and shows that the technology has finally arrived in the startup mainstream.
Cloud Gaming (Schmincke): In Schmincke’s words, “what Google and Microsoft are planning is no less than a revolution in the gaming space and we at Creandum couldn’t be more excited about it. Multi-device enablers, optimized streaming, independent hardware gaming solutions that we’ve never seen before will enable new business models and create more immersive experiences. We already see new development studios popping up for these cloud gaming platforms.”
Industries To Approach With Caution In 2020
Virtual Reality (Schmincke): Virtual reality is a technology which, based on movies and mainstream expectations, has extremely high hurdles to climb to satisfy the mass market. The expectation that video conferences, work rooms, and also gaming will move at a high pace into virtual reality is something Schmincke doesn't believe will happen in 2020.
Voice (Schmincke & Briggs): There are limits to the value of the consumer market for voice technology (not to mention privacy issues). With the amount of funding and the quality of founders banking on voice as the new interface, this area is ripe for success. Unfortunately, there’s a disconnect between the quality of products in the market today, and how it is being adopted. Of course there is room for improvement, but it seems that users are not ready to adopt voice in a broad form yet. Just like virtual reality, the expectations seem to be too high right now.
Men’s Wellness (Briggs): 2019 marked the emergence of brands driving men’s wellness and personal care. However, in the eyes of Harry Briggs, with a few exceptions, it’s not possible to create a valuable, sustainable “brand” by repackaging a generic product and selling it on the internet. Current models simply use the internet as a sales platform.
Developer Tools (Pärson): Developer tools have seen a massive expansion in a number of funded deals over the past years. According to Pärson, this will cool off in 2020.
Hubs To Focus On In 2020
Amsterdam (Pärson & Schmincke): The PayPal mafia has demonstrated how a group of successful founders and executives who have witnessed hyper-growth and success can create a whole avalanche of successful companies. With the IPOs of Adyen and Elasticsearch in the second half of 2018, Amsterdam will begin to benefit from a group of angels, new founders, and role models coming out of those two mega successes. A newfound distribution of wealth should boost the Amsterdam ecosystem.
Eastern Europe (Briggs): The flagship successes of the likes of UiPath and Transferwise suggest a huge opportunity for Eastern Europe and the Baltics, particularly in light of the unrivaled engineering talent in the region. We’re going to see more great companies emerging in Eastern Europe and the Baltics, as engineering-focused diaspora tire of the Silicon Valley craziness and are attracted to a more developed ecosystem back home.
Closing Thoughts
There’s no doubt that this past decade marked a new, more mature phase in the development of the European tech ecosystem. In the last five years alone, Europe has seen 10 exits valued at more than US$5 billion. By comparison, between 2000 and 2010 there wasn’t a single exit meeting this criterion (the Skype & Yandex exit events happened in 2011). The present represents a time of great excitement for Europe’s entrepreneurs and investors. But, as the global appetite for European tech startups increases, it’s crucial for European entrepreneurs to not lose sight of building fundamentally sound businesses, and for investors to devote the proper time and diligence in identifying opportunities that align with their strengths and goals. In other words, it’s critical for European tech to maintain its competitive advantage—high capital efficiency—in 2020.
