European VC tech investment hit an all time high in 2013 according to data from DJX VentureSource, while the number of deals has almost returned to the pre-2007 figures. More than half of the deals were early stage, indicating European investors are increasingly willing to take risks but the data shows that they are still making smaller bets than their U.S. counterparts, putting European start-ups at a disadvantage.
According to DJX VentureSource European VCs closed $4.57 billion in tech deals in 2013, a 20% increase on the previous year. In 2007 the figure was $3.99 billion. Since 2009, the worst year in the last decade, total funding has increased by 57%. (Slide 2). (DJX VentureSource does not directly measure tech start-ups. For this analysis three sectors were included: Business and Finance, Consumer Services and Information technology. The analysis used DJX VentureSource's reporting by deal stage. European data does not include Israel.)
The total number of deals (935) did not quite top the 2007 total (990) but is the fifth consecutive annual increase in deals from a 2009 low of 718.
Looking in more detail at where the money is going, over the decade the average deal size for seed and first round deals has remained broadly flat, while later stage deals have rocketed, from just $3.5 million in 2003, to $16.87 million in 2013. (Slide 3).
But taking just the over the last five years the trends are much clearer. Since 2009 the average deal size for a seed round dropped from $830,000 to $340,000, and that boom in later stage rounds has really happened since 2009, when an average deal went from $5.96m to $16.87m, a growth of nearly 3x. (Slide 4).
Given the explosive growth in later stage deals it is not surprising that they are taking an ever bigger share of the pot. In 2009 later stage deals took 36% of the total investment available. By 2013 that had grown to nearly half (47%), most of that at the expense of first round deals which shrank from 39% to 26%. (Slide 5).
None of this should come as a huge surprise. That seed rounds are getting smaller is an indication of capital efficiency thanks to technologies like cloud computing and open source software – allowing start-ups to do more with less.
But that doesn’t mean that European investors are not making bets on early stage companies. In fact when you look at the share of the pie not by deal value, but by the number of deals completed early stage deals (seed and first round) accounted for just under 35% of all deals in 2003, but by 2013 2/3rds of all deals (66%) were early in those first two stages – A round deals on their own account for more than half of all deals last year. (Slide 6).
On the flip side, however, European tech start-ups attract far smaller amounts of funding compared to their U.S. counterparts. Furthermore the gap is getting wider as European VCs continue to struggle to recover from 2007 while the U.S. industry bounced back by 2010 and continues to motor ahead. The growth in the U.S. industry is considerably faster than in Europe. (Slide 7).
Between 2009 and 2013 the number of deals in the U.S. grew from 1632 to 2397, a growth of 47%. (Slide 8) The amount of money raised went up by 74%, from $12.1 billion to $21.0 billion. The comparable figures for Europe are 30% and 57%.
What’s more, when you look at U.S. average deal sizes, in all stages European start-ups attract less capital. In 2013 a U.S. later stage deal was, on average, worth $18.7 million, compared to $16.87 million (although European late stage deals are catching up). At the important A-round, a U.S. entrepreneur is likely to receive $3.71 million compared to $2.26 million in Europe. (Slides 9,10)
Taken across the last five years, a European start-up will attract about 30% less capital in all stages. (Slide 11)
When looking at the kind of deals U.S. VCs are backing then in the last decade there has been a marked shift towards later stage deals, even more pronounced than European VCs. By 2013 they accounted for 60% of all fundraising, compared to 47% of European deals. (Slide 12)
And again comparing not the amount of funding, but the number of deals, later stage deals accounted for 28% of all U.S. tech deals in 2013, compared to 14% of European deals. Early stage deals (seed and A) in the U.S. accounted for 50% of deals, and 66% in Europe. (Slide 13)
What does all of this tell us? Both the European and U.S. industries are thriving and have bounced back from the economic crisis of 2007, although the U.S. market has bounced back faster and is outpacing Europe.
The criticism that European investors over focus on later stage deals does not appear to be backed up by the evidence, in fact if anything they are more likely to cut early stage deals than their U.S. counterparts, although their exposure will be less.