VCs On Track To Invest $5 Billion in European Start-ups In 2014

A record first quarter for tech investment in Europe means 2014 could be the first year that more than $5 billion in venture money is injected into European tech companies, according to figures released on Monday by Dow Jones VentureSource.

Using the first quarter to project performance for the whole year, 2014 is on track to be the sixth consecutive year of growth in European tech investing since a low in 2009.

The star performer was financial technology where investments rocketed ahead compared to the same quarter last year.

However, while European investors continue to back tech companies with more and more money, relative to the U.S., investment in Europe is a lot lower. And while the European venture scene has recovered from the 2008 financial downturn, that recovery is at far slower pace than in America; the gap between the two is widening.

More, And Bigger, Deals Are Being Made

That said, the data for the first quarter of 2014 paints a very encouraging picture in Europe. More, and bigger, deals are being made.

For the purpose of this analysis European tech comprises Venture Source’s Business and Financial Services, Consumer Services and Information Technology sectors. Funding was a record $1,223.79 million, compared to $963.35 million in the same quarter in 2013, an increase of 27%. The previous best first quarter was in 2011  ($1,040.53 million).

It was also a record for the number of deals, 261, an increase of just under 20% on the corresponding quarter last year (222 deals).

Incredibly Strong Quarter For Financial Services

Looking at average deal sizes, a more mixed picture appears. It is worth noting that with just 261 deals it is risky to draw too many conclusions as one or two abnormally large deals can cause large swings, but with that caveat in mind, the average later stage deal was quite a bit smaller compared to the same quarter last year, ($14.82 million compared with $17.08 million).  In seed, first and second stage deals, funding was marginally up.

VentureSource’s Business and Financial Services category (which encompasses fintech) saw a huge leap, 177% more investment compared to the same quarter last year. ($397.16 million between January to March of 2014 compared with just $143.27 million in the same period in 2013).  Delving a little deeper, and breaking the category into its sub-categories, it appears that the bulk of that increase went into financial institutions and services, which in Europe had a staggering 1,227% increase in first-stage funding compared to the same period last year.

European Tech On Target For $5 Billion In 2014

If we use the data for 2014Q1 to project what the rest of the year will look like then it should be another great year for European tech. Taken over the last 10 years, Q1 has historically been the quietest quarter in Europe (Q4 is the big one).

If this same pattern holds for 2014 then European tech could see, for the first time ever, more than $5 billion ($5.36 billion) of venture money invested in nearly 1,120 tech deals. This would be an all time record for number of deals and total amount invested.

Based on the same projection, there does seem a shift away from later stage funding. From 2009 to 2013, the amount of money going to first round deals has slowly gone down as later stage — and less risky — deals took an increasingly larger share of the pie. If the pattern of the first quarter is repeated, then for the first time since 2008 the all important first round funding will have gone up. For start-ups hit by the so-called “A round crunch” —  a perceived dearth of early stage funding — this has to be a good thing.

Deal size continues to be flat in the early stages. Looking at average deal sizes over the last five years, and working on the projection for 2014, there is a slight uptick in all three early stages, but nothing of any significance. Later stage deals are down from an all time high of $16.24 million last year to a projected $14.82 million for 2014.

$2 Billion More Invested in Q1 in U.S. Than In Europe For All Of 2013

However looking at the global picture, a troubling story emerges. While European VCs are continuing to pour in ever larger amounts of money, both in terms of absolute numbers, and in terms of growth, Europe is a long way behind the U.S. and the gap between the two is getting wider.

Dow Jones VentureSource data for the U.S. was released last week and reveals a very strong system. The first quarter of 2014 was the strongest ever quarter, with U.S. investors backing tech companies to the tune of $6.4 billion, about $2 billion more than was invested in European tech for all of 2013.

Once again U.S. firms are far more successful at attracting finances in all stages of their growth, on average attracting about a third more capital than European companies. That disparity is even more pronounced at the vital early stages. U.S. start-ups have seed rounds that are about 35% larger and first rounds, arguably the most important round, that are 40% larger.

U.S. Pulling Away From Europe

Comparing the growth of the two ecosystems since the financial downturn, both Europe and the U.S. have produced sustained growth, but the differences between the two are telling.

The European market bottomed out at $2.9 billion in 2009. In 2014 it is projected to hit a record $5.3 billion, in other words in five years the market has almost doubled (x1.8).

However the U.S. has done far better. Hitting a low of a low of $12 billion in 2009, if the market continues to perform as it is this year, it could top $28.5 billion in 2014, some 2.3 times bigger.  So, in 2009 the U.S. market was 4.1 times the size of the European market and by the end of this year it is projected to be 5.3 times the size.

VentureSource data was collected through surveys of professional firms, interviews with company executives, and from secondary sources. These venture capital statistics cover equity investments into early stage, innovative companies and do not include companies receiving funding solely from corporate, individual, and/or government investors.




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