As two Americans living in London, operating Hoxton Ventures, one of the new early-stage European micro-cap funds, we’ve always been big believers in the European start-up market.
We started our fund on the thesis that the start-up market in Europe experienced a profound shift in 2007. We believed the simultaneous rise of distribution platforms like Apple’s App Store, Facebook’s app platform and Google Adwords meant that European entrepreneurs had unfettered access to a global customer base from day one. Combined with the falling costs of starting a company and the growing desire of Europe’s entrepreneurs to win big (“a million dollars isn’t cool, you know what’s cool, a billion”), we were convinced that Europe would produce larger, and more frequent, winners over time.
But we always tempered our enthusiasm with pragmatism. We believed that to scale, Europe needed Silicon Valley – for its money, know-how and managerial talent. And eventually, Silicon Valley would see what we saw in Europe.
We never guessed everything would happen this fast.
It’s clear to us that in 2015, European start-ups are on a tear. The market has dramatically changed – for the better.
We still have start-ups that are content to be local champions or copycats. There are start-ups aiming to be the best in one, or at most, a handful of geographies. Rocket still has its sphere of influence, expanding beyond the copycat strategy. Most recently, it can count DeliveryHero, HelloFresh and Home24 as three big successes.
But we now have a growing number of start-ups aiming for nothing less than world dominance. Many of these are also successfully entering and winning in the all-important U.S. market. Whether it’s Adyen building the new payment rails for the world, Auto1 reshaping the way used cars are bought and sold, FanDuel going head to head with DraftKings to battle over the fantasy sports market, Funding Circle providing an alternative to bank lending, TransferWise re-inventing money transfer and WorldRemit transforming money remittance, these companies have no shortage of ambition. And they are scattered all over Europe.
Even the start-ups that avoid the U.S. market are working on achieving scale across other countries. Sometimes their products make less sense in the U.S. market. BlaBlaCar’s ride sharing platform works across the continent, Deliveroo’s food delivery effectiveness is tied to city density, and Klarna’s payment and risk processing works well in European markets. All of these start-ups have the potential to be not just local winners, but global category leaders, just sans the U.S..
These start-ups are joining an ever growing list of European companies that have become the definitive winners of not just their home markets, but entire market categories; companies like King in social gaming, Skyscanner in travel, Spotify in music streaming and Supercell in mobile gaming.
It’s no surprise that when you look at the number of European unicorns in the tech industry, it’s risen from less than 5% of the global market in 2005 to just over 16% in 2015.
We’re also seeing a growing number of start-ups that are not just achieving commercial success, but are setting the standard for state-of-the-art in their markets. These range from Algomi in fixed income trading, to Darktrace in cybersecurity anomaly detection, to Deepmind (now part of Google) in artificial intelligence, to Swiftkey in natural language prediction.
All of this has caught the eye of leading venture firms across the world. Firms that have no presence in Europe such as Andreessen Horowitz, DST, Greycroft, Insight, NEA, Sequoia, True Ventures and Union Square are increasingly finding ambitious companies to back in Europe.
Still A Long Way To Go
But we still have a long way to go. The UK, which accounts for one-third of Europe’s investment dollars, saw a 78% increase in VC funding in 2014 with $1.7 billion going to start-ups. By comparison, NYC start-ups received $4.5 billion from investors in the same time period, up 155% from the previous year. Don’t even bother to compare Europe to the Bay Area; the numbers aren’t even in the same ballpark and are off by more than an order of magnitude.
It’s no surprise that despite early-stage deal sizes growing in North America, with valuations correspondingly going up, early-stage deal sizes in Europe matched a five-quarter low at $3.2 million in Q2.
The good news is funding is up in the first half of the year in Europe, with $6.6 billion invested. This puts Europe on pace to surpass 2014 totals by nearly 60%. As in the U.S., a lot of this is driven by late-stage interest. Late-stage European deals rose to new heights in Q2, hitting an average of $51.9 million.
What we saw in Europe several years ago should now be far more obvious to everyone. At the risk of increased competition to Hoxton, Europe needs more venture funds. Think of the potential we’d unlock if we could capitalize our companies more effectively, as a community.
At Least 39 New Early Stage Funds
In addition to the leading funds, we need more Hoxtons, more Passions, more Connects, more Point Nines, more Lakestars, more 83Norths, more Notions, more Mosaics, more Felix Capitals. The good news is we know of at least 39 new early-stage funds being raised in the market today, some of which have already closed (but not yet announced).
We need these funds to get to scale. In the last six years, only 49 funds have raised more than €100 million. While Josh Lerner at Harvard Business School will tell you that venture performance decreases with fund size, performance also follows an inverted U-shape, where scale can help generate returns.
And while various governments think they can tackle this problem, we need the institutional market to see that the market has changed in Europe. This is a market that really has changed in fundamental ways.
We’re bullish on European start-ups and think you should be too.
Hussein Kanji is a co-founder of Hoxton Ventures