Although the entrepreneurial ecosystem in continental Europe is still at the fledgling stage and rather fragile, new sources of funding are appearing that will enable startups to secure larger amounts of finance while still in their infancy.
By Arthur de Villemandy October 08, 2014
Or Arbel, creator of Yo, a social app for iOS, Android, and Windows Phone, which he developed in a few hours for the sole purpose of enabling you to send a quick ‘Yo’ to your friends, recently closed $1.5 million in seed funding just two months after launch. Initially based in Israel, the startup quickly migrated to Silicon Valley – the ‘Eldorado’ for those who need the services of a Venture Capital (VC) firm in order to speed up their business development. In fact whether the investment comes from VCs or Business Angels, the United States leads the way, far ahead of Europe. According to a recent report from the Bright Sun Group, which uses data analysis to spot promising companies for investors to put their money into, there were 150 Series A funding rounds in Europe in 2013, raising an average of $3.5 million, compared with 700 in the United States, averaging $4.5 million. However, new European investors are now appearing, attracted by the emergence of a new, dynamic class of entrepreneurs. Moreover, the number of startups in Europe raising funds has increased by 600% in the space of five years.
This strong growth is due to the emergence of new venture capital companies in Europe, some concentrating on financing very young startups, others looking to buy into startups that have really begun to take off. Those which focus on ‘early-stage’ financing include White Star Capital – which only works with technology startups – Passion Capital and Point Nine. Those which specialise in helping firms to manage strong growth and scale up to conquer international markets include Atomico and Highland Care Europe, which deal exclusively with startups driving disruptive technology. Project financing – excluding standard Series A and B rounds – went up six-fold in Europe between 2009 and 2013, with just over 900 project financing deals recorded last year. Apart from such macro-economic factors as an attractive tax structure or social aspects which may appeal to would-be entrepreneurs, this increase in project financing and startup development is mainly due to the establishment of startup accelerators in many of Europe’s major cities. One example is the Paris-based accelerator TheFamily, which offers startups an ‘Accord d’Investissement Rapide’ [Rapid Investment Agreement] along the lines of the SAFE (Simple Agreement for Future Equity) deal pioneered by YCombinator, which enables investors to arrange financing very quickly, avoiding at this early stage the thorny issue of what value to put on the company.
The investment gap between Europe and the United States is nevertheless highly visible right from the first phase, i.e. the project financing stage. The average amount invested per startup deal in the US doubled between 2009 and 2014 to reach $500,000, while during the same period the average fell in Europe to eventually flatten out at €150,000. This drop in investment and the gulf between the two continents is the main reason for the general under-valuation of European startups compared with their US counterparts. The US market does of course have certain advantages when it comes to doing business but some European startups – notable success stories include SuperCell, Spotify, King and BlaBlaCar – have in fact achieved phenomenal revenue growth, demonstrating that the European entrepreneurial ecosystem can really work. Nevertheless, while since 2009 the number of Series A funding rounds in Europe has doubled and the average amount increased by 73%, only 6% of companies that were funded as pre-startups succeed in closing Series A financing, compared with 12% on the other side of the Atlantic. Even more revealing, only 1.5% of these firms closed Series B funding, versus 4% in the US. This lack of continuity in financing is due to a wide difference in the length of financing phases. In Europe, the average time between seed finance and a Series A round, 205 days, is much shorter than the 320-day average in the US. Moreover, as the average amount of such funding is fairly low, European startups find it hard to concentrate on growing the business as they constantly need to look for new finance.