The COVID-19 pandemic has impacted all parts of the global economy. Venture Capital (VC) across Europe has remained surprisingly resilient with investment on target to exceed previous records set in 2019. Below we look at the figures for the first six months of 2020 and what can be expected for the second half of the year.
- COVID-19 has caused Europe’s work-from-home, healthcare, biotech and pharmaceutical industries to boom
- Valuations, deal sizes and scale-up rounds have remained strong
- European VC fund investment has been robust with specialist funds targeting tech, healthcare and biotech.
H1 2020 has been a lot better for the European VC market than many expected. In fact, Q2 saw €9.5 Billion invested across 1,113 deals – the third highest quarterly value on record and quite remarkable when large parts of Europe were still in lockdown for much of that quarter.
European VC has seen year on year growth over the past decade and this is set to continue for 2020. Much of the investment has focused on tech heavy businesses with a focus on longer term growth looking beyond the impact of COVID-19.
Deal size in 2020 has been higher with over 60% of deals over €25m clearly demonstrating how the European VC eco-system has matured over the past decade. The amounts invested are higher across all stages of development with angel and pre-seed rounds being strong in H1 2020. At the same time, mature Unicorns are attracting late stage investment as demonstrated by Amazon’s investment in Deliveroo.
Corporate investment into VC has remained strong. Another surprise when you consider the anticipated low corporate confidence due to the uncertainties arising from the global pandemic. VC deals with Corporate VC (CVC) participation reached €8.2 Billion in the first half of 2020, keeping pace with the record levels seen in 2019. The large corporations want to stay ahead and also be on trend investing in technology start-ups. Technology is the sector least hit by the pandemic, with the “Big Five” US tech giants seeing strong value appreciation and this trend spilling over into Europe.
Sectors attracting investment
The sectors that have performed strongly post COVID are likely to attract the most investment going forward.
Software start-ups have accounted for 30-40% of deal value in each of the last 5 years with investment level increasing steadily over the past decade.
Particular post pandemic focus has been on cybersecurity due to the dramatic increase in financial traffic online; cloud solutions to facilitate remote working and online social activity platforms as individuals keep themselves entertained at home.
Fintech investment was dominant pre-COVID particularly in London and this continued in Q2 2020.
There has also been a surge in Healthcare and Bio-Tech start-ups with a view on preventing another global pandemic in the future.
Food delivery has boomed with the closure of restaurants. This has been buoyed by consolidation in the sector: the merged entity formed between Just Eat and Takeaway.com looking to acquire Grubhub for £5.75B and UberEats agreeing to buy food delivery start-up Postmates for $2.65B. Such activity has led to attention being turned to a number of start-ups including Glovo from Spain and Wolt from Finland.
Online platforms and interfaces remain popular as they do not require large office overheads and are not constrained by cross-border limitations.
The sectors hardest hit by COVID – energy, tourism and high street retailers – are not typical VC sectors and as such did not significantly impact the H1 performance of the European VC market.
53 Unicorns and Counting
There are now 53 European unicorns, an increase of ten in the first six months of 2020. This continues the dramatic growth over the past five years; there were less than ten European unicorns in 2014. This is a direct result of the level of investment capital in the European VC eco-system as successful companies attract later stage investment and stay private longer leading to achieving unicorn status prior to exit. This used to be a major criticism of European tech companies, with founders cashing out too early and limiting the ability to build large tech companies to challenge the US giants.
European exits have been down this year especially when compared to the high levels of VC deals and investment. Q2 2020 saw a recovery to $2.7B and exit outlook is expected to increase towards the end of the year as investors look to cash-in on the increased valuations seen during the year. Exit value in 2020 is still on track to register the lowest figure since 2012.
There were 11 VC IPO’s in H1 2020, heavily impacted by the market turbulence seen at the end of the first quarter. Activity has started to recover driven by virtual IPOs with the whole fundraise road show conducted via a video conference service. Overall figures for IPOs this year are expected to remain low.
Specialist funds such as healthcare and bio-tech have driven increased investment in VC funds across Europe with a defiant €7.6 Billion raised in the first six months meaning record levels are again expected for 2020.
The VC Merry-Go-Round
European VC is attracting investment from a wide range of sources – pensions, corporate investment and High Net Worth tech entrepreneurs.
Many high profile technology entrepreneurs who have been heavily backed by VC investment in the past have now turned investors themselves. In the full knowledge that adversity throws up opportunity for smaller companies, they are backing the new kids on the block.
Bill Gates, Elon Musk and Jeff Bezos have all seen 2020 as an opportunity to invest into innovation and new technology.
The US VC market remains significantly more mature than Europe with correspondingly higher valuations. This has led to US investors looking to European tech investments seeking better value. What’s more, there has been a surge in large US VC investors establishing European offices to focus on European tech companies. The general strategy is to invest at European valuations and then look to scale the companies with expansion into the US. If successful, they will see double benefits of an increase in valuation due to the scaling of revenues as well as the higher multiple afforded to tech companies in the US.
The VC market in Europe has demonstrated great resilience and ploughed ahead despite all the uncertainties thrown up by the COVID pandemic.
This looks to continue into the second half of 2020. On a macro level much will depend upon the strength of European economies as the widespread government stimulus packages introduced during lockdown are reigned in.
The vaccine race will also impact the VC markets. Over the past six months, many companies have implemented strategies to conserve cash. These strategies will stay in place until a vaccine is widely available across Europe. At that point, the hope is the shackles will come off and companies will fast forward their high growth strategies. Obviously, the sooner a vaccine is available the better.
The general consensus across European VC seems optimistic that we are over the worst. Although local lockdowns will create uncertainties and challenges, they are unlikely to be as disruptive as the national lockdowns seen in the first half of 2020.
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“In Visible Capital” podcast PitchBook Various
Q2 2020 European Venture Report Pitchbook 30 July 2020