European VC funding could hit EUR100bn in 2021 - Pitchbook

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Nalin Patel, Pitchbook

We’ve already surpassed the EUR45.1 billion that was invested into European-based startups in 2020 – with only half the year gone VC deal value is currently standing at a whopping EUR47.1 billion, according to Pitchbook’s Q2 VC report, released today (Monday, 26 July).

“Deal value in the first six months of 2021 has already beaten the full year record that was set in 2020. The pace set in Q1 was relatively strong, and then that increased to another record amount of capital in Q2,” said Nalin Patel (pictured), author of Pitchbook's latest VC report. He doesn’t think this will slow down anytime soon. In fact, Patel believes European VC funding could hit the EUR 100 billion mark by the end of the year.

The level of VC capital has certainly increased drastically despite recent macro uncertainty. Late-stage deals have increased, driving the amount of capital upwards. “It seems like the pandemic is not really affecting VC investment in Europe as such - record after record has been broken this year. I think it’s a combination of factors causing this. Firstly, we’re seeing a lot more late-stage deals - so deals in excess of EUR500 million. A couple of big deals in H1 2021 were Klarna’s EUR1.1 billion round, and Northolt’s EUR2.3 billion round," commented Patel.

Moreover, nontraditional investor participation deal value hit a record in H1 2021, and again, has already surpassed the total from the entirety of 2020. “Within these late stage rounds we’re also seeing an increase in non-traditional participation, so many investors within these enormous rounds were non-traditional investors including investment banks, corporations, and pension funds. These investors haven’t been as active in VC [previously] as they have been in the last year or so, particularly in the last five years. So far, deals with non-traditional investor participation amount to a value of EUR37.8 billion, compared to a total of EUR33.7 billion invested in that category last year," said Patel.

Another factor, apart from the two main ones of larger rounds and non-traditional investor participation, Pitchbook attributes to the increase in the number of so called ‘unicorns’ – companies valued at USD1 billion or above.

"The increase of companies with higher valuations is also a major factor. The aggregate unicorn valuation across Europe is at 200 billion now, it was 100 billion last year, so it has doubled in a year. These companies are closing larger and larger rounds at higher valuations, and this has led to the increase in the overall deal value figures we’ve seen in the last few months," explained Patel.

The trend of late-stage VC increasing in deal value has been growing since around 2017, according to Patel, and is something which will continue as the European VC ecosystem matures -including the continued rise of unicorns.

One such example is Stockholm-based Klarna, valued at around EUR30-40 billion. “As these companies continue to develop and maximise their investment rounds in the VC ecosystem, I think they are going to be continuing to increase that proportion of late-stage deal value in the ecosystem, which is going to drive overall deal value upwards in the coming years as well,” he said.

Furthermore, US-headquartered GPs continue to double down on their capital-raising efforts in Europe, another long-term trend. "Many US investors want to find a company that has been successful in several European markets, and then take it to the US in order to scale it up to a global brand,” said Patel.

Another reason for US GPs turning their gaze towards Europe is that valuations are slightly lower there, in Patel’s view. An investment in the US might result in a smaller equity stake in a specific company, compared to a European deal.
     
In terms of geography, the majority of capital is flowing into the UK, Germany and France, as the traditional VC hotspots are increasing strongly across the board. “We’ve seen strong activity in Sweden and Israel as well. And in the Baltic region," added Patel.