Billion-dollar start-ups are spreading across Europe at a rapid rate. US VC firms have taken notice. But do hubs in London and Paris really have an advantage over Silicon Valley?
Once considered a frontier market by VCs in Silicon Valley, Europe has developed a network which currently leads the industry by several measures.
Of the total number of unicorns created there – start-ups valued at $1 billion or above – more than half were created last year alone.
Though they still only represent a slice of last year’s global total (14%, according to Crunchbase), the high number of births seems unlikely to fade, even as start-up funding is squeezed elsewhere.
Globally, Europe saw the smallest regional drop in start-up funding in Q2, down 13%, compared to a 25% fall in the US and Asia. Even if it lags the US decline, the long-term outlook for the region remains positive.
“Historically, there has been a valuation arbitrage opportunity in Europe [for global VC funds] – companies have probably been on average more attractively priced,” says Dan Aylott at Cambridge Associates, “but the outstanding performance here up until last year has fueled further interest. I don’t see the European opportunity going away anytime soon. In fact, I see it continuing to evolve and expand.”
US-based VC firms including Bessemer Venture Partners, Lightspeed Venture Partners and General Catalyst have all recently hired or added to their teams in London and Europe to better access the region. Last year, Sequoia Capital opened its first permanent London office, more than 10 years after first investing in Europe, through Swedish fintech Klarna.
In a sign of closer ties between the US and Europe’s VC markets, the EU will open a new outpost in Silicon Valley this month.
“Originally there was a bit of a scouting mentality with US VC firms seeking investment opportunities here,” says a Paris-based VC source, “but that has gone out of vogue… it’s probably proved less efficient and there were a lot of raw deals.”
Despite potential language barriers across the continent, start-ups in the region are learning to leapfrog between emerging VC hubs to access talent, investors and broaden their customer base.
To reach its goal of 500 employees, Estonian online-identification start-up Veriff opened an office in Barcelona last year, saying it has “some of the best product and engineering talent in the world”.
With a presence already in New York and London, such geographic diversification can offer resilience in a down market, say sources.
“If you build a company in Milan, in Copenhagen, in Dusseldorf, in Madrid… as long as the technology is world class, as long as you build it in a global way, it should be like any of the companies from Silicon Valley or Boston,” says Antoine Papiernik at Sofinnova Partners. “Europe’s problem in the past has been translating science and innovation into companies and ultimately the winners of tomorrow, so it has been the little brother of Silicon Valley for a long time.”
A strong university network is fostering much of this innovation, with Paris-based business school Insead and HEC Paris in France, Cambridge University and London’s LSE in the UK, and Stockholm’s main university and institute of technology in Sweden responsible for a large proportion of Europe’s recent unicorn founders.
A handful of cities in northern Europe dominate investment: London, Berlin, Stockholm, Munich, and Paris are home to start-ups which represented more than half Europe’s total VC funding last year.
In a survey by Private Equity Wire, respondents were asked which region in Europe will see the most interesting investment opportunities over the next 12 months. The UK was the most selected, with 25%, followed by Germany (20%).
A source at an investment bank which serves the VC market claims much of the new activity is coming from “the beer drinking countries, rather than the wine-drinking countries [of Europe]”. Even if there’s some truth to this, it may not be the case for long.
Flywheel spins
“The locations where big tech companies are built tend to generate an enormous amount of activity and creativity,” says Ed Knight at Antler, “they become a magnet for talent, and you get a flywheel spinning. Cloud computing now means that businesses can be built from anywhere, meaning that entrepreneurship is no longer limited to just Silicon Valley.”
According to Alex Ferrara, who leads VC giant Bessemer’s European efforts from London, the shift to remote working means European start-up founders no longer need to move to the Bay Area early on, and this is drawing VC investors more into the region.
Knight’s Antler started investing in the UK in 2019 and closed a new seed fund last year to help develop 70 UK tech startups in the country. It’s easy to see why: London attracted more than double the amount of VC funding in 2022 than Paris and Berlin and ranks third only behind New York and Silicon Valley. Funding rounds this year have included digital payments business GoCardless and software payments provider Paddle. In July, London’s Deputy Mayor for Business crowned the city the “fintech capital of the world” claiming it was home to more fintech companies than any other city globally. But in the same breath he also warned of a problem facing all of Europe’s VC hubs as they expand: the race for talent between them, and with VC hubs in the US, will only intensify.
“I think one of the biggest challenges is figuring out the coverage model for Europe,” says Ferrara. “Unlike the Bay Area or Israel, Europe doesn’t have any one major hub. You can find great founders and companies in many different cities across Europe. Figuring out how to best cover so many regions is one of the bigger challenges.” 
