Europe: Untapped Potential

Quick Takeaways: 

• Europe is an Opportunity: It has a growing number of unicorns, robust talent pools, and a historical track record of outperforming American counterparts over longer investment horizons.

• The Future is Consolidation: European early-stage investing will likely involve more explicit collaborations between large American funds and local early-stage European investors, leveraging the strengths of both to navigate the fragmented but promising European startup ecosystem.

• Creating Resources for European Startup Ecosystems: I will be creating and sharing comprehensive resources for startup ecosystems across Europe, providing deep insights and practical tools to support entrepreneurs and investors in these emerging innovation hubs.

Unbundling of Innovation

For the past half-century, Silicon Valley has been the premier destination for entrepreneurs. However, lately, there has been significant pushback from industry leaders against the perceived advantages of the Bay Area. Factors such as crime, housing costs, and a struggling downtown have fueled the narrative of San Francisco's precipitous decline. Elon Musk has relocated to Texas, top VCs have championed Miami, and companies have downsized their Bay Area offices.

Although the criticism towards San Francisco is probably overstated—it’s become ‘trendy’ to bash SF—this movement highlights alternative ecosystems that have been overlooked as innovation hubs. 

Europe, an Overlooked Market

Traditionally, Europeans have been stereotyped as lacking the work ethic and risk tolerance needed for a successful startup.

However, there is a history of success within European startup ecosystems. Numerous unicorns have been founded in Europe, including Celonis ($13 billion), N26 ($3.5 billion), and Northvolt ($12 billion). In total, around 129 unicorns have originated in Europe (for reference, there are 510 in the U.S.). Importantly, European VCs have historically outperformed their American counterparts over 10 and 15 year timeframes (American VCs outperformed Europe in a 20 year timeframe, albeit by 0.16%), demonstrating the region’s potential for outsized growth.

American VC Perspective on Europe

Currently, American VC presence in Europe is comparatively marginal. While several well-known American funds, such as Sequoia, Bessemer, and Lightspeed, have established offices in Europe, the vast majority are based in London. This location offers advantages: London is an English-speaking city with a high density of LPs and investment funds, as well as excellent travel infrastructure. However, this focus on London limits American firms' ability to capitalize on other investment opportunities across the continent. Europe’s technology ecosystem is highly fragmented, with numerous cultures, languages, and governments—a situation exacerbated by the United Kingdom’s exit from the European Union.

Despite these challenges, the landscape of European early-stage investing presents an attractive opportunity for American investors. American venture funds have access to tremendous sums of capital, allowing them to outcompete their European counterparts by offering quicker and more aggressive term sheets to founders. Over the last decade, American firms have raised a staggering $800 billion more than their European competitors. Although American early-stage funds have recently struggled to raise large investment vehicles—thinking about you, Tiger Global—industry-wide headwinds have pushed European VC activity down by more than half from 2022 to 2023. This funding asymmetry partly stems from the maturity gap between the two ecosystems, European funds are on average 20 years younger. The relatively smaller amounts of capital in Europe create a less competitive investment environment, leading to lower valuations, smaller round sizes, and fewer deals.

Possibly in response to this lackluster funding, governments have become the largest backers of European VCs: 37% of LP funds in the past year came from government agencies. Recently, there has been an alignment between government and startup incentives in Europe. Investment areas such as climate tech, global resilience (another way to say ‘defense’), and AI are critical to Europe’s international competitiveness. Consequently, governments have been eager to participate in venture capital and invest in emerging technologies. This government funding is crucial for investment managers and has helped stabilize the ecosystem during a downturn. However, government LPs often attach numerous strings to their money, such as requirements to invest in specific sectors or regions. These restrictions make it harder for European investment managers to make non-consensus bets, which are often crucial in early-stage investing. Theoretically, American VCs, with their deep coffers and investment flexibility, could outcompete their European peers.

However, European early-stage investors inherently possess network advantages that are difficult for Americans to overcome. Venture investing is deeply rooted in networking—the majority of deal flow is generated ‘who you know’. This trend is especially pronounced in Europe, where investors cite leads from outbound sources, other VCs, and professional networks as 78% of their total deal flow. As a result, 65% of European VC funds prefer investing in Seed and Series A rounds, where networking is more critical for discovering unknown potential investments.

Furthermore, the fragmented nature of Europe’s startup ecosystem heightens the importance of strong deal-flow networks. Although the European Union connects much of the continent, there are still 40 different jurisdictions across Europe. Navigating the different business practices, cultures, and legal systems in each country can be challenging. This complex regulatory and cultural landscape has led to the formation of many distinct regional startup ecosystems. In the U.S., the Bay Area alone accounts for 41% of all VC investment. In contrast, London, the largest city in Europe by venture capital investment, accounts for only around 23% of investment across the continent. Numerous locations across Europe—such as Paris, Berlin, Stockholm, Dublin, Munich, and Tallinn—serve as strong ecosystems for entrepreneurs.

Establishing an Infrastructure in Europe

In America, there is an established framework for purposeful interactions with startups. If you want to find a job at a startup, you can subscribe to plenty of newsletters that publish weekly opportunities (Ali Rhode Jobs is especially helpful) or look through the YC Startup Jobs. If you want to co-found a startup, you can join the On Deck Fellowship or Cofounders Lab. If you want to invest in a startup, there are well-developed ecosystems that lower barriers to entry. 

However, partially because of the fragmented nature of Europe’s ecosystem, there is no comparable infrastructure in Europe. Over the next three months, I will be traveling throughout Europe interviewing important players throughout different ecosystems. On a weekly basis, I will be writing deep-dives and publishing resources (look out for Airtables!) for the cities I visit. 

The Way Forward? Partnerships between US and Europe 

The respective advantages and weaknesses of the US and Europe open up the opportunity for collaboration. By working together, investors would be able to combine the financial prowess and flexibility of American funds with the deep connections held by regional early-stage European investors. In the past, there have been informal partnerships developed across the Atlantic where certain investors tend to co-invest together. However, there have been more serious partnerships such as General Catalyst’s recent merger with La Famiglia, a Berlin seed-stage investor. Essentially, the European investor has become the European seed stage arm of GC. Personally, I believe that we will see more collaborations similar to GC’s in the future. 

thanks to GPT-4ο for editing this piece of work :)