European start-ups raised record levels of funding last year after a series of blockbuster deals led by foreign investors but many of the continent’s venture capital firms struggled to raise money, according to data.
Foreign investors were responsible for the biggest deals with SoftBank, the Japanese technology group, leading a €458m financing of UK virtual simulation start-up Improbable, and US funds T Rowe Price and Fidelity investing $385m into Deliveroo, the London-based takeaway food app. Chinese ecommerce group JD.com also pumped up the figures with its $397m investment in Farfetch, the luxury goods website.
However, new research from PitchBook, the data provider, shows the total capital raised by Europe’s venture groups fell by a quarter to €7.4bn amid growing uncertainty about the outcome of Brexit negotiations. Despite a number of large venture firms such as Balderton Capital closing big fundraising rounds, the total number of new funds dropped to a 10-year low of 54 in 2017, compared with 75 the previous year.
“If you’re looking to invest into a UK or European fund, Brexit is a factor that you didn’t have to consider before,” said Doug Trafelet, managing director at PitchBook. “You may say why not wait for a couple of months before investing in that fund . . . or just invest 80 per cent of what you were going to invest.”
The tougher fundraising environment for investors follows two years in which money poured in to Europe’s venture capital groups. Enthusiasm for the continent’s technology sector — especially in areas such as artificial intelligence and financial technology — dovetailed with low interest rates to attract pension funds, insurance companies and family offices on the hunt for returns.
The excitement was fuelled by an increase in the amount of money allocated to the European Investment Fund, a public-private partnership created by the EU to support venture capital in the bloc. The initiative has become a central plank for the bloc’s venture capital groups and accounts for more than a third of investment in UK-based funds.
Between 2014 and 2015, after the European Investment Bank decided to increase the EIF’s capacity, venture capital groups’ fundraisings nearly doubled to €9.4bn.
However, following the UK’s 2016 vote to quit the EU, the EIF paused its investments in venture capital funds based in the UK, hitting smaller investors that depend on it for capital.
“The new funds are having a harder time raising money, or the amount [they raise] will be smaller,” said Omri Benayoun, general partner at Paris-based Partech Ventures, which shelved plans to open an office in London until the outcome of Brexit negotiations.
Venture capital companies are considered a key part of the technology “ecosystem”, that enables start-ups to raise money and advice from experienced investors. Foreign investors and big companies have instead driven growth.
As big automotive and retail companies attempt to modernise their businesses, data from Atomico, the London-based venture capital company, show 637 financing deals last year involved at least one corporate investor, a 19 per cent increase on the year before. Asian investors meanwhile put $1.8bn into start-ups in the continent, compared with just $876m in 2016.
Certain pockets of the industry have attracted outsized interest. The data from PitchBook show artificial intelligence start-ups raised €1.2bn last year, more than double the previous year, while fintech companies raised €4.35bn, more than triple the amount in 2016.
“European entrepreneurs are becoming more ambitious and more competent at building bigger and bigger companies,” said Neil Rimer, co-founder at Index Ventures. “It’s an onward march for tech in Europe.”
Countries such as the UK and France have benefited from their expertise in these specific sectors. “When we started out most people were sceptical at the idea of trying to build a hard technology company in London, let alone an AI research company,” said Demis Hassabis, co-founder of DeepMind, the artificial intelligence start-up bought by Google in 2014. “So eight years on it’s pretty amazing to see how much support is now flowing into the sector.”
Venture capital investors argue that moving away from a large number of small funds and a high volume of smaller deals will benefit start-ups that have struggled to achieve the scale of counterparts from Silicon Valley or China.
“The ecosystem has evolved in terms of the geographic reach and the emergence of venture capital groups outside the UK, in Germany, France, the Nordics and beyond,” said Tom Wehmeier, a partner at Atomico. “What you see now — driven in part by the sustained improvement in European venture — is a really strong willingness from corporate and private venture funds from insurance and other investors abroad to engage with Europe’s tech community.”
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