Europe’s equity finance market has reached heights not since since the final days of the dotcom boom, with European companies raising €2.6bn on 345 deals from January to March, a 41% increase on Q4 last year.
But rather than heading for a crash, given that the number of deals dropped by 5% during this time, George Whitehead, venture partner manager at Octopus Investments says this represents a true maturing of the startup world.
“What we’d be seeing if this was just ‘froth’ would be lots and lots of small deals,” Whitehead said. “In a bubble, any crazy idea gets funded. Investors are clearly being more choosy now, but when they do invest, it’s into a world-changing company that they think will be worth hundreds of millions of pounds, and they’re putting in a significant amount of money.”
This sentiment is echoed by Russ Shaw, founder of Tech London Advocates. “As an increasing number of digital companies move from startup to scaleup, funding rounds are going to grow. This is not indicative of a bubble, but a digital economy maturing,” he said.
Whitehead believes a chronic underfunding of new ventures, which led entrepreneurs to head to the US, has now given way to real money. “Europe is clearly stepping up to the plate in being globally competitive and backing global winners.”
The UK received 25% of all equity funding deals in Q1 2015, according to the quarterly Venture Capital Report from Dow Jones, beating France and Germany into second and third place, respectively.
Germany did, however, raise the largest amount of funding during Q1, receiving €921m across 64 deals and tripling its Q4 2014 investment total, compared to the UK with €886m, an increase of 54% on the previous quarter.
“There have been some large outlier deals in Q1; 40% of the money deployed went into the top 5 companies, all later stage financings,” said David Norris, partner at Forward Partners. “What we’re seeing is companies choosing to do later stage private financings to keep growing without going public. At that end of the market it’s quite heated. At the early stage there is plenty of money still but the valuations haven’t moved significantly so I think we’re not in situation where a major adjustment is needed.”
Consumer services topped the sectors receiving investment, taking half of all VC cash in Q1, with Germany’s Delivery Hero the top deal in terms of money raised, at €288m.
“Consumer services is a a large category which includes food delivery and ecommerce,” Norris explains. “We focus on investing in consumer ecommerce specifically because it’s possible to build international companies that access a large market via the web. The internet provides a platform for newcomers to disrupt existing business models by reducing costs in the value chain and giving a better offering to consumers.”
“These companies attract the highest number of users – the Holy Grail for investment,” Shaw added. “If a company can demonstrate widespread adoption it is far more attractive to investors than early profitability. User numbers demonstrate long term growth potential.”
The largest venture fund in Europe, Germany’s HV Holtzbrinck, closed €285m in Q1.