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The biggest venture funded household names, such as Netflix and Facebook, were born and funded in the US. These successes have inspired innovation in Europe, but it has been an accepted truth amongst European founders that if you want your company to be a truly global success, raising US venture capital funding is a must.
The industry is shifting though: according to the European Investment Fund, VC investment in start-ups has grown four times to €23bn in the last 5 years. While this is encouraging news, Europe is still tiny in comparison to its two neighbors: the US and China. According to research from Atomico, an investment fund, Europe invested around €23bn in venture capital in 2018, whereas the US invested $130bn and China $92bn.
Earlier this week, I attended Venture Crush Paris, an event organised by US law firm Lowenstein Sandler, to gather leading start-ups and investors in Europe. Given the fact that the majority of the founders were European, it was striking to see their interest in getting investment from the US.
Florian Douetteau, founder and CEO of Dataiku, a big data analytics company, started company in Paris, but has investment from some formidable US VCs, including First Mark. He says that the move to get US investors was driven by the company’s need to expand in the US, and so he wanted investors who could help the company understand the US enterprise ecosystem and help with hiring.
“It’s important for the entrepreneur to put themselves in the candidate’s shoes. It is a big leap of faith to start working for a company that you don’t know, funded by a VC you don’t know. Getting known US VCs on board helped us with recruiting,” Douetteau said.
Another reason founders named for their US funding ambitions was the likelihood of exits in America. If the most likely acquirer of a European start-up is in the US, it makes sense to get a local network to become visible to them. While top tier European VCs have recently had notable exits, including Northzone and Creandum with Spotify, and Index Ventures with Farfetch, there are more exits in the US, generally at higher valuations. Research by GP Bullhound, an investment banking firm, notes that unicorns in Europe are typically valued 18 times their revenue, while in the US unicorns are valued 46 times their revenue.
The gap between valuations given to start-ups by US and European venture firms is narrowing, according to Venture Crush participants, but Douetteau noted that a key difference remains. “Because US firms tend to cover the entire US, they specialize more in terms of verticals, whereas Europeans tend to have geographic expertise.” This means that US VC firms are more likely to have a deeper due diligence process, simply because they have the network of potential acquirers and customers for start-ups in their sector.
There is also a trend among some very large US funds to proactively look outside the US for deals. “Investing in companies from $5m is becoming a global market. If you want to grow as a VC, you cannot limit yourself to the US,” says Douetteau.
While it is possible to be contacted by US venture firms in Europe, most European founders work to build their US network and get introductions to relevant investors. One founder I know spent seven months alternating between London and San Francisco every two weeks to build her network, raise funds and transition the company to California.
The pursuit of the biggest opportunities means founders are looking for the biggest markets and venture capitalists are looking for the biggest returns. Both sides are investing to find each other. European venture firms like Northzone and Index Ventures have expanded their US presence, and European founders now have enough precedent and access to the best investors, irrespective of geography. For both, building the right network and visibility are key, which is exactly where events like Venture Crush come in.
May 31, 2019 at 08:54AM
Forbes – Entrepreneurs