The future is being invented in Europe
By Mattias Ljungman
I want to start by making a prediction: I believe that in the next 10 years we will see a $100B company with technology at its core emerge from Europe.
Back in 2006 when we started Atomico, investors thought we were nuts when I said we wanted to find and back Europe’s next billion dollar company. Fast forward to today and Europe has dozens of billion dollar companies, and now we even have two ten billion dollar companies in Supercell and Zalando. These are not outliers, they’re a taste of things to come.
This growth trend only sharpens the focus on the real story: technology is causing seismic shifts in everything from manufacturing, food production, transportation, the way we work and play, and even climate change. Much of that technology is being invented here in Europe. A new generation of European founders is building remarkable companies based on deep technology –AI/VR/AR/robotics/connected devices–and they’re beating the world in the most important game in town. Increasingly, the world’s giant corporations –tech and non-tech alike–are turning their attention and pocketbooks to Europe’s deep tech talent. This past year has been a banner year for tech M&A in Europe — so far at $80 billion –including such knock-out deals for ARM, NXP and Supercell.
There are many more tech entrepreneurs in Europe’s pipeline, but to realise their potential, these great founders need funding, and they need experienced venture capitalists to help them grow. The answer for them lies in venture capital, which has evolved into a double helix: on the one hand a necessary value-added partner for the tech entrepreneur, and as the only asset class that can deliver the kinds of returns that LPs seek.
Just as technology is only now starting to show us how radically it is going to change our lives, venture capital, especially in Europe — and especially now — is also at the beginning of its development as an asset class that can deliver on the outsized opportunity that tech holds. At Atomico, we took an early bet on the explosion of European tech, and we moved early to a new model for VC where venture partners earn a seat at the table through their unique contribution of financing and rigorous board involvement. The days of investing and sitting back waiting to reap the rewards are long gone. Today, VCs and founders choose each other. There are expectations on both sides. And that’s why the opportunity for tech-focused VC is fundamentally bigger than it is for other asset classes.
VC also has some built-in advantages over the other asset classes: it hones in on the tech industry, which has traditionally been less reliant on the cyclicality of markets. To be sure, there have been booms and busts in tech, but we’ve seen over and over again that great tech companies can, and are, built also in downturns –take Skype and Airbnb, both founded in the aftermaths of the dot com crash and the 2008 financial meltdown.
And we’re not in a downturn. While we might have some down quarters here and there, we’re definitely not going backward. Until 2012, VC funding was just under $1 billion per quarter. Starting from 2013, quarterly funding grew steadily to its current level of €3-4 billion. That’s a 4x increase in about 4 years, or roughly 50% growth per year.
Just as encouraging: Europe’s tech pipeline is also stronger than it’s ever been. Series A funding is incredibly robust: According to Dealroom, there were 136 Series A rounds closed in 3Q16, up 44% year on year, but also representing a record high quarter on this metric. All this in 2016 — a year that we can all agree was a rather disquieting one. That’s quite a remarkable pipeline and funding environment to have, especially in turbulent political and economic times.
But while Europeans are good at starting companies, there still isn’t enough gas in the tank to take them all the way. There is still a late stage funding gap, and this is where the opportunity for investors lies. There’s currently 14x gap between Europe and the US in terms of available capital at a later stage relative to the number of companies reaching a billion-dollar valuation.
So what’s my call to action? Going back to my opening prediction –that we’ll see a $100B tech company emerge in Europe in the next decade — I think that now is the time to invest in European tech through the VC asset class. Europe has one of the world’s largest concentrations of institutional investors, and tech represents a huge opportunity for European pension funds. As LPs gain confidence in the sector and seek to take on more risk to find higher yields we could see the same growth in assets under management in venture as we’ve seen in hedge funds and PE –and that will make it more likely to see a $100 Billion company emerge from Europe. That’s less crazy now than predicting a $1B company was ten years ago, because now we have all the ingredients to make it happen.
And once this flywheel is in motion, capital will flood into VC, due to its favourable returns and growing track record. We will quickly move from a scarcity of capital to a feast of it. We should therefore expect VC to become more competitive for LPs too. The best performances will belong to the top VC funds, with the non performers lagging behind. Imagine what a 10-20% stake in a company valued at $70-$100B could achieve.
Ultimately, European tech is on a broad, big, undeniable, and irreversible upward climb. The time to plunge in is now.