Several years back, European expansion captivated North American venture capitalists. From OMERs to Lightspeed, Bessemer Venture Partners, and beyond, firms of all sizes eyed the market, spurred by the Spotify IPO, which underscored Europe’s potential for substantial exits. VCs were seized by the apprehension of not catching the next major wave.
However, whether they managed to catch that wave remains uncertain. Trends haven’t completely reversed since the buoyant days of 2021, but they’ve come close.
Nonetheless, the European startup scene has burgeoned over the past decade. PitchBook data reveals a doubling in deal volume during this period, accompanied by success stories like Klarna, Deliveroo, and Arrival. Understandably, North American VCs seek a slice of this pie, yet establishing a successful, enduring strategy in the region has proven challenging.
In recent months, notable entities like Coatue and OMERs formally withdrew from the region, with remaining venture funds exhibiting significantly reduced activity. Based on insights from Navina Rajan, a senior analyst at PitchBook, the cumulative value of European transactions involving a minimum of one U.S. participant.. party… investor plummeted by 57% in 2023 compared to the preceding year, while deal count fell by 39%. In comparison, overall deal value dipped by 46%, with a 31% decline in deal count during the same period.
The European startup landscape presents nuances that pose difficulties for North American investors. Each European country has its language and currency, rendering investment in Romania and Italy different from that in Texas and California. Moreover, startups and universities in Europe foster distinct networks compared to those in the U.S.
Collectively, these nuances create a challenging market, particularly amidst the recent sluggish economic climate. It’s no surprise that North American investors struggle to find stable footing as they navigate the Atlantic.
Another factor contributing to the struggle of North American VCs in Europe is the simultaneous growth of the European VC market. With increased interest in the ecosystem, competition for top deals, especially at the early stages, has intensified. Sten Tamkivi, a partner at Plural, noted a significant shift in the European startup landscape over the past decade, with a greater emphasis on local players in early-stage investing.
For startups not immediately eyeing U.S. expansion, working with local investors familiar with regional intricacies makes more sense. Additionally, while North American VCs concentrate efforts in London, a prominent startup hub, this focus heightens competition for London deals and potentially overlooks opportunities elsewhere in Europe.
Despite the challenges, North American firms persist in establishing roots in Europe. Notably, Andreessen Horowitz and IVP recently opened offices in London. Regulatory considerations also motivate firms to invest in Europe, particularly in sectors like AI and crypto, where U.S. regulations remain uncertain.
Furthermore, U.S.-based limited partners (LPs) display a growing interest in European investments, indicating a broader shift in investor sentiment. Despite the hurdles, both Rajan and Musielak believe that the European ecosystem remains largely untapped, leaving ample room for international VCs to establish a presence and build portfolios. However, success hinges on developing strategies that ensure efforts translate into meaningful returns.
