Europe has become a major destination for venture capital investors looking beyond the USA and China. In 2021, venture capital investment set a new record and European startups got a bigger share. A preliminary analysis shows European startups captured 20 per cent of global capital during the first half of 2021, up from 13 to 14 per cent in the previous year.
According to exclusive analysis shared by NGP Capital with Silicon Canals, European VC funding broke records every quarter in 2021. The analysis, which looks at VC funding in main European metropolitan areas, and excludes PE and growth equity rounds, shows how Europe has become a new favourite for VC funding.
Amsterdam and other smaller cities are on the rise
The major trend emerging from NGP Capital analysis is that smaller cities like Amsterdam are on the rise. The analysis covers 16 European metropolitan areas and found that all these metro areas received over $2B in venture funding during the first three quarters of 2021. The report excludes the fourth quarter completely to account for reporting delay.
Among smaller cities, Stockholm leads the pack with 331 per cent growth in funding compared to the previous year. In 2021, Stockholm attracted $7.1B in comparison to $1.7B raised in 2020. While 2020 saw an impact in funding due to the COVID-19 pandemic, VC funding on average grew by 69 per cent in smaller cities.
“A handful of smaller cities have seen major increases in funding in 2021, with some practically moving to another new level and becoming hubs in themselves. The most obvious example is Stockholm, which now attracts similar levels of investment to Tel Aviv, Berlin and Paris,” Bo Ilsoe, partner, and Atte Honkasalo, Head of Data & Analytics, at NGP Capital tells Silicon Canals.
Amsterdam is a close second with 306 per cent growth in funding during the first three quarters of 2021. The Dutch capital saw $3.8B in funding during the first nine months of this year compared to just $0.9B VC funding during the entire 2020. The analysis is further proof of how Europe is creating micro hubs for startup ecosystems in various cities and creating an infrastructure for these startups to not only raise funds but scale their operations.
“Amsterdam is another example, where funding has quadrupled in 2021. This is down to the Amsterdam ecosystem maturing and more late-stage ‘megarounds’ taking place (i.e. The Student Hotel, VanMoof, CarNext, Mollie, Bunq, MessageBird in Amsterdam). We’ll see if that level of investment continues, but what is clear is that these companies are growing and things are unlikely to change any time soon,” they add.
Stockholm and Amsterdam were followed by the Rhine-Ruhr region, Munich, Copenhagen, Oslo, Paris, Barcelona and Manchester. They all saw 100 per cent growth in funding compared to 2020. While smaller cities saw growth in VC funding, Helsinki was an outlier with marginal growth of 8 per cent while Zurich was the only city to register a steep decline of 32 per cent.
2021 sets new record for VC funding per quarter
According to data from NGP Capital AI Platform Q, European VC funding reached a new record of $78.1B during the first three quarters of this year. The second quarter was a breakthrough with $31.2B in funding in a single quarter. With Q1 and Q3 seeing VC funding of $21.4B and $25.5B respectively, European startups saw more funding in 2021 than any quarter before 2021.
In comparison to 2020, European VC funding saw a cumulative growth of 145 per cent. It is 69 per cent ahead of the full funding of $50.3B seen in 2020. “Our data shows that Europe attracted 22 per cent of global funding, but that is likely to be an overestimate, because we (NGP Capital) are primarily using our AI-powered “Q” platform to analyse the investment landscape in our fund’s main target markets – China, Europe and the United States,” Bo Ilsoe and Atte Honkasalo explain.
While there is a softening of VC funding in the third quarter, NGP Capital sees that as a seasonal fluctuation. “We often see some seasonal fluctuations and quarter by quarter a handful of large deals can skew the picture. However, the overall strength of 2021 is clear if we compare the first three quarters of 2021 in aggregate,” they remark about the year.
London continues to be top destination for VC funding
With a total VC funding of $23.8B, London has emerged as the top destination for the third year in a row. Paris swapped places with Berlin to become the second popular destination for VC funding in 2021. Paris and Berlin recorded VC funding of $11.4B and $7.8B respectively. The analysis also shows how London managed to attract more than double the funding seen by Paris in 2021.
Paris also saw the biggest absolute increase in funding led by ACC, Sorare, Mirakl, and Gamifly, among others. In 2020, Paris saw VC funding of $5B and the number has grown to $11.4B during the first three quarters of this year. “The European ecosystem is certainly maturing, with repeat entrepreneurs and several large hubs now established in places like London, Paris and Berlin,” Bo and Atte tell Silicon Canals.
Stockholm, with its record 331 per cent growth in VC funding this year, jumped to fourth place while Tel Aviv dropped to fifth. Tel Aviv is now in the same magnitude as that of Stockholm and Berlin with $5.5B VC funding. The absolute increase in VC funding in Stockholm was led by Northvolt and Klarna, while SumUP, Revolut and Capital on Tap led in London.
These major cities are followed by Oxford & Cambridge, Amsterdam, Munich, Copenhagen and Barcelona, with funding in the range of $1.7B and $3.8B in 2021. NGP Capital analysis also shows that Germany is back after the country scaled back more than others due to COVID-19.
“Israel has experienced a boom, especially in large exits and funding. That investment market coupled with population growth in a geographically limited area is likely to drive up the cost of living and especially in housing. The Israeli ecosystem is arguably more mature than many European hubs, maybe on par with London, and historically Israel has had strong links and ability to seek listings in New York,” Bo and Atte add.
Average round size tripled since 2019
The average round size continues to increase with the average VC round at $43.6M in the third quarter of this year. This is triple the size of the average VC round seen during the same period in 2019. In Q3 2020, the average VC round was $23.2M which translates to 88 per cent growth in a year. With 213 per cent growth in average round in two years, the analysis shows that round sizes saw growth starting from the second quarter of 2020.
“It’s hard to measure the success of individual funds. But if we look at the number of deals being completed, the highest growth is in later VC and growth-stage funds. Seed and early VC round amounts have been pretty stable for the last 7 or so years. By comparison, the later stage VC market has been completely transformed over the same period,” the growth stage VC firm says in its analysis.
“There were around 300 late VC rounds in Europe in 2017. In 2021, there will already be 1,034 [late VC rounds] and that figure is only going to grow. Of course early-stage venture capital is also attracting more funding, due to larger rounds – but the real change in the ecosystem has happened within late-stage investment. If we think of investment as a pipeline, it seems the big increases in early VC rounds in the early 2010s are now driving success and opportunities at the later stage today,” Bo and Atte say in their analysis of average round size.
European VC funding: What’s next
It is abundantly clear that European VC funding is setting new records on the back of a matured ecosystem, repeat entrepreneurs and smaller cities becoming hubs in their own respect. With still a quarter to go in 2021, Europe is poised to set a new record for the full year of 2021. Even with the rise of a new COVID-19 variant called Omicron and possible travel disruption, NGP Capital does not see any direct impact on European VC funding.
“It will be some time before governments start issuing their medical guidance to combat the Omicron variant. However, barring any surprises, from what we’ve seen, we do not expect the new variant to have a major impact on the technology markets overall. There may be some slow down in travel, tourism and related sectors if any new restrictions are stricter than anticipated, but technology should not be affected,” Bo Ilsoe and Atte Honkasalo explain.