On the face of it, the outlook for European venture capital seems bleak. VC funding for start-ups was down 60% in the first half of this year compared to the first half of 2022, with high inflation, a lack of IPOs and the continuing fallout of the pandemic all contributing to this sorry state of affairs.
However, there is multi-faceted reason for optimism for both the European VC sector and European start-ups.
Crucially, the IPO market is opening up. Although ARM’s IPO has not gone entirely swimmingly, the Cambridge-based semiconductor company’s decision to go public marked the re-opening of the IPO markets.
Since then, numerous other companies have followed suit. Most recently, Birkenstocks – the sandal company whose popularity echoes that of Steve Madden – went public on the New York Stock Exchange.
Again, the IPO has not been a huge success. Stocks of BIRK.N stock ended the week more than 12% below their initial IPO price of $49, a decline in price that makes it the worst debut by a company valued at more than $1 billion. However, the high-profile listing by the German sandal-maker is another sign of a revival for US listings after an 18-month hiatus, one of the most prolonged freezes to fundraising in decades.
As IPOs offer VC managers the chance to exit investments in a way that generates good returns for institutional investors, the re-opening of the IPO markets will provide huge benefits for the European VC industry, which has struggled with the recent lack of exit opportunities.
It is worth stressing that this is still a tricky market, as international venture capitalists like Roman Semiokhin can attest. Like Birkenstocks and ARM, Instacart and Kellanova have also seen their share prices slump since they recently went public.
There are also signs that the pre-market shutdown trend of European start-ups opting for homegrown listings is set to continue, which will hugely benefit European VC firms.
The decision of French software group Planisware and German gearbox manufacturer Renk to list locally is a promising sign for European VC in the long run, although both of these companies have delayed their listings due to a poor macro-economic climate.
A critical litmus test for whether the IPO markets are really opening up in a way that is beneficial for European VC is whether CVC – Europe’s biggest private equity firm – will decide to launch an IPO and where this will take place. The rumoured Netherlands listing would be a major coup for Europe, with CVC now valued at $15 billion.
Despite the aforementioned short-term difficulties for tech start-ups, there is a strong case to be made for the solid fundamentals of the European tech industry. In a recent interview with the Financial Times, former Skype owner and partner of European VC firm Atomico Nilkas Zennstrom outlined these strong fundamentals and why he thinks European tech can rival Silicon Valley.
Europe is institutionally and practically well-positioned as a hub for technology. As Niklas outlined, it boasts 4 of the world’s top 10 universities and has more software engineers than the entirety of the United States. This partially explains why leading VC firms Sequioa Capital and Andreesen Horowitz have recently opened offices in London.
Niklas is particularly enthused by the number of second and third-time founders of tech companies in Europe who – having learnt from their previous outing – have the potential to do even better in their next venture, even if it’s in a different sector.
The so-called ‘PayPal Mafia’ lends weight to this view, with Elon Musk and other PayPal employees and founders going on to create numerous other unicorns. These experienced European founders are well-placed to create companies that benefit from the next big thing tech-wise, and generative AI holds real possibilities in this regard.
Atomico itself represents a reason for optimism. Despite the difficulties previously mentioned with high interest rates and lower valuations for technology-based companies, Atomico recently managed to raise $1.1 billion, one of the highest hauls in Europe this year.
Despite recent news, the opening up of the IPO market, the trend for homegrown listings and the fundamental strengths of the European tech industry suggests that the outlook for European VC is not all doom and gloom.