Record levels of capital are flowing to European start-ups

The value of venture capital financing injected by strategics and financial investors into European start-ups and scale-ups has reached its highest level ever.

According to a new report by KPMG, at the end of the third quarter of 2019, year-to-date venture capital investment in Europe stood at $28.1 billion. In comparison, in 2018 venture capital investment for the full year amounted to $26.6 billion, and the year previous, value hovered around the $21 billion mark.

Interestingly, the records achieved in value come on the back of a dropping number of venture capital deals. In the third quarter, the number of transactions fell significantly, from 1,232 to 777. The number of deals has dropped for three consecutive quarters now, and is nowhere near the number at the start of 2017 (1,600), demonstrating how investors have become more selective in their picks.

"Despite a drop-off in the number of venture capital deals, venture capital investment in Europe grew for the third straight quarter. While there continues to be a significant amount of geopolitical and economic uncertainty permeating Europe, venture capital investors have continued to make strong investments, particularly in late-stage deals as maturing companies target international expansion,” said Kevin Smith, a leader at KPMG in the UK.

In Europe’s largest economy, Germany, venture capital performance is on a surprising course. While Germany is nearing a recession and business uncertainty is on the rise, particularly in the key automotive and banking sectors, Germany set a new quarterly record for venture capital investment by a significant margin. FlixMobility, the parent of Flixbus and FlixTrain, received $564 million, challenger bank N26 raised $470 million in financing, while biotech company saw $325 million added to its cash flow.

According to Tim Dunachen, a partner at KPMG in Germany, the challenging market conditions are ironically one explanation as to why corporates and investors are taking stakes in smaller, more innovative players. "Economic challenges are putting a lot of pressure on traditional organisations to rethink their core business models. This is likely contributing to the big investments we've seen in for example fintech and mobility. We're going to see some significant disruptive changes in the near future,” he said.

Meanwhile, across the North Sea, UK companies continued to attract substantial investment this year, despite Brexit concerns. Three of the largest venture capital deals this quarter were pulled in by UK-based companies: Babylon Health (Series C), CMR Surgical (Series C) and OneTrust (business software).

Smith: “The amount of capital in the UK venture capital market remained strong with no sign of a slowdown in sectors where the UK is seen as a leader – such as fintech, healthtech and biotech. In these areas, venture capital investors in the UK appeared to be more than happy to continue making investments in good UK companies with strong business models.”

The Nordics is another region on a growth track. Jussi Paski, Head of Startup Services at KPMG in Finland, elaborated; “The Nordic region is seeing more money in the venture capital market than ever. A lot of venture capital firms are fundraising for new funds, while new micro funds are also trying to enter the market focused on specific technologies or industry sectors. Recently, there has also been a strong uptick in corporate investment, mostly focused on late-stage deals.”

The growing interest in start-ups and scale-ups coincides with a time when the availability of funding is stronger than ever. Investors are keen to find better investment returns as opposed to traditional financing solutions, and are therefore turning to venture capital and private equity. However, building on lessons learned in the past years, investors are conducting more due diligence on their targets. The number of first-time investments is declining, and venture capital injections are shifting to more mature players.

“Investors are increasingly taking a critical look at the business model and profitability of companies,” said Daniël Horn from KPMG in the Netherlands.