Economic Growth

How healthy is the European venture capital market?

Our analysis of the European VC market revealed that contrary to conventional wisdom, it is in good shape. (See “A Snapshot of Europe’s VC Market.”) Returns on European VC investments are on a healthy upward trend. Returns on the EIF grew at a 7 percent compound annual rate from 2011 through 2014. Money multiples have increased continually since 2011, with a strong rise in 2015. (See Exhibit 1.)

151020-Europe's venture capital market BCG

Again contrary to conventional wisdom, VC investments in Europe are at a secular peak. They surged strongly from 2012 through 2014, growing by 73 percent, nearly matching the growth rate of VC investments in the U.S., which increased by 78 percent. (See Exhibit 2.) Investment levels now stand at their highest point since the bursting of the dot-com bubble: since the third quarter of 2013, each quarter has surpassed the year-earlier period.

exhibit

The main source of growth is investment in Internet-specific and software ven-tures. Investments in these companies account for more than half the current VC investment volume in Europe and the U.S., doubling in volume from 2013 to 2014 alone.

European fund-raising has traced a path that is the opposite of the growth in investment. According to Thomson ONE, since 2012, European fund-raising has plunged by 33 percent, while U.S. investment has increased by 45 percent to approach a ten-year high. In consequence, the gap between U.S. and European investment widened to about €21 billion. (See Exhibit 3.) However the momentum in 2015 is encouraging. Each of the top ten funds raised more than €100 million, and three of them raised more than €300 million.

exhibit

Experts we interviewed mentioned that the strong uptrend in U.S. fund-raising has produced a highly competitive U.S. market. Now, U.S. managed capital is starting to spill over into a comparatively undervalued European VC market, offering large opportunities as the fund-raising gap widens. U.S. outbound venture investment in Europe has more than tripled in the past ten years, accounting for more than a quarter of total VC investment in Europe in 2014 and posting disproportionate growth during the past few years.

The State of European Venture Capital was originally published by The Boston Consulting Group. It is republished here with permission. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Michael Brigl is a writer at the Boston Consulting Group. Heinrich Liechtenstein is a writer at the Boston Consulting Group. 

Image: A view shows the headquarters of a French business in Courbevoie, outside Paris. REUTERS. 

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