Q2 2013: UK Start-ups Continue to Raise More Venture Capital Investment Than Their German and French counterparts

According to CrunchBase data, total new capital invested in the EU tech industry rose from $861 million in Q1 2013 to $870 million in Q2. The data, which was extracted on 24th June, breaks down venture capital raised by round type, investor, company, geography and more.

In the second quarter of 2013, $870 million was invested in over 185 rounds. The rounds break down to 81 angel rounds, 46 Series A, 14 Series B, 10 Series C and later, and 34 unattributed venture rounds. These results exclude later-stage investments, such as private equity and post-IPO investments.

  • The Top 10 of European countries* by total amount raised by start-ups in Q2 2013 was in descending order: the UK, France, Germany, Spain, Ireland, Switzerland, Sweden, Norway, Finland and the Netherlands

FIGURE 1

  • The UK still dominates other European countries both in terms of number of rounds and total amount raised, although it was the only country in the Top 8 that saw a drop in amount raised compared to Q1 2013 (c.-30% decline quarter-on-quarter and -68% year-on-year)
  • UK companies raised $225 million in 70 rounds in Q2 2013, while France raised $178 million in 20 rounds, Germany raised $118 million in 18 rounds, Spain $85m in 16 rounds and Ireland $74m in 8 rounds
  • The most active investors in the first 6 months of 2013, in terms of number of rounds they participated in, were in descending order: Eleven (headquartered in Sofia), Index Ventures (London), Crowdcube (Exeter), London Business Angels, and North West Fund (Warrington). The top 50 is as follows:

FIGURE 3

All data for this post comes from CrunchBase, TechCrunch’s free database for start-ups.

Note:

* Not all funded companies have a category and/or region set. Most do, but not 100%, so there is a bit of a discrepancy across the data

Here is the Top 15 of VC funds by job creation in Europe in 2013 (… so far)

I’ve just found out about Ventureloop.com. This website provides what looks like a pretty comprehensive listing of available job positions in VC-backed companies throughout the world.

I thought it would be interesting to crunch that data to see what insights it can provide. Having a vested interested in the EU innovation eco-system I focused my analysis on the top 5 EU countries by number of jobs listed in the Ventureloop database for the period 15 of January to 28 of February 2013 (i.e. 7 weeks), which were as follows:

  1. the UK with c.900 jobs (49% were in the Greater London area)
  2. Germany with c.290 jobs
  3. Sweden with c.150 jobs
  4. the Netherlands with c.70 jobs
  5. France with c.70 jobs

In total 1,465 jobs were listed on the Ventureloop website over the last 7 weeks. If job creation is equally distributed over time and assuming the Ventureloop database is exhaustive this would amount to a total of c.11,000 jobs created by VC-backed start-ups in Europe in 2013… not bad!!

I tried accessing older job listings from the Ventureloop database, via the Wayback Machine (web.archive.org) but they were not available. I may carry out this analysis again in 3 months to see how the results presented below evolve over time.

With no further ado, here goes the output of my data crunching (click on the pictures to enlarge):

VC job creation_1

VC job creation_2

Based on this analysis, the Top 15 of VC funds based on job creation* in Europe was as follows in descending order:

Rank VC fund name Total jobs created
1 Index Ventures 312
2 Balderton Capital 130
3 Wellington Partners 92
4 Accel Partners 92
5 Sequoia Capital 90
6 Draper Fisher Jurvetson 72
7 Bessemer Venture Partners 71
8 Summit Partners 65
9 Benchmark Capital 63
10 First Round Capital 46
11 Sigma West 41
12 Kleiner Perkins Caufield & Byers 38
13 North Bridge Venture Partners 26
14 Northzone 25
15 Meritech Capital 21

I will shortly publish another post, showing how this job creation was split by start-up and by industry segment – watch this space 😉

Note:

*In cases where a start-up was backed by several VC funds I assumed an equal share of capital investment from VC backers and distributed to each VC fund an equal contribution of job creation. For instance a start-up with 3 backers with 5 jobs offering would result in a job creation of 5/3=1.66 attributed to each of the 3 VC funds

The VC industry is beneficial to innovation ecosystems… but that doesn’t mean it will survive in its current shape

The beneficial role of VC on innovations eco-systems is clearly established

Whilst it may be an underperforming asset class, the VC industry has nonetheless established itself as an indispensable element of innovation ecosystems. Evidence shows that VC-backed start-ups grow faster and bigger than bootstrapped start-ups. I identify two main reasons for this: firstly, VC-backed start-up gain greater financial stability (and are free to “aim for the stars”) and secondly VC investors add tremendous value by teaching entrepreneurs the ropes of growth hacking. 

1. VC as a reliable source of finance: just like bigger and established companies, start-ups operate in an increasingly turbulent business environment. A big part of why venture capital actually is important is because it helps start-ups stay the course and ignore cyclical fluctuations in the public market, in the late-stage investors market, and even, for that matter, in the consumer market. VC funds have a 10-year lockup on the money they receive from Limited Partners, so an industry segment can go in and out of fashion several times in 10 years and that’s something that VC-backed start-ups can disregard because they have the financial stability to stay the course
2. VC investors as growth hackers – in the B2C segment: Oliver Samwer, one of the co-founders of Rocket Internet, a successful but most controversial VC fund, has put to the test the recipe for success that he laid out in the academic thesis he wrote in 1999 (I am paraphrasing two key arguments from that thesis below)

The fast pace of change today means that B2C start-ups need a lot of funding from the start to create an aura of success, claim leadership in a hot market and sustain this claim. To achieve this, they need a comprehensive operations team (including marketing and sales) right from the start. Essentially, what many companies in the Silicon Valley do is to declare victory before they have won. In fact, they may only have a beta site and not yet shipped or even developed a working product

A very important game in the B2C segment is securing mindshare of the target consumer population – that’s a game that requires a great PR network and a serious advertising budget. In many industries customers rely on the press, analysts and other influencers for their purchasing decisions. Especially in industries that move very fast such as the fashion  industry, customers cannot keep up with all the things that are happening and they make their decisions based on what key opinion leaders say

3. VC investors as growth hackers – in the B2B segment: For B2B start-ups, securing the first 10 major corporate clients is absolutely crucial. According to Chi-Hua Chien from Kleiner Perkins if your start-up is the first to reach this milestone then the chances are you have beaten the competition already. In that context, B2B start-ups can gain a clear advantage over their competitors by choosing to partner with the appropriate VC fund since the top-tier Venture Capitalists are incredibly well-networked and can effectively be seen as gatekeepers: they have direct access and influence over key enterprise accounts (you may call this the “Harvard MBA advantage”).

However, the VC industry not only performs poorly as an asset class, it also needs to evolve in the near future due to the increased involvement of new types of participants

The ongoing economic crisis acts as a wake-up call for developed economies and a painful reminder that sustaining wealth and a large pool of high value-added jobs is heavily reliant on winning the innovation game. There is also a wide understanding that the availability of early-stage capital is an essential condition for a thriving innovation ecosystem, very much in the same way that rich nutrients carried by the warm East Australian Current are a key condition to the fertility of the Great Barrier Reef.

EAC

(picture from oceanclimatechange.org.au)

As a result, three categories of players in developed economies are upping their role in the provision of early-stage capital and challenging the traditional VC model:

  • Major corporations are setting up their own Corporate Venture Capital funds (think Intel Capital and Google Ventures) – I have already described in a previous article recent developments in the CVC industry
  • Governments are increasing their participation in VC funds / PE funds and even setting up new investment structures in order to fill the funding gap affecting some innovative industry sectors. Cleantech is a typical example: New York Governor Andrew M. Cuomo proposed in January 2013 a $1 billion “Green Bank” to draw in private sector money and spark investment in clean energy projects; likewise, Greencoat U.K. Wind Plc aims to raise £205m via its IPO on the London Stock Exchange in March 2013 with strong support from the UK government (the Department of Business, Innovation and Skills plans to take shares worth about £50m)
  • The Crowd: crowd-funding platforms such as Kickstarter, Fundable and Crowdfunder enable you and me (anyone really; no need to be a professional investor) to donate money in order to support start-ups

Out of these three categories of participants, crowd-funding is by far the most exciting development. A study from Crowdsourcing.org reported that about $1.5 billion was raised from 452 crowdfunding platforms in 2011, and this was expected to double by 2013.

And it’s not just about seed rounds; we are now seeing mammoth series A rounds going down that route too… I was fascinated by a piece of news last week that describes how an entrepreneur raised $8M in two weeks (!) via AngelList, a social network for business angels and professional investors, establishing itself as the largest crowdfunded Series A round to date.

It is truly amazing to see the speed at which crowdfunding has become an effective fund raising method for legitimate startups, despite the fact that the payback for people giving away their money has so far been limited to goodies such as T-shirts, novels, CDs, and a few new toys.

Still, this is just the beginning. The passing of the JOBS Act is about to accelerate that growth even further as it will allow private businesses and startups to sell equity (i.e. shares of their business!) via crowdfunding. Once the rules are in place later this year, anyone will be able to become an investor in a start-up and to get an actual monetary return. Fred Wilson, co-founder of the venture capital firm Union Square Ventures, predicts that once it gets up and running the equity crowdfunding market could reach $300bn, largely driven by families and individuals investing a small percentage of their assets via crowdfunding. As a point of comparison, the total amount invested by traditional VC funds across all industry sectors and all stages of maturity in the US in 2012 was $24.3bn (according to latest NVCA data)… In other words, the VC industry could very soon get crowded out…

Why the PE & VC industries have bright days ahead of them… Part 1: late-stage / mature investment

Russel Steenberg, Managing Director and Global Head of BlackRock Private Equity Partners, gave an interesting view on the future of the private equity industry last week in an interview by PrivCap. The money quote goes as follows:

Steenberg: How many stocks do you think there are out there in the world that you can invest in today?

PrivCap interviewer: Globally? I don’t know.

Steenberg: The number is someplace in the 30,000 to 40,000 range my experts at BlackRock tell me. What’s the capitalizations of the world’s public stock markets?

PrivCap interviewer: I can’t guess.

Steenberg: It’s in the trillions of dollars. The amount of money available in private equity funds, even if you count the leverage which people like to add, is less than 1% of the capital available to chase these 40,000 stocks. I’ll put it to you, there’s comparatively much more money chasing public securities in the world today than there is in the private equity world because the number of private companies that exist in the world today that would be investable goes way beyond 40,000. So we have only scratched the surface on private equity.

[…] The biggest barrier to entry to the private equity business always has been and still is the ability of a group to raise their first fund.”

Beyond this bold “back of the envelope” estimate, there are a number of underlying trends supporting the argument that the late-stage PE industry is set for long-term growth, both in the pre-IPO and post-IPO segments.

  • Post-IPO growth

Public-to-private buyouts will increasingly represent a much needed vehicle for publicly-listed companies to get out of difficult situations when drastic decisions/pivoting are required. The truth is public companies are not well structured and incentivised to implement such significant/brutal pivot because of the enormous pressure they receive from the stock market; shareholders expect stable and predictable financial results on a quarterly basis! For instance, have a look at what happened last week to Apple’s market valuation (despite record-breaking earnings!) when its latest results turned out to be below analysts’ forecasts. As a consequence, executives of public companies are not under the right incentives and most adopt the unfortunate “boiling frog” tactic when faced with tough challenges, instead of implementing a new course of actions. Executives in PE-backed companies, on the other hand, are free (and in fact incentivised) to make these difficult changes. Going forward, given the ever more challenging and competitive business environment companies operate in you can bet there is not going to be a shortage of public companies finding themselves in tough situations. Consider the recent demise of HMV in the UK: would this bankruptcy have occurred, had the company undergone a strategic U-turn, supported by a buyout, 2-3 years ago when the signs of imminent failure were already obvious?

  • Pre-IPO growth

Ever-larger injections of private investment are required before growth companies can have a shot at an IPO, in part because the Sarbanes-Oaxley regulation in the US has made the IPO process more costly and more difficult to pull through. The resulting need for bigger pre-IPO deals has fuelled the creation of “mega-VCs / secondary market funds” whose investment model sits somewhere in between VC and Private Equity funds. Digital Sky Technologies (DST) is a prime example, having pioneered this type of mega-deals by investing $200 million in Facebook in May 2009 and then launching in July 2009 a tender offer of $100 million to Facebook employees.

Given these two trends I expect to see a continuous rise in the global amount of assets under the management in private equity funds focused on late-stage/mature companies.

[This article will shortly be followed by a second part with a focus on early-stage / seed investment]