REPORT: Europe presenting even more growth opportunities for VC funding

By Ellen Thijs, Executive Program Manager

Europe is still the largest single market in the world and remains an open economy, a stable political system with a proud history of innovation and a highly educated workforce. Growth is expected to reach 1.7% in 2017 according to EU Commission figures, with forecasted further growth in 2018 and beyond. 

The European Commission, as part of its ambitions to develop a Digital Single Market & Capital Markets Union, is working to make investment easier and to remove barriers to the cross-border distribution of funds. Recent initiatives include the amendment of the EU VC regulation allowing more fund managers to use its marketing passport, the launch of a pan-European VC fund-of-funds to grow larger VC funds using public and private capital, as well as the publication of a study on VC tax incentives. As the market continues to grow, this will allow larger institutional investors to access VC funds in Europe.  

European VCs are globally known to be well experienced. Many of the EU leading firms have lived through multiple economic cycles and know the other markets in the works very well. Around half of the VC firms in the EU have been around for more than 12 years, understanding the challenges inherent in sourcing highly promising scale-ups and building them into global leaders.

European VC funding is now at its highest level since 2007. This growing fundraising environment is a clear sign of investor faith and will ensure growth capital for next-generation, EU-based successes. European VCs now have a healthy mix of both public and private sources of funding with family offices and individuals contributing 20% of the total raised by EU VCs in 2016, and fund-of-funds and corporate investors add 15% each. Larger funds are also gaining momentum. In 2016, 13 of the 45 VC funds raised closed at €100m or more.

European VC Funding

Since 2000, the emergence of experienced business angels has improved seed financing linked to mentoring, improving the overall quality and quantity of deal flow for EU VCs. In addition, since 2010, corporate venturing programs are proving to be another source of smart capital; providing valuable contacts, expertise and potential exit routes. The EU has witnessed the creation of over 50 venture-backed unicorns (companies valued at $1bn+) since 2000, with many of them now reaching the $10bn mark. Overall, EU stakeholders can now show the proven ability to create global leaders. Success breeds success.


Broad trends within the European growth market

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Banks and financial institutions are increasingly collaborative instead of fearing disruption of one by the other. Several collaborative models have been set up during the last few years; starting from 1-1 partnerships, partnerships with global collaborating platforms, the set-up of innovation centers through internal or external incubation and acceleration initiatives and the creation of several national/EU-focused technology hubs.

52% of the top 100 global banks have formed 130+ partnerships and 37% have completed 60+ acquisitions.  This collaborative model has enabled companies to discover new business (models) for both incumbents as new scale-up companies.

For example: Pivoting to B2B or partnering with or selling into incumbents/corporates allows scale-ups to access a large, established customer base without the high cost of customer acquisition.

Tech companies are becoming more active in M&A as they look at buying vs. building. Evolution is leaning towards buying rather than building product diversification, in addition to in-house product development, to move beyond their traditional businesses. This strategy seems to be an effective way to broaden the offering with multiple new products, especially in B2C, facilitate cross-selling to maintain profitability in the face of rising customer acquisition costs, as well as enabling faster growth. 

After fintech, insurtech and regtech are the new up-and-coming areas within the financial sector. Europe is also seeing a notable rise in blockchain startup activity. For example: Switzerland has proved itself a regulatory haven for blockchain startups, while the technology’s decentralized funding mechanism lends itself to borderless innovation. A number of European governments are experimenting with blockchain for land registry and for tokenizing national currencies. Notable among them are Sweden, Ukraine, the UK, and Estonia. 

Following the digital revolution, government and corporates are looking very closely at cybersecurity solutions, making sure the new technology presented on the market is fully secured and can be trusted by all stakeholders involved. Fear of hacking valuable data sources and complex technology systems has never been so prevalent.  This exercise of cybersecurity is currently being executed, linking actively to US and Tel Aviv market.

Further, a shift has been presented within the EU regulatory landscape, with full implication this year, Q2 2018: Brexit and new regulatory frameworks like PSD2, MiFID II, GDPR, among others, will shake up existing financial services infrastructure and allow fintech insurgents to compete in new verticals and geographies.

On one hand, the MiFID II Directive will have an impact across the technology stack for financial services (client connectivity, risk and compliance, etc.).  Corporates will also use this obligatory change as a catalyst to evaluate other efficiencies/rearchitecting older legacy systems.

On the other hand, PSD2 is presenting incremental challenges since it requires banks to open up to other parties, giving third-party providers secure access to bank customer accounts and payment services. For fintech companies, this new regulation represents both a test and an opportunity. Challenger banks will have to comply with regulations that promote consumer choice and competition, but also platform development. Non-banking players such as P2P payments platform could use open banking APIs to build enhanced customer experiences with more actual and real-time data than ever.

Combining the new PSD2 regulations with the GDPR requirements regarding data protection, the future will lay in customer-empowered, accessible and interoperable financial services.  Furthermore, banking and compliance will operate through a platform connecting a global network of partner banks with companies who want API access to global banking.  It will unlock the value of banking as a service (BaaS).

Given these new directives, a new generation is looking to develop and capitalize on data and payments services APIs: regulatory reform opens the gates for API-centric, banking-as-a-service companies. Financial institutions are on one side increasingly looking at startups to help develop API offerings and platforms for them to compete effectively in the new world of PSD2 and open banking. On the other side, AI has enabled smaller startups to compete with more established institutions, making a wide variety of consumer-level applications (credit offerings, insurance options, personal finance services and regulatory software) immediately accessible to a larger audience.


Broad trends within European investments activities

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Since 2012, investment focus has shifted toward fintech, health tech, deep tech and enterprise software. €9.5 billion has been invested into European deep tech (cutting-edge technologies applied to solving complex problem such as robotics, aviation, drones, semiconductors, IOT, AR/VR, etc.) and AI companies with a steep increase in 2017; from € 2.3bn in 2016 to € 4.6bn 2017 YTD with a decline in the number of rounds toward fewer larger deals.

As a result, 17-23% of European VC investments are now AI and deep tech related, vs. 26-30% in Israel. Data analytics (€3.4bn), medical (€1.7bn), fintech (€1.3bn) and security (€1.0bn) are the top verticals for overall investments

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Looking at regions within Europe, UK is leading the number of VC rounds by 24%, but Israel is ahead by total capital deployed since 2012 (€3.5bn in Israel vs €3.4bn in UK, followed by Switzerland, France, Germany and Sweden, where Belgium is taking 12th place with €0.1bn). Other countries on the rise are Ireland and Finland.

UK takes the top spot by number of deals (38%), followed by Germany (14%), then we have Sweden (9%), France (8%) and Spain (5%); Brexit aside, over a third of European fintech deals since 2013 have gone to UK-based companies. Sweden and France have shown signs of growth in 2017, while Germany’s 16% in 2016 and 14% in 2017 could bode well for a strong final percentage for the year.

The overall fintech sector is maturing, attracting larger funds. Numbers show the following investments: capital invested into $20m+ European fintech rounds has risen at a CAGR of 75% since 2013. In annualized 2017, the capital invested totals $2bn over 43 deals.


The graphic shows over $8bn of capital invested into European fintech companies since 2010. Over half of this has been invested into fintech companies raising $20m+ rounds. Investment saw a sharp increase in 2012-2013, and has continued to rise each year.

Given the 5-7-year time horizon for the typical VC fund, the pressure to look for exits will inevitably intensify in the next 5 years. Critics state that these high historic funding valuations will inevitably have ramifications for the eventual exits.

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Deal size has been trending upwards generally since 2012. Both early and late stage round sizes have increased 3x+ since 2012, indicating again that financing valuations have risen across the board. Larger fintech valuations (as a multiple of revenue) are often significantly above publicly traded established players.  Higher current fintech valuations increase pressure to deliver higher future exits, as yet unproven in European fintech.  In short, fintechs have recently raised rounds at valuations ahead of actual performance, and above reference publicly traded "comparables." This implies that investors are buying into potential growth/growth stories more than results, historic or current.

Investment into B2B fintech has been increasing since 2015, both in capital invested and in percentage of total investment with YTD 2017 attracting $948m. The percent of capital invested in B2B companies vs. B2C companies has also increased, with almost half of investments going to B2B companies in YTD 2017. In $20m+ funding rounds, the percent of investments into B2B has almost doubled since 2015, from 26% to 49% in YTD 2017.  This is due to many factors, including regulation, increased collaboration and emerging technologies.


Investing in European fintech: investor trends

On an annual basis, the number of active investors in European fintech could rise drastically this year; after a year of 24% growth, FY 2017 is on pace for more than 50% year-over-year growth. (2013: #199, 2014: #290, 2015: #433, 2016: #541, 2017YTD: #520).

Deal participation illustrates a similar pattern, with a shrinking gap between VCs and corporate investors. At a full-year run rate and on a percentage basis, VCs could see a 24% increase in deal participation, while corporate investors could see a stronger 48% increase. Corporates have been increasingly active in European fintech investment over the past 4 years. Nearly a quarter of all fintech rounds in annualized 2017 have Corporate or CVC involvement. Corporate involvement in larger rounds is even greater, with 44% of the $20m+ fintech investment rounds in annualized 2017 involving at least one Corporate or CVC.


With 80 M&A deals already this year, 2017 is on pace to set a new record for mergers and acquisitions of European fintech companies. Private investors will indeed continue to focus on M&A exits until public investors show an appetite for fintech IPOs. European exit options have increased with recent activity from different routes like IPOs to strategic sales to European and international buyers.



  • State of European fintech; current trends & prediction – September 2017 – Innovate Finance
  • European Fintech Trends – August 2017 – CB Insights
  • Artificial Intelligence, Deep Tech & Venture Capital in Europe – October 2017 - Dealroom
  • The acceleration Point; Why now is the time for European Venture Capital – October 2017 – European Venture Capital