The state of start-up funding in Europe

Technology is booming. It has been thriving for a while and its pace doesn’t seem to slow down.

About $100 billion was invested in European startups during 2021

Regardless of whether you measure performance based on startups, finance, or research, it’s a booming market where every other title seems to be announcing new records in the tech finance world.

Although this represents a largely global technology boom, the dynamics in Europe are different, and it has been a notable year for the region in many ways, with the continent growing faster than any other major tech hub.

To give you some context, there were 98 unicorns created in Europe in 2021, and $100 billion of capital was invested, which is nearly three times the level of 2020. We’re now seeing a funding round of roughly $100 million every two days, according to Atomico’s State of European Tech 2021 Report.

Fintech is no different. One in five European unicorns are financial technology companies. There are tremendous opportunities for technology companies to remove friction and inefficiency within the financial system. But to build new products, expand the team, and compete with existing companies while battling new competitors, a strong financing strategy is key to winning in a competitive market.

The good news is that with European technology creating value at its fastest rate ever, we have seen a tidal wave of funding entering the ecosystem and a definite increase in investor appetite for early-stage European tech companies.

Startups looking to expand their businesses have plenty of ways to do so, but you need to carefully consider the options available to them and evaluate which ones can provide the capital they need while matching the company’s risk profile.

Unlike the United States, Europe has not really experienced a full-fledged technological boom. The European startup scene was very young and focused on taking full advantage of the dot-com era, and the boom that preceded the financial crash came at a time when the industry was just beginning to mature.

The upheavals of the 2000s and Europe’s more conservative investment culture generally mean that few European venture capitalists or entrepreneurs have real experience in the current market. Thus, the scope for making poor financing decisions is much more acute than in the more battle-hardened United States.

So, what does this mean for European entrepreneurs?

There has always been a good balance that founders need to play when pitching their startup ambitions against the reality of their business. For European founders, this balancing process is now more complex.

On the other hand, the investment boom has led to huge expectations shown by the staggering valuations. On the other hand, the complexity of expanding into Europe means that the rapid growth that US startups can achieve is not necessarily replicable for many companies.

As such, the search for investors with specific regional and sector expertise is more important than ever. Depending on your business model, this may mean focusing your investment strategy on partnering with venture capital firms based in or with experience in your home country.

Of course, this can reduce the options available, but it will greatly increase the chances of partnering with an investor who has a realistic vision of your startup’s growth path, given your local market conditions.

The next aspect of the European boom is the fact that deals have never moved faster. This means that founders may find themselves immersed during the tour. Indeed, in some cases it appears that the “explosive term sheet” is back, designed to pressure a startup into a deal.

Thus, there is a very real risk of closing the round, which, upon reflection, is a bad deal for your business. My most important advice is to take your time, which I know is easier said than done because there is a temptation to get money in the bank during the good times.

If you have a good idea and a well-run company, investors should wait a reasonable amount of time until you consider your options.

What are the financing options currently available?

Overall, as the VC market becomes more competitive with a large influx of capital and new players, we have seen an increase in founder friendship and improved terms of venture capital in Europe.

However, it is not the only option available. It might be too slow for a company that needed cash yesterday to develop new products, for example. Or a business on a slower growth trajectory.

Many traditional financial institutions now offer more flexible and seamless loan options when starting up. This trend has been accelerated by the pandemic and the growth of the self-employed. Then there are state and local grants and investment programs. Although the amount of cash is limited and often tied to a geographic area, they often offer incredibly favorable terms.

Finally, there is a new generation of non-dilutive financing options that provide upfront access to future revenue for a fee. This can be a particularly attractive option if the startup has a strong pipeline of expected revenue. As such, fintech companies that have a clear position for their revenue and growth for the coming year are ideal candidates.

If we look at the United States, the primary difference between the two ecosystems is the extent to which founders use non-dilutive financing to grow their business. In Europe, about 5% of capital in 2020 (less than $100 million) was raised through venture debt (compared to 95% of equity). However, in the United States, about 16-20% of the capital raised in 2020 was risk debt.

keep it simple

Overall, the evidence shows that investors are looking to innovate and adapt their offerings as competition grows to win over the best founders and bridge the gap between founder needs and market choices.

As proximity to investors no longer holds the same importance, this means that European startups are beginning to access a broader and more founder-focused investment ecosystem.

With a bustling market at the moment, the best advice for startups is often the simplest – take your time, consider all your options, pay attention to unbalanced or huge prospects, ignore pressure from outside and within, and stick to a long-term investment strategy.

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