Several years ago, North American venture capitalists found themselves attracted to Europe owing to Spotify’s initial public offering success. But the European startup market was a tougher nut to crack than anticipated. Not only were there differences in regulations, the market was diverse and entrepreneurship varied along with it. Nonetheless, the growth and market-disruption possibilities remained enticing.
Indeed, over the past decade, the European startup market has seen more than a double increase in deal volumes. This boost has been seen in companies such as Klarna, Deliveroo, and Arrival — symbols of success in the startup world, indicative of Europe’s immense potential. This surge in growth is attributed to the region’s innovation ecosystem, rapid technology adoption, and investor-friendly policies. Many sectors, including fintech, food delivery, and electric vehicle manufacturing, have witnessed unprecedented growth.
However, the dream wasn’t to last forever. North American VCs found it difficult to establish long-term success in Europe. Faced with challenges such as cultural differences, a decentralized market, and contrasting business regulations, some firms such as Coatue decided to completely withdraw from Europe. Others chose to reduce their operations, treading more carefully in the complex European market environment.
Navina Rajan, a Senior Analyst at PitchBook, reported that in 2023 the value of European deals involving at least one U.S. investor saw a dramatic fall of 57%. Within the same year, the number of deals also decreased by 39%. It was obvious that the challenges presented by the European market were proving a stumbling block for investors.
The European market does present some unique characteristics. Amid diverse languages and currencies, differences in the statuses of startups and universities, and a competitive environment, European startups have begun to rely more on local funding sources. Local investors, possessing inherent understanding of these obstacles, can provide more suitable support and advice, which often proves more beneficial than foreign investment.
Despite a significant inroad made by North American VCs into London, the city is only one of many startup hubs across Europe. In addition, it is disconnected from the European Union, which can result in legislative and trade challenges, potentially impeding startup growth opportunities. Hence, it may be worth considering other thriving European startup hubs such as Berlin, Paris, and Stockholm.
However, North American VCs have not given up. Companies such as General Catalyst have been merging with local firms like Berlin-based La Famiglia to exploit early-stage investment opportunities across mainland Europe. By establishing partnerships with local outfits, North American VCs can tap into intimate knowledge of the market’s unique characteristics, opportunities, and challenges. Additionally, they have started to diversify their portfolios and spread risk by venturing into emerging sectors with high growth potential. Innovation and economic growth are increasingly being driven by collaborations between American and European venture capitalists. Despite the challenges, the endgame of abundant potential keeps North American VCs interested in the European market.
