European Silicon Valley is in the making

In Europe, for at least two decades, we cried about how far behind the US we are, where Silicon Valley has thousands of innovative companies, whose inventions uncover risky capital and make them global giants. And we cried how the Silicon Valley is unrepeatable and that the fate of Europe is properly miserable.

source:eunews startup

Well, the trends have changed. At least since the establishment of Skype, investors noticed that there is huge innovative potential in Europe and also huge number of garage innovators on the old continent.

In recent years, the volume of investments of risky and other capital into new technological projects has greatly increased - from €5 billion in 2013 to over €19 billion in 2017. The volume of individual transactions varies from 2 to 5 million €.

The US market is still by far the first with approximately 80 billion dollars of annual venture capital investments compared to 20 billion € investments in Europe. However, the gap is getting smaller. Sweden and the United Kingdom have already reached half of US per capita values.

It is also important to know the structure of these technological investments in Europe. They want to link investments in technology projects with various kickstarts, crowdfunding and other mass financing platforms. However, these are actually peanuts in terms of their total volume (only € 700 million out of a total of € 19.2 billion in 2017), as well as the extent of funding under the project.

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The majority (two thirds) of technology investments are funded by large investment funds, while the remaining third are large companies (from Microsoft to Volkswagen), which are buying startups with promising inventions.

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Most technological investments in recent years are focused on mostly technological inventions, artificial intelligence and technological solutions in the financial sector, and relatively few in the real sector (transport, industry, food industry, energy). In service solutions or applications, the yield is obviously higher than in more realistic sectors. It is, of course, not surprising that a Chinese peroxide-producing company is willing to deduct $ 1 billion to buy a company that produces applications and cartoons with a "talking cat".

However, despite the rapidly growing trend of investment in new technology projects, the typical "valley of death" for innovators and for investors in these projects still exists. Namely, from startups receiving start-up capital on the market in the first round, only a quarter of them come into the second phase of financing. Some of them manage to maintain themselves, and the vast majority of them fail. Only 10% come into the third round of financing, less than 5% into the fourth, and only 1% into the fifth round. This is quite similar to the degree of success of US startups.

Of course, most of you may ask yourself, why are - despite of such a low level of performance and extremely high risk- investment funds and risk capital being thrown into new technological projects. Why they are willing to invest tens of billions of euros?

Good question

The answer is hidden in the picture below. Those who succeed are experiencing a thunderous success and more than reimburse not only their input, but also all missed investments. In the period 2013-2017, the total value of the companies from which the risk capital investors "left" (sold the investment) amounted to over € 172 billion, while the total financial contribution in this period amounted to just under € 62 billion. In other words, despite all the missed investments, the investors for 1€ invested in new technology projects earned on average €3. There are no such returns anywhere else.

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*source of all the graphs is from Dealroom annual European venture capital report 2017 and Dealroom twitter website

Article is based on Dealroom annual European venture capital report 2017 data.

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