European VC catching up to US, says EIF's Grabenwarter

Greg Gille
10 April 2019

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Panellists at the recent Invest Europe Investors' Forum in Geneva extolled the virtues of the European venture ecosystem, and argued the gap with the US scene is shrinking. Greg Gille reports

"If you haven't invested in venture over the past five years, you have missed something," said Uli Grabenwarter, deputy director of equity investments at the European Investment Fund (EIF), when addressing delegates at the Invest Europe event on 28 March. Grabenwarter was drawing from performance figures from EIF's own portfolio between 2006-2015. Out of the 150 VC funds in the institution's portfolio, a third returned an IRR in excess of 12.5% – with the top 10 generating between 35.5-162.4%.

Furthermore, the EIF portfolio statistics shown by Grabenwarter highlighted that for most vintages between 2005-2016, performance for the institution's venture fund investments was either very close to, or sometimes exceeding, US VC benchmarks. "If you invest selectively, you can certainly match and sometimes exceed the performance of US venture, and private equity more generally," said Grabenwarter.

However, he noted that cash coverage remains a definite advantage for US venture funds. "US VC still has the best vertically integrated market, so cash-back remains an advantage there – our cash coverage with US VCs has been positive for the past couple of years. But Europe is also catching up there," said Grabenwarter. EIF's overall venture portfolio was cash-flow positive in 2014, 2015 and 2018 despite increasing investment volumes.

Believe the hype
Grabenwarter was later joined on stage by a panel of prominent European VC investors – all panellists agreed that the current ecosystem in Europe is generating strong tailwinds for venture. Some of that is down to technology-driven shifts across a multitude of industries, which European startups have been quick to leverage. "It has never been a better time," said Pär-Jörgen Pärson, general partner at Northzone. "We used to invest in software companies selling their products and services to banks. Now we invest in software companies that are banks. And the banks can't respond to that; the competitive advantage for startups when it comes to the use of technology is immense."

Steve Schlenker, managing partner at DN Capital, noted that European startups are now firmly on the radar of US and international corporates: "Global corporate giants headquartered in the US are looking at startups to get a competitive advantage in technology; and they are increasingly looking at Europe to find these."

Pärson added that some of that success was down to the talent available to European tech startups, especially compared to recent trends in the US: "Startups are also now hugely appealing to young professionals, so there is a vast talent pool available, especially with the tighter immigration rules in the US and the higher cost of top-tier software engineers in the Bay Area," he said.

The panellists were also unanimous in highlighting the difference between the venture scene of the early 2000s and the more mature ecosystem and experienced management teams now enabling quicker success. "The success you get in venture now is because you keep backing people that have seen the movie before, and do it again and again but better," said Steve Schlenker, managing partner at DN Capital. "You didn't have that in the early 2000s." To put this trend in context, Pärson highlighted the fact that 25 startups had already spawned out of former Northzone portfolio company Spotify.

The flipside of European startups' appeal is punchy pricing, with escalating valuations in recent months prompting talk of a potential bubble threatening future returns. Again drawing from EIF's own portfolio figures comparing the median entry price for a 1% stake and the eventual return multiple, Grabenwarter argued the conversation should move beyond a narrow fixation on pricing: "Yes, prices are rising in the VC space. But if you look at 2005-2006, you can see the same spike in valuations – and the performance from these vintages has been very good."

The other panellists were equally adamant that pricing is not of primary concern. Schlenker noted that for DN, entry valuations have not historically been correlated to performance. Meanwhile, Christoph Jung, a general partner at HV Holtzbrinck Ventures, said he did not see pricing as a particular concern at the seed and early stages: "Yes, you have to be disciplined of course – but finding the perfect recipe of a great team and a great product will always be the first priority."