B2B the European investment ecosystem itself is maturing

For their development and creativity, American tech businesses have received honours from all over the world. Silicon Valley has grown into a major startup hub where entrepreneurs can show off their ideas, acquire personnel, and raise money through venture capital.

Entrepreneurs and investors in Europe who have long admired the success of the United States as a startup hotbed are witnessing signals of change in their own nations.

Over the last few years, the tech world has changed dramatically.

The European startup scene is exploding. In 2017, it raised a record 25 billion euros, which was one of the important signs of Europe’s evolution in the innovation sector.

In comparison to a mere five years ago, Europe seemed posed for this type of growth, given its diversified population. There are over 40 countries that make up the European continent. Each country brings its own culture, language, and legal system.

Of course, there are some disadvantages that this brings. For example, it is more difficult for a European startup to expand and scale its operations outside of its home country. The language and regulatory guidelines create obvious problems. Yet, this is also its strength. The diversity found in this region allows for new ideas and creative endeavors to become possible.

Key Trends

European startups have not only been able to raise record amounts of euros over the past several years. The size of the deals has also risen. For example, in 2017 there were 26 deals that were worth more than 100 million euros as compared to the previous year that had half the amount.

Much of this expansion has occurred in the United Kingdom. In 2017, British IT companies raised about 7.1 billion euros. In addition, the amount of money invested in German companies has increased dramatically. In 2017, they raised nearly double that amount, totaling 4 billion euros.

The majority of the funding for these European IT businesses has come from European venture capital funds. International investors, on the other hand, are playing a larger role in late-stage fundraising. Softbank (Japan), Naspers (South Africa), JD.com (China), and GIC (Singapore) have all made significant investments in numerous European firms.

B2B Start-ups in Europe

What has boosted the count in the United States are B2C startups. Data provided  indicates that European B2B startups are outperforming their counterparts in the U.S. in funding efficiency. This metric references how much value is invested per capita. Revenue would be an example of such a value.

The data shows that on average the revenue per dollar invested is 2.4 times greater than B2B startups based in the U.S. B2C startups in Europe also have this advantage over their U.S. counterparts, though it’s not as glaring as the B2B startups. About 1.2 times more revenue is generated by European B2C startups than US B2C companies.

Another interesting statistical reference that shows the growth of B2B startups in Europe is when you look at the valuation-to-investment ratio. This ratio is nearly 10 percent higher when compared to B2B startups based in the U.S. In addition, B2B startups in Europe outperform B2B startups located in this region.

Here are a few reasons that European B2B startups are outperforming other companies in this region and in the U.S.:

European B2B funds had a more conservation approach to fundraising due to capital not being heavily available until recently.

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Startup costs in Europe are typically lower when compared to U.S. counterparts, i.e. Cost of office rentals and salaries of software developers.

Opportunities for growth in sectors like technology and industry are high due to the region’s industrial heritage. Biotech, energy, robotics, and aerospace are among the B2B tech industries that European startups have been able to generate more revenue per dollar invested.

Certain regions in Europe have higher funding efficiency than other regions; i.e. Eastern and Southern European counties have higher funding efficiencies (funding is also least abundant in these regions). Even when you observe the largest European ecosystems for startups like Fr

When compared to their American counterparts, European startup expenditures, such as office rentals and software development wages, are often lower.

Because of the region’s industrial past, there are several opportunities for expansion in industries like as technology and industry. European entrepreneurs have been able to create greater revenue per dollar invested in biotech, energy, robotics, and aerospace, among other B2B tech fields.

Certain European regions have better financing efficiencies than others; for example, Eastern and Southern European countries have higher funding efficiencies than others (funding is also least abundant in these regions). Even when looking at the largest European startup hubs, such as Fr.

Differences Between European and US-based Startups

The ecosystems between Europe and U.S.-based startups cannot be any more different. Understanding their differences is important for both investors looking for potential companies to invest in and founders that may be considering a home base that’s far from home. They offer also some answers to why we’re seeing these growth trends occurring specifically with European B2Bs.

Differences Between European and US-based Startups

Being able to raise capital when necessary is highly important in the success of a high-growth startup. If founders are unable to secure funds, the future of a startup is in question. Startup environments outside the U.S. generally have limited options when it comes to funding.

Startups in Europe have found access to funding for seed and early-stage funding. However, finding growth stage funding remains a challenge. London, Berlin, and Tel Aviv are the three main startup capitals in Europe. These cities have a strong network that consists of the startups themselves, talent, and funding from institutional investors, and mentorship from business angels.

Out of these cities, London is the only one that has late-stage funding options. VCs  have a presence in the city. Berlin offers many key benefits including a low cost of living, a population of international developers, and well-known startups that are backed by notable company builders like Project A Ventures. The tradeoff is that once a startup needs funding in the growth stage, it’s best to go abroad. Tel Aviv has started to attract more of this late-stage investment and also offers strong technical talents.

Revenue First Approach

The U.S. startup space focuses on a growth-first approach where they focus on competing in a large market by penetrating the market to gain a competitive advantage. Their launches entail creating a ton of media coverage and generating thousands of users to keep their momentum going until it reaches the critical mass. VCs fund this massive movement in the hope that the startup becomes the next Uber story.

This has lead to numerous startups being given their Unicorn status; companies that have over a billion-dollar valuation without the revenue to reflect this expectation. Only a few of these startups actually realize success in becoming one of the most valuable tech companies in the world.

This approach contrasts with how European startups operate their businesses during these key stages. The only way that a European startup can survive is to generate revenue early on. European startups don’t have access to as much later-stage funding so they can’t expand rapidly like their U.S. counterparts.

The advantage of this revenue-first approach is that if a business is generating revenue, you’re demonstrating product-market fit. This proves that there are consumers and businesses who are willing to purchase their product/service. Fighting to stay alive without continuous rounds of fundraising has given European founds more autonomy and less equity dilution.

Go-To-Market Strategy

European startups must deal with different languages and developing partnerships in different countries which slows their growth by nature. Reaching all European countries at the same time is simply not possible. This is another reason why we see fewer Unicorns coming from the region.

Launching in smaller markets actually works out to offer some advantages. Using a sequential go-to-market strategy can help a startup focus on finding product-market-fit and building a process in its domestic market first. Gaining success in their home market, they gain the competitive advantage of being the dominant player so there are fewer fears of competitors domestically.

Then once they are ready to spread to other countries, they have the rails already built for growth. The startup can then put all its attention on entering the new market and gaining a dominant position. This experience of entering new markets successfully is one that is a trait among European startups.

Their experience in localizing processes, adapting products, and building new partnerships have allowed European startups to gain an advantage in their regional business models. Through smaller market entries, these startups improve their go-to-market approach more frequently. It’s really the best way that a startup with limited resources should approach new markets.

Startup Industry makeup

The European B2B marketplace has expanded rapidly in the past decade. In 2010, only 20 B2B startups existed. 10 of these have raised over 50 million euros and 4 had raised over 100 million euros. As of last year, there are over 300 B2B startups in the European ecosystem. The key industries that make up these businesses include:

Retail

Commodities

Transport & logistics services

Machinery & heavy industry

Contractor services

Other services

Property services

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Startup Industry makeup

The makeup of these startups is 60 percent based on services and 40 percent based on goods. Contractor services make up the largest of these service-based startups. These services are relatedly easy to set up and scale because they are based on acquiring supply which is generally more straightforward. As a result, there’s also more competition between these startups and they tend to take a very localized approach.

The transport and logistics startups are the next largest category of businesses. The majority of these startups are based on freight and warehousing. There are several players within each market because these startups tend to be very commoditized services.

The B2B startup space is still in its infancy with about 60 percent have started in the last five years. The majority of these B2B startups have yet to raise a seed fund. Though we are seeing some standards being set recently. Nine B2B startups have raised over 1 billion euros which is about 1/3 of the capital that’s been raised in the total marketplace.

Labor Force

Europens’ tech sector has been expanding despite the COVID-19 pandemic and has created many opportunities throughout the region.

Last year, almost two million people were employed in the European tech scene. In 2016, there were 1.5 million jobs in the European tech scene, which means that it has grown 43 percent. Around 4,900 startups have generated 73 percent of tech jobs in Europe.

Investment Players

Skype, Spotify, Klarna, and Lovefilm’s founders and early employees are among those who have been fueling European startups. These leaders of Europe’s biggest firms are leading the charge to a new generation of entrepreneurship in the region.

8 percent of European B2B founders have founded at least two companies. This is fairly close to U.S. B2B founders who make up 12 percent of those that can say the same thing.

European tech alumni have become active investors in European startups too. Daniel Ek, who is the founder of Spotify had pledged to invest one billion in European startups. The amount of investment has nearly doubled from 2015 to 2020. This has allowed startups in Europe to reach a new level of maturity.

Since 2015, European VCs have raised record-breaking amounts of funding, totaling 10.2 billion euros in Q3 of 2020. This is across 1.024 deals.

Still, getting funding remains to be a challenge for European startups.B2B startups are particularly challenged due to their nature of business. Their solutions are more complex which means investors need to have specialized knowledge to understand them.  On average, a U.S.-based B2B startup will receive 2.4 times more in financing than their European counterparts.

The number of financing rounds is also greater for U.S. B2B startups. They receive 2.5 financing rounds versus 1.9 in European B2B startups. From the seeding phase to the next financing round, only 27 percent will make this jump. However, these financing levels start to become more even in growth and expansion phases. A B2B startup in the U.S. will receive only about 10 percent higher investment amounts in a Series C round.

Both the U.S. and Europe rely on venture capital to grow their business. We’re seeing more U.S. investors investing in European B2B startups. In 2020, one in four investors of European B2B startups were from the U.S. This represents a 78 percent in share of U.S. investment in European B2B startups since 2015.

These U.S. investors are coming from the Series A-C financing phases. During the Series A stage, 10 percent of investors are coming from the U.S. which grows to 24 percent by the Series C.  This appears to depict that these investors want to focus on financing B2B startups in Europe that are in the growth phase.