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Atomico Partner Tom Wehmeier reviews ‘The State of European Tech’ 2019 report

01:33 | 3 December

Atomico, the European venture capital firm founded by Skype’s Niklas Zennström, has released its latest annual The State of European Tech report, published in partnership with Slush and Orrick.

As part of the report, the authors surveyed 5,000 members of the ecosystem — including 1,000 founders — as well as pulling in robust data from other sources, such as Dealroom and the London Stock Exchange .

This year, the report reveals that the European tech ecosystem continues to mature and shows no sign of slowing — particularly highlighting the contrast from five years ago when the The State of European Tech report made its debut. Almost every key indicator is up and to the right, except, rather depressingly, diversity.

The data shows, for example, that competition for talent and access to the best founders has increased ferociously. And from a funding perspective, European founders have more choice than ever, especially with U.S. and Asian VC firms investing more and more in the region. Progress with gender diversity stalled, however, such as 92% of funding going to all-male teams.

I caught up with the report’s author Tom Wehmeier, Partner and Head of Insights at Atomico (also sometimes jokingly referred to as the “Mary Meeker of Europe”), where we discuss in more detail some of the key findings and why, it seems, that the rest of the world has finally woken up to Europe’s tech potential.

But first, a few headlines from the report:

  • European technology companies are on track to raise a record 30$B+ in funding in 2019, up from $25B the year before. (Source: Dealroom)
  • Despite failing to match the level of venture-backed exits of 2018, there was a record number of 40 $100M-plus deals as of September 2019, a size that many European tech sceptics did not believe was possible. (Source: Dealroom)
  • A number of multi-billion-dollar non-venture backed companies like Nexi and Trainline made their debut on the public markets.
  • European tech policymaking remains a mystery to many European founders.
  • When asked to describe the top priority of the European Commission in terms of tech policy, 40% of founders and startup employees say they don’t feel informed enough to comment. (Source: survey)
  • Despite this reported lack of awareness on policy issues, all respondents voted EU competition commissioner Margrethe Vestager as the person who had the most influence on European tech in 2019, good or bad. (Source: survey)
  • European parliamentarians aren’t talking about fintech and digital health, two sectors which investors poured a combined $12.7bn into last year (Source: Politico and Dealroom)
  • Europe’s diversity figures are still grim reading.
  • In 2019, 92% of funding went to all-male teams, a similar level to 2018. (Source: Dealroom)
  • There is still only one woman CTO in the 119 companies (<1%) based on a sample of executives in CxO positions at 251 European VC-backed tech companies that raised a Series A or B round between 1 October 2018 and 30 September 2019 with more than $10M funding, even though 7.5% of software engineers are women. (Source: Stack Overflow, Craft, Dealroom)
  • Looking beyond gender diversity, ethnic minorities in tech experienced discrimination at a much high rate than white peers. (Source: survey)
  • At least 80% of Black/African/Caribbean respondents who reported experiencing discrimination linked it to their ethnicity. (Source: survey)
  • 63% of women VCs reported increased focus on attending events with stronger participation from diverse founders. The corresponding number for men VCs was only 33% of female respondents suggested that their male counterparts are leaving female VCs to fix Europe’s diversity problem. (Source: survey)
  • European founders aren’t just aiming for commercial success — they are trying to solve some of the world’s largest problems.
  • One in five European founders states that their company is already measuring its societal and/or environmental impact. (Source: survey)
  • Only 14% of founders don’t believe it’s relevant for their company. Founders that are women are much more likely to be advanced in their approach to measuring impact. (Source: survey)
  • Employees are placing a greater emphasis on corporate social responsibility, with 57% citing its importance in the State of European Tech survey. (Source: survey)

Extra Crunch: It is 5 years since Atomico published the first The State of European Tech report, which really attempted to capture a data-driven snapshot of the entire ecosystem. What are some of the biggest changes you’ve seen within European tech in the intertwining years or in this year in particular?

Tom Wehmeier: If I think back to when we did the first report, people who believe that Europe could actually be an interesting player in global technology, were largely limited to people who were in the tech industry in Europe itself. If you then fast forward to today, what has clearly happened — and I think 2019 was the year where this really materialized and became part of the narrative — was that belief translating from people on the inside to a bunch of people that were on the outside.

Most obviously has been the strength of interest from from the U.S. and the number of top-tier U.S. funds that are not just increasing their level of investment activity but committing to spending more and more time here on the ground, hiring people, building teams, building a network, and getting to know companies. I think it probably surprises people to know that 19% of all rounds this year will involve at least one U.S. investor in Europe, which is more than double since since the first year we did the report.

I think the other thing, where I come back to this idea that now we have finally convinced a certain group of people about the role that Europe can play, is mainstream institutional investors. I know it is not going to be lost on you, [but] this is going to be another record year for VC fund raising from Europe. And whilst the headline numbers might not be a surprise, I think what should catch people’s attention is that the composition of the LP base here in Europe is now shifting. And finally, there’s an unlocking of institutional investors, [by which] I mean pension funds, funds of funds, insurance companies, sovereign wealth funds, who are committing to European VC at levels that are significantly increased and elevated from where they had been in the past. So, if you just take pension funds, we’re going to see close to a billion dollars invested which is up nearly three fold.

It’s a validation of what’s happening around European tech to see that now coming through and I think is ultimately something that helps to build a foundation for the next five years of success. As much as this is a report that’s looking back, it’s also about trying to understand where things go from here.

With regards to the pension funds, do you think that is driven by the general bullishness towards European tech, or do you think it’s more the macro economic reality that maybe other places where they could put their money aren’t very attractive at the moment?

I think it’s really a reflection that there’s a strong level of belief that European venture as an asset class is an attractive investment opportunity. And that is reflected by the numbers. One of the charts that we’ve got in the report is from Cambridge Associates who do the benchmarking for the VC indices… And when you look back over a 1, 3, 5, or even a 10 year horizon, the performance from European VC is demonstrating that this is a place where for anyone building a diversified portfolio, they should have some allocation. I think it’s fundamentally the strength of the investment opportunity. That is the single biggest driver for why you’re seeing this happen.

I think the biggest thing that Europe has been able to prove is that it can take a great idea and turn it into a great company and that company can scale to not just a billion dollar outcome but to a multi-billion dollar outcome and go all the way through into an IPO or into a large scale acquisition. What you’ve seen happen in 2019 is in part A reflection of what happened last year where it was obviously this record year with Spotify, Adyen, Farfetch, Elastic and others that really showed you can go full cycle from start all the way to finish. And that the magnitude of those outcomes can be at a scale that makes them globally relevant.

Are the pension funds shifting their allocation of VC away from other geographies or are they just doing more VC as a whole?

 


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Funding Circle, a P2P SME lending platform, steps towards an IPO

12:59 | 3 September

UK founded startup Funding Circle, a p2p lending platform which focuses on the underserved small business market, has announced a “potential intention” to float on the London Stock Exchange.

In a press release today, announcing the publication of a Registration Document for a possible future IPO, Funding Circle says that should it proceed with floating on the stock market it would be looking to raise around £300 million (~$387M). According to the document the business is being valued at up to £1.65BN (~$2.1BN).

Heartland A/S, the private holding company of Danish billionaire businessman, Anders Holch Povlsen, has agreed, as part of the potential IPO Offer, to purchase 10% of the issued ordinary share capital at a range of valuations (but Funding Circle notes this commitment falls away if the equity valuation prior to the issue of new Shares pursuant to the Offer exceeds £1.65BN).

Funding Circle has raised more than $373M to date since being founded back in 2010. The founders had the idea to help small businesses obtain loans after the retrenching of traditional financing sources after the 2008 financial crash.

The global lending platform now connects investors in the U.K., U.S., Germany and the Netherlands with small businesses wanting to borrow money for growth. More than 80,000 retail investors, banks, asset management companies, insurance companies, government-backed entities and funds have lent more than £5BN to over 50,000 businesses globally since the platform’s launch in 2010.

In a statement on the IPO announcement, Samir Desai, CEO and co-founder, said: “At Funding Circle our mission is to build a better financial world. Today’s announcement is the start of the next stage in our exciting and transformational journey. Over the last eight years, we have worked hard to build a platform that is number one in every market we operate in.

“By combining cutting-edge technology with our own proprietary credit models and sophisticated data analytics, we deliver a better deal for small businesses and investors around the world. I am very proud of the team and culture we have created at Funding Circle, both of which have been integral to our success to date”.

A year and half ago Desai told us that while the business had “no current plans to IPO” that was the longer term aim. “We’ve always said that we’d like Funding Circle to be a listed business, in line with the things that we care about deeply like transparency and being a tech platform versus being a lender ourselves,” he said then.

Should it now go ahead with floating the business, Funding Circle says it will use the proceeds to enhance its balance sheet position — which it says would help grow trust in the business with investors, borrowers and regulators, as well as support it pursuing growth over profitability in the medium term.

It also says going public would give it strategic flexibility and let it take advantage of opportunities “either in current markets or new geographies”.

The registration document describes Funding Circle as a high growth business, revealing it had revenue in the year ended 31 December 2017 of £94.5M compared to £50.9M in the year ended 31 December 2016.

It also highlights an improving financial profile, flagging up strong growth in revenue — with 78% CAGR from 2015 to 2017 (excluding property loans), primarily driven by an increase in loan originations from £607M in 2015 to £1,631M in 2017 (both excluding property loans).

Funding Circle exited the property loans business in 2016, tightening its focus on small business financing.

According to the registration document, repeat business is growing, with approximately 40% of Funding Circle’s revenue generated from existing customers in 2017 (again excluding property loans).

It also says that attractive unit economics are driving expanded margins, with the margin per loan in 2017 rising from approximately 20% for the first loan, to ~57% for repeat loans in the UK. And it adds that the path to superior margins is driven by operational leverage.

The business is targeting in excess of 40% revenue growth in the medium term and longer term, and adjusted EBITDA margins of 35% or above.

Commenting on Funding Circle’s announcement in a statement, Neil Rimer, partner at Index Ventures and a Funding Circle board member, said: Just as banks have become more reluctant lenders, Funding Circle has become an indispensable source of financing for small businesses in the UK, the US and in continental Europe; directly supporting the growth of the most critical engines of the economy.

“It is a prime example of a new breed of financial services companies, who by making their products more transparent and more convenient, have democratised access to valuable services and increased economic activity.

Rimer added: “Funding Circle has a broad impact on the growing businesses it funds, the employees they hire, the communities they operate, their customers and the countries they operate in. This is an important milestone that will allow the company to support tens of thousands of additional small businesses: something everyone should celebrate.”

Index is Funding Circle’s largest shareholder and has been a backer of the business since its Series A funding round in 2011 — when it became the 2010 founded UK startup’s first institutional investor. It’s just posted a blog post to coincide with Funding Circle’s announcement — taking an inside look at the company mission and ethos.

Index also has several other fintech investments in its portfolio, including the likes of Adyen, iZettle, Revolut and Robinhood. Though the VC firm did not take an investment in UK-based payday loans firm Wonga, which collapsed into administration last week.

TechCrunch’s Steve O’Hear contributed to this report

 


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