\n<\/p>\n
A few years ago, setting up shop in Europe was the soup du jour for North American VCs. From OMERs and Lightspeed to Bessemer Venture Partners, the market attracted firms of all sizes, and the Spotify IPO seemed to wake up North American VCs to Europe\u2019s potential to create outsized exits. VCs wanted to make sure they didn\u2019t miss out on the next wave.<\/p>\n
But it\u2019s unclear that they were able to catch it. Trends haven\u2019t fully reversed since the happy days of 2021, but they\u2019ve come pretty close.<\/p>\n
Still, the European startup market has grown rapidly over the last decade. Deal volume has more than doubled in that time frame, according to PitchBook data<\/a>, and there have been numerous success stories like Klarna, Deliveroo and Arrival. North American VCs, understandably, want a piece of that market, but setting up a successful, long-term strategy in the region hasn\u2019t proved easy.<\/p>\n Big names like Coatue and OMERs formally pulled out<\/a> of the region in recent months, and the venture funds that have remained are significantly less active. Navina Rajan, a senior analyst at PitchBook, said that the overall value of European deals with at least one U.S. investor declined 57% in 2023 compared to a year earlier, and deal count declined 39%. To compare, overall deal value declined 46%, and deal count declined 31% in the same time frame.<\/p>\n The European startup market comes with nuances that make it a difficult one for North American investors. Each country in Europe comes with its own language and sometimes currency. Investing in both Romania and Italy is different from investing in both Texas and California. Plus, startups and universities produce different networks for European startups than in the U.S.<\/p>\n Taken together, all of those nuances make for a challenging market in the best of times, let alone the doldrums of the past couple of years. It\u2019s no wonder then that North American investors have struggled to find a secure footing as they try to straddle the Atlantic.<\/p>\n Another reason why North American VCs are struggling in the European market is that while their interest in the ecosystem has grown, so has the European VC market. Today, there is much more competition for the best deals, especially at the early stages, which is where prices are the lowest and the potential for a big return is the highest.<\/p>\n Sten Tamkivi, a partner at operator-led venture fund Plural based in Estonia, told TechCrunch that the startup market has changed drastically since he started off as a founder a decade ago. Early-stage startups in Europe used to look to the U.S. for funding by default, he said, but that\u2019s not the case anymore. \u201cOver the last decade, the early-stage investing has shifted way more toward local players; 80% of capital deployed in Europe is European,\u201d he said.<\/p>\n Unless a startup is planning to expand into the U.S. right away, instead of launching in other European countries first, Tamkivi explained, it makes more sense to work with a local investor who would know the nuances of the local markets. He added that there isn\u2019t nearly as much European venture capital at the late and growth stages, meaning startups can bring on these investors later while having a local focus early on.<\/p>\n It probably doesn\u2019t help that most North American VCs have been setting up shop in London, which isn\u2019t part of the European Union anymore and is only one of the region\u2019s startup hubs. Having \u201cboots on the ground\u201d in London does not equate to having \u201cboots on the ground\u201d in the rest of the continent.<\/p>\n \u201cA lot of the American traffic stops in London,\u201d Tamkivi said. \u201c[The market] is way more diverse. If you set up shop in London, that may or may not give you visibility into Copenhagen. When you\u2019ve made it to the U.K., you probably need to make a little effort.\u201d<\/p>\n This U.K. focus also drives up the competition for deals in London, making it that much harder for North American GPs to get a stake. It also means they might be ignoring opportunities elsewhere.<\/p>\nEasier said than done<\/h2>\n