2017 outlook: four key drivers

2017 has started strong for European venture capital: €1.3 billion was raised in January alone so far. That’s on track for €4 billion per quarter and €16 billion per year. We know that 2016 was a record year for European venture capital. What can we say about 2017?

The following are four key drivers for European venture capital in 2017:

Driver #1: European VC funds raised well over €8.4 €9.8 billion in new funding from LPs. 

This represents a roughly 50% growth rate versus 2016. This includes both new first time funds and existing funds. €9.8 billion is clearly a lot of VC firepower already. But in 2016 companies raised €16.2 billion, so where is the remaining €6.4 billion⁽¹⁾ coming from?

Driver #2: U.S. investing €3-4 billion annually into European VC rounds. 

That € amount is also consistently increasing each year (U.S. funds directly contribute roughly 20-25% of European VC rounds).

Driver #3: Private equity firms increasingly active in VC rounds and growth equity rounds.

Growth equity firms such as TA Associates, Summit Partners, and Highland have been around for may years in Europe. But in recent years private equity has become increasingly active in European VC: 17 private equity and growth equity funds active in European VC.

Driver #4: Corporates are increasingly active in European VC.

As mentioned in last week’s post Europe was experiencing somewhat of a corporate investing boom in 2016, with €4.9 billion in corporate rounds (= blended gross amount, i.e. all rounds with corporate involvement, which also includes VC funds). This trend is likely to continue in 2017 in sectors including transportation.

Combining #1-4:

The below waterfall chart combines these three factors and indicates that sufficient VC firepower is available to make 2017 again a strong year in venture capital. The following waterfall chart shows it is reasonable to assume there is enough capital to support investing levels well above that of 2016.

Notice by the way, that drivers #2-4 are not government supported.

Like in 2016, funding activity is likely to include plenty of small business and enterprise software models, as well as deep tech, security and online banking. In addition, 2016 saw a big decline in B2C models, partly due to Rocket being a lot less active. But in January 2017, Rocket raised a €1 billion fund.

How much room for growth is there still in European VC before saturation sets in? Funding per capita indicates there is still plenty of room. Funding per capita is far from an ideal measure, given that most startups have international ambitions, but it is still interesting to note that funding per capita is still only at about 1/10th of the U.S. level of investment in most parts of Europe. It is also clear from the below chart that high-risk taking favors stable democracies with strong and reliable legal institutions, whereas it tends to steer clear from kleptocracy and high-corruption.

• Note: new LP funds raised in one year are not all deployed in the next year. But over a period of multiple years, the amount of capital deployed by VCs will roughly equal the amount of capital raised from LPs.