Unicorns: A tale of two continents
Victor Basta is the founder of the boutique investment firm Magister Advisors.
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There’s an implosion of early-stage VC funding, and no one’s talking about it
Venture investing in the US and Europe are totally different industries
If you’re hoping to create a unicorn on a budget, look to the European technology sector for inspiration. Despite the well-documented increase in available funding for tech companies across the continent, startups are reaching unicorn status with much lower totals of venture capital than U.S. rivals. In fact, this level of “capital efficiency” is one major attraction for international investors weary of the “burn rate” of many U.S. companies aspiring to valuations of $1 billion+.
It costs a staggering 50-100 percent more in the U.S. to create a company valued at $1 billion than in Europe. For U.S. tech companies that achieved unicorn status in 2018, the median amount of funding required was more than $125 million, whereas their contemporaries in Europe required a lesser total of $80 million. For 2017, the gap was even wider; U.S. companies again required just over $100 million, the smaller pool of Europeans slightly above $50 million.
Median funding required prior to reaching a valuation of $1B
The median funding secured prior to (not including) the round in which tech companies in the U.S. and Europe achieved a $1 billion valuation during 2017/18 (Data source: PitchBook)
A key reason for this greater efficiency in scaling is because European companies have had to make do with less. Europe has historically had a much smaller pool of “late-stage growth” funding (typically rounds of $30-75 million), and even today it is far easier to raise $20 million for a European tech company than $50 million, while that does not hold true in the U.S. to anywhere near the same degree.
This dearth of late-stage money has forced European tech companies to scale more efficiently, with lower overheads and a focus on profitability at an earlier stage, rather than the aggressive growth patterns often witnessed in the U.S. But this “enforced prudence” has come at a price.
The cost of creating more unicorns
Greater capital efficiency has arguably resulted in fewer European tech companies achieving unicorn status, with Europe lagging far behind the number created each year in the U.S. In 2018, the U.S. birthed 53 unicorns; Europe, only 10. So how much funding is required to close the gap?
Let’s assume (safely) product innovation and quality is available both in the U.S. and Europe, and let’s assume (less safely) there are many more quality European companies built to “unicorn potential” that are currently unable to raise enough to fuel scale to the point where they achieve $1 billion valuations. To plug this funding gap, we estimate Europe would require a multi-year capital pool of $10-20 billion in additional late-stage capital.
That math is based on a large number, up to 40, of companies a year missing out on becoming unicorns because of a lack of available funding, alongside the assumption that each unicorn needs more than $100 million in funding in total.
The extremely good news is that it is not $100 billion. Due to the inherent efficiency of risk capital, $10-20 billion can go an awfully long way. Arguably, there is no other industry or sector that can yield such a high return on committed money within a reasonably short few years.
Is it all about the money?
No, Europe is still a trickier market to scale than the U.S. Not only does Europe have to compete with the ready availability of capital in the U.S., but different regulatory environments, language barriers and a brain drain of talent attracted to Silicon Valley all combine to create impediments for European tech companies scaling in an interconnected world.
Funding, however, stands as the simplest of limiting factors to address. Especially when an analysis of the stats shows that whilst European tech companies are “saving” a lot of money, this directly contributes to far fewer of them being worth the mythical $1 billion+. A marginal uplift in capital would produce a disproportionately higher number of unicorns.