Over the last year and into 2022, odds are you've stumbled upon another story about a European startup announcing a $100M+ funding round. Whether in France, the UK, Germany or Eastern Europe, money has poured into businesses across the continent.

Funding for European startups is booming. What are the factors and trends behind it?

It seems a new European unicorn is created every week, although it has taken many years to reach this point. We look at some of the industries affected and others you should keep an eye on.

Nicolas Levy - Consultant

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Over the last year and into 2022, odds are you’ve stumbled upon another story about a European startup announcing a $100M+ funding round. Whether in France, the UK, Germany or Eastern Europe, money has poured into businesses across the continent.

During 2021, total capital invested in the European ecosystem was a record $121bn, up from $41 billion the previous year, and already in 2022 this trend shows no sign of slowing. The increase was most noticeable in Venture Capital, with total venture funding in Europe up 142% during 2021, compared to a global increase of 111%. 

While the Euro boom has been a long time coming, several European startups have already established themselves as household names. Indeed, if viewed purely in value terms, this current boom is driven primarily by late stage funding: despite the huge overall increase, the total number of overall deals barely changed in the same period. To find out where the ‘smart money’ is going and gain some insight into how these investments are changing certain industries, read on.

The Euro funding boom – e-commerce leads the way.

When it comes to big raises and even bigger valuations, most notably in the world of e-commerce, Klarna is a great place to start. Founded in 2005, the Swedish startup has the highest valuation among Europe’s privately held businesses at $45bn after raising another $639m in 2021. The business pioneered Buy Now Pay Later (BNPL) in Europe, which helps consumers pay for purchases in multiple installments. Although primarily aimed at consumers, more and more retailers are adding services like Klarna to their online stores due to the boost they see in conversions. Such valuations then contribute to a trickle-down effect; investors and their money followed the trend across the continent with Alma in France ($50m), Zilch in the UK ($190m) and Scalapay ($155m) in Italy.

The succession of lockdowns during the pandemic led e-commerce businesses to double down on innovation and take advantage of sales shifting online. As a result, companies which provide tools for online experience attracted big investment. Marketplace enabler Mirakl raised $555m in September, having also raised $355m only a year earlier, thereby almost tripling their valuation to $3.5bn. The company helps traditional retailers turn their websites into marketplaces, meaning they can offer customers a wider array of products complementary to their own and thus increase average baskets. Another big player in e-commerce is German headless CMS business Contentful. They raised a $175m round in July at a $3.5bn valuation off the back of stellar growth in the sector, fuelled again by lockdowns and the resultant cyclical avoidance of in-person retail.

Away from pandemic related trends in e-commerce, sustainability and ESG have increasingly captured popular imagination. Vestiaire Collective, a second-hand luxury clothing marketplace from France, raised two rounds with $180m in March and a further $210m following in September. Alongside Lithuania’s Vinted, which raised $303m in May, they have brought issues of sustainable fashion and over-consumption to the attention of the fashion industry. In turn, this trend led ‘traditional’ retailers to follow suit, with several creating re-purchase programmes; customers can sell back items they’ve bought previously, in exchange for gift cards and other rewards and credits.

Funding the future of work – not just working from home.

The adoption of new technologies during this period led to ever-larger rounds that may have been unimaginable without it. Hopin, a virtual events company founded in London in 2019, has raised a total of $929m over the first two years of its existence. As millions were forced to work from home for extended periods, the startup benefited from a much larger market for its product than might otherwise have existed. It could be a mistake to think that such success won’t last: repeated lockdowns convinced companies and employees that remote working was not only possible, but maybe even desirable. Thus many of them – startups and corporates alike – either switched to or commenced remote-first working. The future of work will require even more tools to help teams bond and collaborate without being in one single place, and other products and services will surely emerge in this space.

Additionally, the past two years favoured and accelerated the adoption of new business models, with large sums of capital required to build first-mover advantages. No trend illustrates this better than the quick commerce and delivery frenzy taking place across the continent. A combined €1.5Bn was raised by just ten such companies during 2021. Gorillas, founded in Berlin in 2020, raised two rounds in 2021, $290m in March with a further $950m in September. Flink, another German quick commerce startup, raised $750m in funding during December from DoorDash, the American food delivery group. in France, Cajoo, raised a $7m seed round before even launching its service, with another $40m following in September. However young this trend might be, it has taken Europe by storm, catching the attention of retail incumbents and forcing them to seriously consider the space and develop similar services. In fact, the lead investor in Cajoo’s second round was none other than French supermarket giant Carrefour.

What led to the boom – Europe as Safe Haven?

An argument could be made that this funding boom is the result of a maturing ecosystem, combined with macroeconomic factors, alongside the arrival of new investors: as rounds were raised at ever-higher valuations, wider interest grew in the entire European ecosystem. Can we expect funding to keep growing at such a pace? If so, investors will find it increasingly difficult to cut through the noise and find deals at ‘reasonable’ valuations.

The rise in investment is also partially driven by the entry of non-European investment funds. Tiger Global and Coatue, two American Hedge Funds, seemingly set their focus upon Europe over the last two years: in 2021, Tiger invested in 27 European companies and Coatue in 17. Many observers doubt their contribution can last at such a pace, but their effect on the European ecosystem is noticeable. As they injected large sums of cash, they forced local players to compete more fiercely over deals. As a result, according to Atomico’s State of European Tech, European deals with at least one American or Asian investor rose to 33% in 2021, up from 27% in 2020 and from just 19% in 2017. Indeed, as American investments themselves skyrocketed, and as China seemed to crack down on some of their biggest tech companies, Europe came to appear an increasingly safer place for investment. That may also explain why staple names of the American VC landscape are now playing closer attention than ever; Sequoia opened its London office in 2020 and General Catalyst arrived in Europe during December 2021.

Mo Money, Less Problems?

There is little doubt that the funding frenzy which has Europe in thrall is rooted in both structural and contextual factors. The uncertainties related to the pandemic, sky-high market caps in the stock market and low interest rates have thus far favoured the potential returns from startup investment. New investors arrived to shake up the status quo, choosing Europe as one of their main arenas of battle. Companies came out of stealth with $100m+ rounds and entirely new categories are attracting unprecedented levels of investment. On the other hand, companies which have built a strong reputation over the years also reaped the benefit of this fresh capital influx. For investors, that means that while the European tech ecosystem heats up, so will competition for deals. Cutting through the noise will also become harder and resisting FOMO by sticking to investment fundamentals is probably advisable. For Corporates, opportunity and challenge both arise out of this situation: there will be new products and services which they can partner with, purchase or leverage to deliver better experiences for their customers, while others will compete directly and threaten the status quo. As the first month of the new year has already demonstrated, this process doesn’t seem to be slowing down any time soon.