By Douglas Busvine
BERLIN (Reuters) - With Europe in coronavirus lockdown, venture capital fund manager Fergal Mullen told his investors in April he would find it hard to back a startup without first meeting its founders.
A couple of months later, the Geneva-based co-founder and partner of Highland Europe broke his own promise and invested in Meditopia, a mindfulness app with teams in Berlin and Istanbul that he got to know over some 40 calls on video app Zoom.
"I had to eat my hat," said Mullen, looking back on a year of deal making that, after a sudden stop in the spring, came back to life in late summer and has gathered pace since.
Highland Europe has just raised 700 million euros ($850 million) for a fourth fund, its largest, and is preparing for the sale or flotation of around 10 of its portfolio companies next year.
And, according to interviews with more than half a dozen investors, the wider recovery in European tech investment activity looks likely to extend into 2021 as venture-backed startups achieve scale.
Proceeds raised by European venture funds have already hit an annual record 17.1 billion euros in the year to date, while the amount invested in startups has reached 39.7 billion euros, according to data platform Dealroom.co.
Taking into account reporting lags, the final sum invested is on track to beat last year's all-time high of 40.3 billion euros, said Tom Wehmeier, partner at Atomico and author of the closely-watched State of European Tech https://2020.stateofeuropeantech.com report.
"The scale of those outcomes is getting bigger and bigger, and the velocity in which value is being created - it's getting faster and faster," said Wehmeier, pointing to the 115 venture-backed 'unicorns' in Europe valued at more than $1 billion.
While Europe still lags North America by four to one in dollars invested in tech startups, the institutional money flowing into venture capital has grown threefold over the last five years.
Nearly two-thirds of venture capitalists and 70% of their investors expect European tech to gain ground on the United States and China over the next decade, according a survey by Atomico.
Graphic: European technology investment https://graphics.reuters.com/TECH-EUROPE/azgvoykjgvd/chart.png
DRY POWDER
Early-stage and growth investor Index Ventures raised $2 billion just before the coronavirus pandemic hit, and soon discovered that remote working enabled it to review and do deals far more quickly.
"We never had a slowdown and had a lot of dry powder," said partner Martin Mignot. "With everyone remote we can see and meet more entrepreneurs."
Where deal flow has slowed is via exits onto public markets, with proceeds from initial public offerings (IPOs) by European technology firms less than half their 2018 peak even as a string of IPOs took U.S. markets by storm.
That partly reflects the growing depth of private markets, however, say investors who point to Klarna, the Swedish financial technology company, achieving a valuation of more than $10 billion in its latest funding round.
UiPath, whose software helps automate routine business tasks, has achieved similar 'decacorn' status while still private and, like Klarna, is eyeing an IPO in 2021.
The Romanian startup now has a U.S. headquarters and plans to float there. That's a common route for European startups chasing rich U.S. valuations and founder-friendly listing rules - and a challenge for Europe's tech ecosystem, investors say.
UiPath was backed in its infancy by Earlybird, whose emerging Europe fund turned heads in June when Istanbul-based Peak Games, in which it had invested, was sold to Zynga (NASDAQ:ZNGA) Inc for $1.8 billion.
Such deals are breeding new startups even in parts of Europe previously little known for home-grown tech entrepreneurship.
"Every liquidity event, every acquisition, every IPO ends up spawning groups of these talented people," said Earlybird's Cem Sertoglu.
LONDON STRONG
While the remote working trend is helping founders take on global markets without having to relocate to Silicon Valley, it is also taking the edge off the near-term risks arising from Brexit - Britain's looming exit from the European single market.
"It won't affect the momentum that much in 2021, given how much pent-up demand there is, how much money is sitting on the sidelines, and how many conversations are happening," said Erin Platts, the London-based regional head of Silicon Valley Bank, a specialist lender to technology firms.
Britain has actually extended its lead this year in venture fund raising and its tech startups have attracted a third of total European investment, Dealroom.co data show.
It also remains the preferred landing zone for U.S. software firms seeking to gain a foothold in Europe, said Stephen McIntyre of early-stage investor and advisory firm Frontline (NYSE:FRO).
"The only people who are talking about Brexit are the Brits and Irish," said McIntyre. "With U.S. CEOs, not only does it not come up – they honestly think it’s done."
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