Cracking the European Market: Challenges for North American GPs
The European startup market has seen significant growth over the past decade, with deal volume doubling during that time. Despite this growth, North American venture capitalists (VCs) have struggled to establish a successful long-term strategy in the region. Big names like Coatue and OMERs have pulled out of Europe, and the venture funds that remain are less active. The overall value of European deals with at least one U.S. investor declined in 2023 compared to the previous year.
The European market presents unique challenges for North American investors. Each country in Europe has its own language and currency, making it different from investing in different states within the U.S. Additionally, startups and universities in Europe have different networks and nuances compared to those in the U.S. These factors make it difficult for North American investors to navigate the European market.
Another challenge is the increasing competition in the European VC market. While North American VCs have shown a growing interest in the European ecosystem, local players now dominate early-stage investing. Startups in Europe are more likely to seek funding from local investors who understand the nuances of the local markets. This focus on local investors during the early stages leaves opportunities for North American VCs at later stages.
Furthermore, many North American VCs have set up shop in London, which is no longer part of the European Union and is just one of the region’s startup hubs. Having a presence in London does not equate to having a presence in the rest of the continent. This focus on London also drives up competition for deals, making it harder for North American GPs to secure stakes and potentially causing them to overlook opportunities outside of London.
Nevertheless, North American firms are still trying to establish a foothold in Europe. Despite some firms pulling out in 2023, Andreessen Horowitz and IVP have opened offices in London. One reason for this continued effort is regulation. Startups in hot categories like AI and crypto face regulatory uncertainties in the U.S., while Europe offers clearer regulations, though not as magnanimous as they could be. A16z’s London office is primarily focused on blockchain and crypto, likely due to the regulatory clarity in Europe.
There is also increasing interest from U.S.-based limited partners (LPs) in Europe. LPs are looking for opportunities to invest in managers backing European startups, and the interest has grown following successes like Spotify. Europe is seen as a reliable creator of outcomes, especially as large markets like China become less attractive.
Despite the challenges, the European ecosystem remains largely underpenetrated, presenting opportunities for international VCs to establish a presence and build portfolios. However, they need to develop strategies that ensure their efforts will pay off. With the right approach and understanding of the European market’s nuances, North American GPs can still find success in cracking the European market.