Over the past decade, Europe's venture capital landscape has undergone a significant transformation, with the continent becoming a magnet for a diverse and international community of investors. So far in 2024, nearly 6,000 unique investors from Europe, North America and Asia have invested capital on the continent. At a regional level, the change is also notable, with the number of investors at least doubling across all regions and even tripling in the Nordics over this period.

Looking specifically at investors based in Europe, the growth since 2015 highlights how far the ecosystem has come. Back then, just 2,100 unique European-based investors participated in rounds. By 2024, that number had risen to more than 4,000. And within the subset of very active investors (who make five or more investments per year), we have also seen a significant increase of 54% since 2015.

International investors also continue to be a significant driver of overall investment activity, accounting for 30% of the unique European investor pool in 2024, up from 24% in 2015. Four times as many North American investors are backing CEE startups in 2024 compared to 2015, while the number of Asian investors in the Nordic region has increased fivefold. These foreign investors play an important role in connecting European tech with further global capital, expertise and new market opportunities.

But there is still room for growth. While the number of investors in Europe has grown tremendously, it still lags behind the US ecosystem, which had more local investors in 2015 than Europe has today.

Outsized success stories lead to outsized impact for local startup ecosystems. This manifests itself both in the number of investments the founders of these companies make, but also their contribution to building their local market. Topping the leaderboard is Taavet Hinrikus, the co-founder of Fintech giant Wise. He has made more than 90 investments to date with roughly half based in either the UK or Estonia, the two key Wise hubs.

It’s a recurring theme that many of Europe’s top angel investors with backgrounds building $1B+ companies focus most of their investment activity in their home countries. For example, Guillaume Lestrade, the co-founder of photography marketplace Meero, has made more than 80% of his 50+ mapped investments into companies based in France, which is also home to Meero's core operations. The same can be said about Copenhagen-based Just Eat co-founder Jesper Buch, who has built a portfolio focusing almost exclusively on Danish startups.

The multiplier effect that one successful exit can have on its local ecosystem (and beyond) cannot be stated enough.

A critical component of the startup ecosystem is the all-important first cheque that helps many companies get off the ground. Founders now represent the majority of angel investors — who are normally the ones making these very early investments — in European startups. In fact, almost 66% of startups surveyed have an angel investor who fits this description. 

These investors are of particular importance in any startup ecosystem, reinvesting not only capital but also valuable domain expertise and personal networks into the next generation of company builders.

Europe's VC fundraising environment is showing signs of recovery after hitting a five-year low in 2023. VC fundraising is a slow process, and the reported funding numbers reflect the efforts of VCs over the last year or more of fundraising. Therefore, the reported funding numbers in 2023 are a lagged view of market sentiment and we are only now seeing the shift in sentiment from the peak years reflected in the numbers.

Since 2015, total VC fundraising has been on a steady upward trajectory, peaking at over $25B in 2022. Last year was a stark contrast to this activity, with H1 fundraising falling to $6.3B, a significant change from the $15.9B raised just six months earlier. Overall, VC fundraising in 2023 was down by more than 40%. Overall, VC fundraising in 2023 was down by more than 40% and H1'24 results show a continued decline of 8% on the previous year.

Over the past decade, US VC funds have been quicker to raise successive funds. On average, it has taken European VCs roughly 10 months more to raise consecutive funds than their US peers, averaging 3.2 years versus 2.4 years in the US.

2021 saw a significant acceleration in Europe, matching US VC’s timelines for the first time, followed by a subsequent cooling as market conditions changed. The same pattern played out a year later in the US, with 2022 being the speediest fundraising year on record.

Facing the new market reality, funds on both sides of the ocean have had to readjust expectations, with median timelines now merging back to 10-year averages. This aligns with LPs’ preferences too, as it provides them with greater time diversification.

Over the past decade, the total dry powder — the amount of committed but unallocated capital available to venture capitalists — has increased significantly. Including growth funds, data from Invest Europe shows there has been a threefold increase in dry powder between 2015 and 2023, from $34B to $104B.

This growth curve is now beginning to flatten, likely reflecting the challenging fundraising environment that is starting to show up in the numbers. While the availability of dry powder increased by 44% between 2018 and 2020, it rose by a more modest 13% between 2021 and 2023.

Nevertheless, European venture funds have access to a significant amount of deployable capital, suggesting GPs still have meaningful firepower to invest in current and upcoming cohorts of European startups and scaleups.

The volume of capital invested in European early- and growth-stage startups has increased significantly since 2015, more than doubling for the former and tripling for the latter.

Of the $30B invested so far this year, European investors have contributed 60%, or more than $18B. This is a more than twofold increase from the $7B equivalent in 2015.

While the lion's share of funding is allocated to growth-stage companies, European VCs remain the primary source of capital for the early-stage tech ecosystem, accounting for almost 80% of funding, a level relatively similar to 2015.

At later stages, European founders rely on an international investor base. After withdrawing in 2023, US investors contributed $9B to European startups in the first three quarters of this year. This is down significantly from the peak of $34B in 2021, reflecting a slowdown in new investments in line with the pullback of overall investment volumes in Europe.

Similar to 2015, non-European investors together account for 47% of total funding, and US investors now account for 35% of the European growth funding pool, up from 30% a decade ago. Once startups raise $15M+ rounds, they increasingly rely on a global investor base to fund their next stage of growth.

Recent discussions around Europe's investor base have centred on the decline in overall funding raised in 2023, and the lack of funding available at the growth stage. But they have missed an important trend: that VC funds are scaling up to meet the opportunity set.

The median value of VC funds that closed in the first half of this year is $85M, building on the record highs set in 2023. This is more than double the $37B median fund size seen in 2015, and speaks to the growing opportunity set in Europe, where GP and LP investors alike recognise the potential.

Established (and repeat) European fund managers are building the much-needed capital layer to support the growing number of later-stage companies. Several €500M+ VC firms announced their latest fundraises in 2024, demonstrating their ability to continue attracting institutional funding, even in a challenging market. The share captured by €250M+ VC funds has been trending up from 30% in 2015 to 53% in 2023, with the number of associated funds having quadrupled in that time frame. Data from the first half of 2024 shows the same trend playing out, with €250+ sized VC funds accounting for 54% of all capital raised.

Although they only account for 14% of total dollars raised, smaller funds of €100M or less play a vital role too, accounting for 55% of VC funds by count in 2023. These new or emerging fund managers are a leading indicator of future dry powder for European venture, as they will attract larger pools of capital to Europe as their track records grow.

Back in 2015, there was just one $500M+ fund in Europe. Today that picture is very different, and despite a difficult fundraising environment, the number of these funds is increasing.

The top 10 largest funds in 2024 now have a combined value of $6.8B, and this growing pool of available funds speaks to the ongoing maturity of the European venture landscape. The prevalence of larger funds, fuelled by increased capital availability, is a leading indicator of the growth of Europe’s tech ecosystem. 

London retains its status as Europe’s venture capital powerhouse, home to seven of the 10 largest funds in Europe, but funds in Stockholm, Amsterdam and Vienna also feature in the rankings. As these larger-scale, multi-stage funds proliferate, they create more opportunities to support founders with European capital from the early stages all the way through their growth and scale-up lifecycle. 

A local base of LPs remains as important today as it was a decade ago, with European GPs still raising the vast majority of their funds from domestic partners. This speaks to the broader challenge posed by a fragmented European capital market, which hampers the ability of VCs to raise capital across borders.

In 2023, local LPs contributed 65% of the capital raised by European GPs, a figure that has remained stable over the past 10 years. Cross-border European investments have become somewhat more common, accounting for 22% of capital raised in 2015 and 23% in 2023. By region, the developments since 2015 are particularly striking in Southern Europe, where all funds were raised from domestic LPs a decade ago. Today, the region’s GPs are tapping a much broader base of European investors. Similarly, in the DACH region, the share of funding raised from North American LPs was negligible in 2015, but rises to 20% in 2023.

While cross-border fundraising has increased, it's still relatively low and shows that VCs are heavily reliant on raising in their home market to be successful. This poses a particular challenge in parts of Europe where the LP base is not as deep and experienced in venture investing.

A new era of government initiatives could be on the horizon, with the AI boom, energy transition and the ongoing European productivity crisis incentivising public bodies. Since 2015, governments have contributed more than $25B to European venture capital funds, with support set to increase significantly in 2023. Last year, governments invested $0.42 for every $1 invested by institutional investors, compared to $0.13 in 2022.

The topic of startup investing continues to gain traction in government circles. Mario Draghi’s recent report on European Competitiveness warns that unless innovation is accelerated, Europe risks falling further behind the US in areas such as AI. A key recommendation is to increase the budget of the European Investment Fund (EIF) as part of a broader €800B package to boost European competitiveness.

Government action can act as a catalyst for start-up investment, with initiatives such as the Tibi initiative in France, WIN in Germany and the Mansion House reforms in the UK helping to shine a light on the sector. However, diversified sources of funding are important to reduce overreliance on specific investors and potential regulatory requirements that come with government funding.

Indeed, the heavyweight EIF is already a significant supporter of the European venture asset class, contributing more than half of all government funding to startups over the past decade. The France & Benelux region, which the EIF calls home, committed $1.5B in government funds in 2023, bringing the total committed since 2015 to $14.5B.

Interestingly, government funding in Southern Europe increased from less than $600M in 2022 to $1.5B in 2023, highlighting local and EU-led efforts to boost the region. From large pan-European measures such as the extension of the European Tech Champions Initiative (ETCI), to more localised deep-tech-focused support (such as the Southern Europe Entrepreneurship Engine), policymakers are looking to close the funding gap.

Pension funds can play an important role in decreasing Europe’s funding gap. They have doubled their investments over the past near-decade. In 2023, they contributed $858M to European VC funds, up from $359M in 2015.

There are significant regional differences in this activity, though. LPs from just four regions — the US, France & Benelux, the Nordics and the UK & Ireland — made up the significant majority of pension fund contributions to European VC in 2023. This highlights the untapped potential in other parts of Europe, particularly the DACH region, where pension funds have reduced their VC fund allocations to below 2016 levels.

European pension funds have total assets under management (AUM) of $9.6T. But when it comes to the percentage invested in venture capital, the picture is bleak across the board. Despite a robust local startup ecosystem, pension funds in the UK & Ireland allocate just 0.007% of AUM to VC. It appears that pension fund allocation to venture is close to a rounding error.

One in three LPs responding to this year’s State of European Tech survey cite the lack of liquidity and distribution as some of the key barriers preventing more LPs from making their first investment in European VC. As one LP succinctly put it: "The asset class is attractive... on paper." This focus on liquidity and exits, and why it is so highly valued, is heavily influenced by current market conditions and the fact that exit markets, particularly on the IPO front, have been weak.

While Cambridge Associates benchmarks show that European VC asset class returns are in line with their US counterparts, LPs remain highly focused on the asset class's realisations and how that translates into track record, with 24% citing this as a hurdle. While some also cite ‘risk / reward perception’ as another barrier, a large proportion of LPs (21%) feel that there is still a knowledge gap for many of their peers. More education is needed, as well as more data on returns and performance. Over time, as firms mature and large exits take place, European GPs have the potential to strengthen the case for high returns and dispel lingering doubts about Europe's ability to compete with other major markets.

In the ‘other’ category, the fragmentation of the European market is also cited, resulting in a perceived lower potential outcome for companies emerging from Europe, as well as an additional administrative burden for all players in the ecosystem. Another LP says: "It is far too expensive and a bureaucratic nightmare to launch a fund in Europe, which suppresses the number of potentially interesting emerging managers.”

Experienced LPs say Europe’s GPs have levelled up over their time in the industry.

Investors with more than 10 years in the industry note broad improvements across several factors, with 72% saying the number of top-tier GPs has increased and 46% saying access to them has also improved. The majority (77%) say their own teams have become more sophisticated in assessing VC opportunities. 

However, despite the overall optimism, macroeconomic factors including a difficult exit environment have taken a toll. Roughly a third (36%) of LPs with more than 10 years of experience state that liquidity has become a more pressing issue since they started in the industry, compared to the much steeper 72% of newer LPs seeing conditions worsen in this area.

Distributions to paid-in capital, or DPI, is an important measure of success for LPs. At the beginning of a fund's life — before any distributions have been made — this ratio will be less than one. As the fund generates returns and distributes capital to investors, the DPI will increase. For LPs, a higher DPI not only indicates better returns, but also affects their liquidity and ability to make further investments.

Using this metric to look at the performance of historical vintages paints a mixed picture. US and European GPs have achieved DPI of 2x or higher in some vintages prior to 2011. More recent vintages have been affected in both regions, but US GPs appear to have been more active and systematic in taking liquidity when markets were buoyant compared to their European counterparts.

Robust and diverse exit sources are important for consistent DPI across vintages. Thriving public markets are key to successful IPOs, as is an engaged and deep pool of potential buyers for start-ups and scaleups, whether they are strategic corporates or financial sponsors. A variety of buyers can provide exit opportunities across the scale spectrum. As we explore in the Outcomes chapter, there are many ways to create liquidity and thus generate DPI.

In our survey, both VCs and LPs respondents are registering an increase in LP appetite, the first rebound after two years of more negative sentiment. 

In 2024, LPs reported a positive shift in sentiment towards European venture capital, with 29%saying they have more appetite compared to 12 months ago, up from 18% in 2023.

Experienced, long-term investors in European venture capital tend to have a more positive outlook on the asset class than their less experienced counterparts. In fact, 66% of LPs with 10 or more years of experience say their appetite has increased since they started investing in venture. Close to 60% of experienced LPs also say their organisation invests a higher percentage of AUM into the asset class than when they started participating.

Less experienced LPs and VCs are more cautious. Only 53% of LPs and 38% of VCs with less than five years of experience report increasing appetite for venture capital, and almost half of this group of LPs say their organisation’s allocations haven’t shifted.

These charts reveal the role experience plays in shaping investment outlooks in European venture capital, with seasoned LPs not only expressing more confidence, but increasing their allocations. It also speaks to the short-term negative sentiment surrounding the asset class currently, which experienced investors are less prone to be influenced by, having stood through different market cycles.