Tech

Leila Abboud is a former Bloomberg Gadfly columnist.

(Corrected )

France's new president Emmanuel Macron was greeted like a rock star last month when he inaugurated a startup incubator in Paris and urged the crowd to help him "disrupt" the country. Two of the country's biggest venture capitalists, Partech Ventures and Idinvest Partners SA, have just announced fundraising totaling 700 million euros ($801 million), with one proclaiming the current scene as "magic."

When even the French catch startup fever, it's time to ask whether Europe's techies are getting a bit ahead of themselves. A surprising euphoria has taken hold in European technology circles. While some optimism is backed by evidence -- European venture capital funds are raising money at a pace not seen in a decade, while returns show nascent signs of improving -- the risks of a painful comedown are real.

The asset class has disappointed investors before with poor returns for most of past decade, so it has much to prove even if more European unicorns have emerged such as Deliveroo, BlaBlaCar and Klarna.

Dry Powder
Money is flowing into European venture capital funds, although they remain much smaller than their U.S. or Asian peers.
Source: Invest Europe

The first cloud is Britain's pending exit from the European Union, which could affect the ability of venture funds to raise and deploy money. Since Europe doesn't follow the U.S. custom of big pension funds or university endowments putting money into venture capital, governments try to fill the breach. Their main channel is the European Investment Fund (EIF), part of the European Investment Bank.

A year after the Brexit vote, it's impossible to say whether the EIF will continue to invest in British tech funds. This matters not only because the U.K. is the biggest recipient of venture money in the region, but also because its tech scene can't simply be separated from the rest of the continent.

Important London-based funds such as Atomico and Balderton Capital get EIF funding, which helps them attract other limited partners. They then back startups from Estonia to Germany.

From 2011 to 2015, the EIF contributed 37 percent of the money invested in U.K. venture capital funds, according to data from Invest Europe, the private equity and VC trade association. Indeed, London has been the biggest recipient of EIF largess, with Cambridge coming third (Paris is second). Maybe the British Business Bank could fill the void after Brexit, as one government official has hinted. But, as with parts of the City of London banking industry, VC funds may have to move to the continent to get around the problem.

Yet a fragmenting of the VC scene wouldn't help what's already a more complex market than the U.S. or China. One of many reasons Europe hasn't nurtured an Amazon.com Inc. or Google is that startups must contend with dozens of languages and a plethora of national regulations and tax systems. Getting big is hard here.

Europe Lags
There is less venture financing available for start-ups in Europe compared to other regions
Source: KPMG Venture Pulse Q4 2016
KPMG data includes start-up financing from venture funds, corporate venture funds, among others

There are other reasons for caution. Potential exit routes for funds look more scarce in Europe than the U.S. European blue chips are more wary of paying high multiples for unprofitable startups just because they're sprinkled with some tech fairy dust. In fact, European startups are more likely to get bought by U.S. companies or more recently Asian ones, than locals.

Non-tech buyers have also helped U.S. exits -- look at Unilever’s $1 billion deal for Dollar Shave Club or Wal-Mart Stores Inc.'s $3.3 billion for Jet.com Inc.

Headed for the Exit
Fewer startups were able to sell themselves to larger companies last year in Europe
Source: Invest Europe

The nationality of the buyer doesn't really matter, but young companies do benefit from having more potential suitors.

There are hints that things are changing, though progress has been slow. European corporate giants such as Siemens AG and Orange SA are starting venture arms to find promising targets. Corporate venture capital flowing into young companies has more than doubled in the past five years to reach $5.5 billion in 2016 in Europe, according to KPMG.

Much like Macron and France, things do look more promising than they have in a while for startups. But delivery is always the true measure of success.

(A previous version of this article was amended to remove Accel's name from a list of firms that received funds from the EIF.)

To contact the author of this story:
Leila Abboud in Paris at labboud@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net