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Will there be a Series A crunch in Europe?

CB seed vs Series A

The coming Series A crunch is perhaps the hottest topic of conversation in US tech circles at the moment and the numbers in the charts above show why. The number of seed deals has shot up whilst the number of Series A deals has stayed flat, ergo the percentage of seed deals that go on to raise Series A will fall, perhaps by as much as two thirds. People are predicting that as many as 1,000 angel invested companies will fail next year.

This data is from the US and I haven’t found anything comparable for Europe so answering the question of whether or not we will have a Series A crunch here is more difficult. What we do know here is that the VC investments are roughly flat at c£1bn a year in the UK and maybe the same again around Europe, implying that Series A investments are also flat, as is the case in the US. So if there is to be a Series A crunch here it will be for the same reason as in the US; because the number of seed investments has ballooned.

In place of interrogating the data we can look to see if the factors that drove the increase in seed funding in the US are present here in Europe:

  • declining costs of innovation has made it possible to create more value with less investment improving the return profile of small investments (in theory at least) – innovation costs the same the world over
  • many people have recently been made millionaires because they held shares in Facebook and other tech companies that achieved big exits or because they founded companies that were acquired for $10-50m – only in the US (regrettably)
  • accelerator and incubator programmes are funding large numbers of companies – also happening in Europe, but not to the same extent as the US

Looking at this root cause analysis you would conclude that the number of seed deals in Europe is likely to have increased a little, but not as much as in the US, and that fits with my qualitative feel for what’s happening. Given that the overall market is underfunded in Europe then I don’t think we are heading into a period when the Series A market is going to change radically. It has always been tough to get Series A funding and the competition for those VC dollars will most likely increase a bit but I don’t think that most people will notice the difference.

  • http://www.facebook.com/people/Sharky-Rechinas/100003609817993 Sharky Rechinas

    In Europe seed money is much more about personal connection therefore there is less multiplication factor based on other facts.
    You can have demultiplication factors though.
    Regarding VC I was reading that some US VC’s expanded to Europe – therefore if you say VC investment was flat it means Europeean VC’s invested (slightly) less ?
    Due to economic conditions I think (and got casual feedback) that In Europe in the last couple of years seed money went down – as people were/and are worried about EU recession.

  • http://www.facebook.com/people/Sharky-Rechinas/100003609817993 Sharky Rechinas

    More seed money because of crowdfunding/crowdinvesting?

  • http://fishfishme.com/ Abdullah Alshalabi
  • http://www.theequitykicker.com brisbourne

    That makes me wonder if Natasha reads my blog…

  • http://www.theequitykicker.com brisbourne

    I don’t think there has been enough crowd f funding to make a difference.

  • http://www.birthdayslam.com Jeff Robinson

    Capital of all sizes has and will always be available to any deal that makes sense. The real issue that needs addressing is the type of deals that do get financing. Silicon Valley has financed way too much crap based on way too much hype. Yes there are a handful of experienced VC’s who do make some sound judgement calls but the vast majority who have put money to work have absolutely no track record of success to speak of. Akin to taxi cab drivers in 2008 flipping million dollar properties or day trading equities. As with all business cycles,booms and busts, I look forward to 2013 being the year of the weeding out real VC’s vs wannabees.

  • http://www.venturestrategy.biz/ Martin Stillman

    Feedback from a number of pre revenues / SMEs I’m working with, suggests hand in hand with lower costs of innovation / commercialisation, is a smaller initial capital call. HNWI / Seed / Crowdsourced funding therefore becomes more appropriate and is easier in the current climate to cut away.