Venture Capital

European seed fund explosion – what does it mean?

By March 10, 2014 No Comments

BrightSun have just published research on the number of seed funds in Europe. As you can see from the graphs below the number of seed funds is growing very fast whilst the number of later stage funds is flat.

numberseedfundsChart 1: number of European funds investing in rounds of $1m and less (blue line) and number of countries receiving investment (green bars)

largefundsChart 2: number of European funds investing in rounds of over $1m (blue line) and number of countries receiving investment (green bars)

There are two obvious take aways here. I’m going to deal with the country point first. The number of countries where small funds invest is double the number of countries where large funds invest. If I was a ambitious startup with large capital requirements I would make sure I was in a geography where large funds invest regularly. Even if that meant moving the company. The chances of success on any other path are too low. If I was passionate about my country’s startup ecosystem I would aim to make good money out of my startup and then come home and invest the proceeds locally.

The second point is that the ratio of early stage funds to later stage funds has shifted from around 1:1 to 2:1, implying that the number of seed funded companies is growing much faster than the number of Series A funded companies and that we will have a Series A crunch here in Europe at some point. When you consider that a large number of the new early stage funds are accelerator programmes making 20+ investments each year then it seems almost inevitable that an increasing proportion of companies funded at the seed level will fail to raise Series A.

For anyone running an early stage fund or accelerator programme that means you have to work like crazy to be the very best of the 278 funds investing in rounds of $1m and less. That includes us at Forward Partners where we focus on two things – being attractive to entrepreneurs by being the best at helping them get to the next stage and on making great investment decisions by having a deep understanding of our target markets and companies.

For entrepreneurs raising money it means that if you have the luxury of choosing between investors you should select based on which one is going to give you the best chance of getting your next round away. At the risk of talking our own book, I think that comes from a combination of focus on making sure the fundamentals of the business are strong and connections with investors at larger funds.