Venture capital investment in Europe is poised to reach record levels this year despite the COVID-19 pandemic.

That’s the conclusion of an annual survey of the state of Europe’s technology market from Atomico, the venture capital firm started by billionaire Niklas Zennström, a cofounder of Skype.

The total venture investment in European technology startups is poised to reach $41 billion by year’s end, which would be a slight increase on the $38.6 billion invested last year, the report finds. But given that the total investment round grew despite COVID-19, “we feel like it’s a real demonstration of the strengths of the underlying foundations of the ecosystem,” says Tom Wehmeier, an Atomico partner who helped compile the report.

Still that amount is far behind the $141 billion that venture capital funds have poured into U.S. technology startups so far this year, or the $74 billion that has gone to Asian tech companies.

The report notes that Europe continues to punch below its weight when it comes to its global share of venture capital investing, accounting for just 13% of all VC investments globally even though the region accounts for a quarter of global gross domestic product. The U.S. accounts for half of all global venture investing, well above its 26% contribution to global GDP.

But in at least one respect, Europe is ahead: At the very early stages and at small funding sizes, Europe does very well. It accounts for 40% of all funding rounds globally below $5 million, according to Atomico’s analysis.

Pandemic? No problem

The coronavirus pandemic didn’t dent European venture firms’ ability to continue to raise money. They raised new funds at a pace slightly ahead of 2019, which was itself a record-breaking year with more than $16.5 billion poured into European-based VC firms. In the first half of 2020, $7.8 billion was invested in these funds, compared with $7.5 billion in the first six months of 2019, according to Atomico’s report.

And European technology remains attractive to investors from outside the region, particularly those based in the U.S. The number of U.S. institutional investors participating in at least one European-based venture capital fund has grown 36% to more than 550 since 2016, Atomico reported. Meanwhile, almost a quarter of European startups raising venture rounds have at least one investor from either the U.S. or Asia.

With increased competition, valuations for European tech startups have continued to increase. The top quarter of European startups now achieve early stage valuations of above $22 million, according to Atomico, a 38% increase from 2019. “There is still a pretty remarkable difference between valuations here compared to the U.S., and that has contributed to U.S. investors’ interest in Europe,” Wehmeier says.

The fact that Europe has managed to produce more blockbuster exits—companies that either sell out to an acquirer, or list shares on the public markets—helps feed this dynamic too, since it makes it possible for venture capitalists to justify higher valuations in earlier investment rounds, he says.

Biggest players

Europe now has two tech companies that have gone public in the past two years, Spotify and payments company Adyen, that are worth around $50 billion. It also has two private technology companies, the financial technology company Klarna, and the robotic process automation company UiPath, that are worth more than $10 billion.

It also has a company, Hopin, the virtual conference software startup whose fortunes have soared during the pandemic. It became the first European startup to achieve “unicorn status”—a startup company worth more than $1 billion—within a year of its founding. The company raised a $125 million second, or Series B, venture capital round in November that valued the startup at $2.1 billion.

The chances of creating a unicorn in Europe are about the same as those in the U.S., Atomico’s analysis found: About one in 100 startups makes it to that lofty status. The big difference between the U.S. and Europe is actually what happens in terms of acquisitions.

While the rap on European founders has often been that they sell out too early, preventing the region from ever building tech giants to rival those found in the U.S., Wehmeier says that Atomico’s analysis points to the opposite problem: European founders are more often stuck nursing companies along that will never be huge, independent successes. U.S. startups have a 50% greater chance of being acquired at almost every stage of their life span, he says. “This enables a fail fast culture,” he says, and that means the founders, employees—and capital—are freed up faster to potentially reinvest in another startup.

It also doesn’t hurt that the U.S. continues to have much more robust public markets for technology investment. Although Europe has actually hosted more technology IPOs than the U.S. every year since 2016, the valuations achieved in these public offerings run far behind those in the U.S. The top five U.S. tech IPOs in the past year were worth more than 3.6 times what the top five European tech IPOs were worth, and that number grows to a fourfold gap when looking at the top 10 tech IPOs, Wehmeier says.

Snowflake, the eight-year-old cloud-based data warehousing company that went public in September, achieved a valuation of $70.3 billion on its first day of trading, an amount greater than the combined value of the entire top 10 most successful European tech IPOs of 2020. (The most valuable 2020 tech IPO in Europe was that of data management firm Allegro, which achieved an $18.9 billion valuation at the close of its first day of trading.)

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