23 October 2015

Europe’s Growth Equity Funding Gap

Europe’s Growth Equity Funding Gap

The supply of growth equity investment into Europe’s later stage companies is on the rise. However, in terms of magnitude, recent increases offer little to bridge a funding gap which has traditionally impeded Europe’s later stage companies in scaling.

The first 6 months of 2015 saw 167 growth stage companies raise a combined total investment of €3.5B. In comparison to the same period in 2014, this has represented an increase of 26% in the number of companies being funded and a 106% increase in the amount of growth capital raised. This increase aligns with an existing growth trajectory which has emerged and continued since 2012, where investment capital into European growth stage companies has achieved a compound annual growth rate of 46% from 1H 2012 – 1H 2015.

Despite a trend of increase, the funding environment for growth stage companies in Europe is still very much one of scarcity rather than an abundance of capital. This scarcity is indicative of an environment in Europe where 75% of funding comes from bank lending. Another contributing factor to the scarcity of growth stage capital is the size of Europe’s funds. 75% of funds that have been raised in Europe between 2009 and 2014, have been less than €82m, a fund size representative of a minimum threshold sufficient to supply Europe’s Growth stage market.

The extent of this funding gap is best visualised by examining the relative distribution of capital across the different stages of the funding lifecycle in the US, and how it compares in relative terms to Europe. In 2014, the US allocated 1.9x the amount of capital to later stage growth equity as it did to Seed and Venture stage investments combined. In contrast, the capital made available to growth stage companies in Europe was actually less than the combined total funding received at the Seed and Venture Stages. European companies raised investment totalling €3.9Bn at Seed and Venture stage, while only €3.5Bn was distributed in Growth stage funding. Were Europe to supply the same 1.9x multiple of Seed and Venture capital investment to the supply of Growth stage investment, this would have equated to €7.4Bn in 2014, not €3.5Bn.

The effect of this funding gap is that European companies progressing through the funding lifecycle have struggled as the number of companies receiving growth stage funding converges competitively on a scarce, relatively finite pool of available growth capital.

Source: VentureSource, EVCA

By: Conor Doyle