In Europe, the startup funding graduation rate is also surprisingly low

In this post we:

  • Present a primer on the startup funding graduation rate in Europe;
  • Find that both European and US VC-backed companies show a steep drop off rate between Seed and Series A;
  • Find that the startup graduation rate in Europe and the US shows exponential decay;
  • Find evidence suggesting that Seed investments have been increasing over the past ten years in Europe;
  • Find some evidence sustaining the argument that investing in this asset class (Venture Capital) across the US and Europe may be a viable diversification and risk dispersion strategy;
  • Recall that, from the top 20 factors leading to startup failure, less than 3 are due to external factors;
  • Argue for the importance of increasing capital availability for early-stage investments;
  • Argue that the drop-off rate is due to internal factors, such as the inability to raise new rounds or pivot to a sustainable business model in a non-VC backed reality and issues among the founders;
  • Recommend founders start fundraising long before they need any cash;
  • Recommend founders favor investors who can help them through future fundraising rounds.

The availability of capital is a key catalyst for a thriving start-up ecosystem. It is key in the growth of ventures and, generally speaking, entrepreneurial success. Venture Capital (VC) is, arguably, the silver bullet in terms of venture investing for startups. Not only does VC play a huge role in the growth and value creation of startups, but it is also essential in supporting and stimulating entrepreneurs. The European Investment Fund (EIF), a European Union agency for the provision of finance to SMEs, found that, on average, VC-backed ventures grow faster.

New venture creation is one of the main engines of economic growth, job creation, productivity and the economic system’s efficiency.

Despite the potential of the European Single Market, start-ups have difficulties in growing as fast as their American counterparts. The European VC industry is smaller, less attractive and many barriers to cross-border investment persist. This might even seem slightly paradoxical. Europe has several VC investment opportunities, with more SMEs per unit of gross domestic product than anywhere else in the world. However, the American VC industry is far more mature.

Very little is known about the dynamics of the portfolio of VCs across financing rounds in Europe. The startup graduation rate is an indicator shedding light on the funding lifecycle of startups. It shows the percentage of VC-backed startups that have been able to ensure funding after their first seed investment.

Simply put, if 100 startups raise a Seed round, how many of those will go on to raise a Series A, and then a Series B, and so on?

A cohort of 1092 European startups

We used Crunchbase to look at all European-based companies that raised a Seed round between January 1, 2008, and December 31, 2010. This period is close enough to make any findings actionable, and long enough ago that the companies had time to set their trajectory.

A total of 1092 companies received a seed investment in Europe between 2008 and 2010. Data show that the number of companies securing a Seed round increased yearly from 2008 to 2010. In 2009 the number of seed-funded companies increased by 19%, and in 2010 it increased by 59%. This particular finding is in line with existing research and data; suggesting that securing a Seed round of funding has been more common over the past ten years in Europe.

The countries with most companies securing a Seed investment were the United Kingdom, Germany and France. This is likely related to the maturity of their innovation ecosystems. But still, no direct relationship or correlation was evident. Factors like the gross domestic product, tax system and/or the existence of fiscal benefits might also play a role.

Headquarter location – European Startup Cohort 2008-2010.

From these 1092 companies, only 217 secured Series A funding and, from those, only 118 secured Series B. The drop-off rate is clear. This trend persists throughout Series C, all the way to Series E, and across all yearly cohorts. Only 20% of the companies receiving seed funding can secure a Series A. We found exponential decay in the startup graduation rate in Europe, shown by applying a logarithmic scale.

Startup Graduation Rate – European Startup Cohort 2008-2010
Exponential Decay of the Startup Graduation Rate European Startup Cohort 2008-2010

The steep drop-off rate, allied with the macro-economic benefits of startups and venture creation, clearly attests to the importance of developing a stable and attractive ecosystem. We must be able to attract more people as potential entrepreneurs. As for governments and institutional players, they must increase capital availability for early-stage investments.

Similarly, for founders who have been able to secure Seed investment, this paints a stark picture. These founders might be tempted to adopt a somewhat narcissistic view and assume that subsequent rounds will be easy to raise. In reality, as shown above, it is quite the contrary. A couple of takeaways would be, as a founder, to start fundraising long before you need any cash and to favor investors who can help you go through future fundraising. Access to later-stage capital is crucial. The latter is also relevant for investors; who must ensure they have enough gunpowder for follow-on rounds and access to later-stage syndication partners.

If you are a founder and need help fundraising, do feel free to reach out and we’ll match you with an expert venture builder & developer.

Is Europe different from the US?

The startup graduation rate in Europe shows the same behavior as in the US. However, the drop off rate is higher for the Seed-Series A round in Europe than in the US. This might be explained by the fact that the VC industry is more mature in the US. Nonetheless, this might be an interesting insight for investors active in only one of these regions (the US or Europe) interested in diversifying their portfolio. This strategy could lead to more diversified portfolios with investors being less exposed to regional macro-economic dynamics.

An interesting side note would be the fact that, by using very similar methods, the US cohort had 2011 companies and the European cohort had 1092 companies. These values, in particular the difference between them, seem to sustain the argument that the European VC industry is smaller vis a vis the US industry.

The graphs below are originally from a similar analysis done by Mattermark.

Startup Graduation Rate – US Startup Cohort 2008-2010 (adapted from Mattermark)
Exponential Decay of the Startup Graduation Rate – US Startup Cohort 2008-2010 (adapted from Mattermark)

Why is there such a steep drop-off rate?

The steep drop-off rate is, most likely, due to internal factors of the venture and, from these, we would argue, due to the inability to raise new rounds or pivot to a sustainable business model in a non-VC backed reality and/or issues among the founders.

Despite the possibility of this analysis having missing data (companies who raised rounds which are not registered in Crunchbase), this behavior is not unexpected. The main reasons for startup failure are having the wrong team, not having enough money, building stuff nobody wants, having a user “un-friendly” product and ignoring customers. In fact, from the top 20 factors leading to startup failure, less than 3 are due to external factors. It’s mostly about entrepreneurial skills and founders. In this previous post, we deep-dived into the main reasons for startup failure and argued for the importance of fostering entrepreneurial culture and education in Europe.

Part of the analysis here presented was developed by Marta Quadros Brito in the course of her Master’s Thesis.

What do you think?

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