The rise of the European tech unicorns

It’s been conventional wisdom for more than 20 years that the United States is the home of exciting tech companies, while in Europe the focus has been on traditional, analogue businesses. However, there is rising interest among investors in fast-growing European tech startups – boosting valuations and leading to an increasing number of billion-dollar private companies, known as unicorns.

“We’ve played second fiddle to the US for some time, but something is changing in the mindset of entrepreneurs, venture capitalists, and growth companies,” says Ben Bailey, who leads Macquarie Capital’s Head of Telecommunications, Media and Technology (TMT) business in Europe.

By May this year, American venture capital investors had already placed $US10.1 billion into Europe’s startups, according to investment analyst Dealroom. That compares to just $US9.3 billion in the whole of 2020. One indication of how tech stocks are becoming increasingly appealing in Europe is the growth of interest in them from Family Offices, traditionally more conservative or longer-term investors.

“We’re also seeing the emergence of ‘super angels’,” says Bailey. “These multi-millionaires might have sold their first technology businesses in their thirties or forties and they’re now looking to re-invest in the next generation of tech startups.”

Bailey, who has overseen a long list of major transactions, including transactions with Allegro, Booksy, Brandwatch, Finanzcheck and Smartly, among others, cites another development. “The value uplift that private companies achieve because they stay private longer and grow is massive compared to what it used to be,” he says. “Historically, companies would probably go public when they were worth a few hundred million dollars, but these days they may well be worth a few billion, and that means that investors see a massive uplift in value.”

This is boosting demand from all types of investor. For example, October 2020 saw the flotation of Allegro, an e-commerce site that rivals Amazon in Poland, with a valuation of over $US17 billion. Such was the demand for the stock that the exchange delayed the company’s opening to ensure that its systems could cope with demand. Having benefited from Poland’s growing middle class, the company, which was founded in 1999, has begun to court consumers from other countries.

COVID-19 has accelerated the growth of e-commerce sites, as increasing numbers of consumers have moved their purchasing online. Gorillas is another example, and one of a number of companies offering consumers fast grocery delivery that has benefited from the pandemic. After launching in Berlin around the time of the early 2020 lockdown, it became the fastest European startup to reach unicorn status – doing so after just 9 months.

“There’s a feeling among investors that many of these trends are long term and will continue after lockdown and other restrictions end,” says Bailey.

The growth of Software as a Service (SaaS) adoption by corporates and new and innovative providers moving enterprise software online is another factor fuelling tech investment across Europe. Insurtech Shift Technology, for instance, helps insurers to identify fraud by analysing claims for crimes such as money laundering. With clients including Generali France and AXA, it achieved unicorn status in May 2021.

Mambu, a Berlin-based SaaS cloud banking platform, closed a round of €110 million at the start of 2021, giving it a valuation of €1.7 billion. The company provides software to banks and other financial services firms to power their lending and borrowing services.

Alongside unicorns, there is a growing army of exciting, fast scaling companies in the €5 billion to €10 billion range. “Across Europe, we have the market, both in enterprise and consumer, we have the intellectual horsepower from the world’s leading universities, and we have innovation centres spread across the continent. What we lacked was capital; however, that situation has changed dramatically.” explains Bailey.

Capital is now coming in from the United States and other regions looking for opportunities in Europe. “The market is now squarely in the sights of established and aspiring US players, and capital is flowing to Europe like never before,” he says.

As a result, many of the necessary conditions required to generate high-value companies at a rate similar to the United States are in now place. These include talent or teams; products, services or concepts; markets; plus planning, funding and execution. “Investors tell me that the one remaining area where Europe is still behind on is its public market depth and sophistication. But if over the next ten years it improves here at the same rate as it has improved in other areas over the past ten, we’ll be in a very good place.”