Topics and Trends Defining the Investment Landscape for Europe’s Tech Hubs
Start-ups, scaleups and incumbents across the European tech landscape are prime investment targets. Companies’ ability to respond to the on-going COVID pandemic is one of the topics defining their place in the investment landscape.
As illustrated by the first and second edition of BDO’s International Technology Hub publications, new companies, investment, and innovation define the technology industry in areas like Ireland, The UK, The Netherlands, Germany, and France.
Weathering the fall-out from Covid-19 is one vector influencing the investment opportunities and outlook for technology start-ups, scaleups and incumbents throughout these bustling hubs. BDO has developed the RETHINK framework to assist companies proactively react to the crisis, increase resilience throughout their businesses, and realise their full potential. But Covid-19 is not the only trend that companies and investors are taking into consideration.
At a glance: Ireland
Bridging the gap between Europe and the United States has laid the foundation for Ireland’s unique position as a tech hub.
Ireland commands an impressive level of interest from international capital. It is often the first choice for investment from US tech companies. With incubators, start-up funds, R&D support and more, investor groups can find well-supported tech innovators with ease.
Whilst there is little doubt that Ireland’s attractive corporate tax rate brings in significant interest, its start-up scene is home to many exciting companies and a uniquely collaborative sense of community.
Europe saw growing tech investments in 2019. According to Atomico’s State of European Tech report, year-on-year deal totals rose from $24.6 billion in 2018 to $34.8 billion while totals in both Asia and the US dropped. A growth in + $100 million deals indicates growing maturity in the space.
Data: Dealroom/State of European Tech report. Graph: BDO Global.
Dealroom data shows that London, Paris, and Berlin saw the most investments, with Amsterdam and Dublin also among the top seven cities. BDO M&A experts in the cities report increased interest – and investments – from overseas, led by American VCs and PE firms.
US investors often, as, exemplified by Germany, lead later rounds, while domestic VCs tend to lead on earlier rounds. The dynamic has been key to the recent growth in Germany’s overall VC funding.
For founders and management teams – particularly in more mature companies - understanding international investors’ preferences and way of conducting business is, in other words, increasingly important. The same applies to the general investment landscape. A 2019 Financial Times estimate put the amount of private equity cash available for new deals at $2.5 trillion – in London alone. The capital available to VCs and PEs, as well as private companies looking to make acquisitions, can be daunting to founders trying to find the right fit for their business.
Covid-19 has led to a slow-down in funding and investment, but it will likely be short-term, due to available capital and an increase in distressed, high-quality targets.
At a glance: The Netherlands
Listed as Forbes’ fourth-best country for business, the Netherlands is a leading technology hub. With a tech company ecosystem worth $73 billion in total, the strength of the sector is evident. At its heart lies Amsterdam, home to many of the country’s start-up and scaleup companies.
The country has seen investment from over 400 active venture capital and private equity funds, with over €1 billion raised by Dutch start-ups from national and international parties in 2019. The Netherlands is currently the recipient of 8% of all FDI into the European Union.
Strong Developer Ecosystems Competing
StackOverflow data suggests that Europe is home to more professional developers than the US, led by Germany and the UK with more than a million developers apiece. Access to developers is often crucial for technology companies throughout their lifecycle. The same positive dynamic applies to the integrated, mature technology ecosystems in European technology hubs. Here, start-ups grow out of universities or established technology companies – and over time themselves feed talent and solutions back into the ecosystem.
The Thames Valley area outside London provides a great example of this. Start-ups formed by people peeling off from the European HQs of the big US tech giants, such as Microsoft, often feature in BDO UK’s Tech Track 100 of high-growth companies. Furthermore, said companies often go on to become part of the supply chain for the big tech companies where the founders used to be employed.
Data: State of European Tech report. Graph: BDO Global
However, the ecosystems are also engaged in intense competition, exemplified by tech company founders pointing to access to talent as a main challenge. While offshoring has proven difficult during 2020, our M&A and technology experts are seeing increased interest in near-shoring and exploring alternative business and organisational structures to combat the talent crunch.
Clear plans for how a company is addressing – or will address – challenges associated with access to talent is a cornerstone of any investment pitch.
At a glance: Germany
With a well-developed economy and a significant export market – the world’s third-largest – Germany has a lot to offer tech companies.
VC investments in Germany are flourishing. In 2019, VCs invested an all-time high €6.7 billion, up 45% compared to 2018, and second only to the UK in Europe. Approximately 570 start-ups and young companies were financed.
There is also a recognisable shift from VC investments dominated by Ecommerce to Fintech/Insurtech and Mobility, Software, Analytics, AI as well as Deep Tech. Germany is historically known as being home to traditional manufacturing technology, and 4.0 manufacturing (digital manufacturing) is also a flourishing technology sub-industry.
Public-Private Partnerships and a COVID Bounce-back
As part of the Digitising Industry-strategy, the European Union committed to investing more than $20 billion in areas including cybersecurity, robotics, and future factories by the end of 2020. Public-private partnerships (PPP) play a central role in the initiative, as is the case throughout many of Europe’s premier technology hubs.
One example is the Dutch Growth Co-Investment Program in the Netherlands, which invests equity alongside private investors into businesses moving past the start-up stage. During a year partly defined by slower investment, such schemes can function as a buffer that improves businesses’ resiliency and runway.
France also has a great deal of public and private assistance for businesses, both from large corporations and the government itself. However, navigating its more than 5,000 specific schemes for fast-growing companies in the tech space may be tricky; in part, because funding through PPP partnerships may hold consequences for taxation and financial reporting.
The strength of connections between public and private entities has played a part in European countries’ response to COVID. Semi-public financial organisations such as Bpi France, KFW (Germany), and the British Business Bank have supported tech companies through the pandemic, helping European tech ecosystems respond to the coronavirus crisis.
At a glance: London (United Kingdom)
The ability to set up a company overnight, open a bank account, and hire some freelance payroll talent contributes to making London and the UK attractive for start-ups and scaleups.
Universities and the big tech giants create an ecosystem of specialist talent, supply chains and spinoffs. For example, employees leave Google UK, going on to build their own business as part of Google’s supply chain or partnership network.
The investment landscape includes a network of crowdfunding options, angel investors, family offices, investor clubs, VCs, and PE firms.
Innovation Primed for Boost?
Europe is by no means a slouch when it comes to innovation. Germany provides a great example. With over €100 billion invested annually into research and development, it sits proudly in fourth place behind the US, China and Japan, cementing its reputation as a haven for innovation.
However, as exemplified by data on patents from the World Intellectual Property Organisation (WIPO), European innovation is often tied to traditional strengths, such as transportation, and still lags somewhat in areas like computer technology.
Data: WIPO. Graph: BDO Global.
Furthermore, a certain degree of risk averseness and focus on short-term profitability among European investors has hampered disruptive innovation. However, increased competition from more risk-tolerant overseas investors has changed the investment landscape somewhat in later years.
Covid-19 could have a profound impact on innovation speeds by increasing the need for digital transformation, thereby potentially growing the market for new approaches and solutions. Deciding on what technology to integrate – not to mention when and how – will be top-of-mind for management teams, who will, at times, be moving into unchartered territory.
For European tech companies, increased demand for solutions in traditionally strong areas like robotics and semiconductors, and basic needs like healthcare, education, food, and finance, could provide a strong sales argument when seeking investment.
At a glance: France
Thanks to a well-oiled market, stable economy, impressive infrastructure and talent pool, France offers appealing opportunities for businesses and investors alike. Furthermore, its stability and proximity to major European infrastructure make it appealing to companies.
In 2018, 58 countries invested in France – with the United States, Germany, UK, Netherlands, and Italy the highest contributors. Venture capital firms in France have invested amounts of up to €3.6 billion. French tech businesses tend to stay in the country for three to four years before expanding abroad, mainly because the initial support is favourable here.
Taxation and Regulatory Issues Remain
Founders across Europe point to streamlined tax regulations for technology businesses as one of the most significant priorities needing to be addressed.
This is also the case in France, where the prospects of singlehandedly wrestling with often archaic rules and regulations cause newer businesses trepidation. The digital services tax, recently implemented by President Macron, is an indication that the French government is looking to change how tech businesses will be taxed, creating a need for updating financial setups. Another top priority is widening the country’s VC market to reach critical size and attract the main venture market players. French unicorns’ growing numbers is a sign of this evolution. While still only ten today, with the newcomer Mirakl joining the ranks in September 2020, the target is 25 French unicorns by 2025
The tax situation is mirrored elsewhere, including – to some extent - in the UK, where the tax system’s intricacies also include pitfalls to watch out for (and incentives to harvest). But with some good independent advice, it should be relatively easy for most tech company founders to prepare for and address such issues.
Technology start-ups, scaleups and incumbents all face both opportunities and challenges when navigating issues such as those described in this article. BDO offices across Europe have technology and financial experts standing by to assist you reach your full potential. Contact us to hear more about our services and how we can assist you.