By Nitin Dahad
Financing of the European internet industry has continued to progress by deal volume, but declined in value in 2016, according to the latest European Internet Industry 2016 report released by our sponsors Silverpeak LLP and based on Go4Venture’s Headline Transaction Index (HTI) data.
The key finding of the report is that in 2016, the slowdown in venture and growth was not as drastic as anticipated. The funding decline was more pronounced in Q3, but deal volumes rebounded in Q4. A softening market resulted in investors being more discriminating, placing a greater emphasis on a clear path to profitability. It also found that there is a renewed interest in deep technologies – primarily driven by artificial intelligence (AI) and big data, which is making very high demands on infrastructure.
Based on Go4Venture data, an index (see footnote) based on deals in Europe over $10m in the tech sector, the report found that the decline in value of internet deals in 2016 is driven by a decline in transactions greater than $75m.
However, the market remains active in the traditional European sweet spot, deals between €7.5m and €25m. In particular, 2016 saw a significant increase in both volume and value in this category, with average deal size remaining stable year-on-year. This suggests Europe is building a strong pipeline of tech companies that could drive a rebound in large fundraisings this year (2017).
Furthermore, the data suggests that large European transactions consist mostly of series A & B rounds (see chart below).
Key observations from this chart are:
- Volume of European Series A and B rounds significantly accelerated in 2016
- Series B is holding up well with steady value, and volume of deals up 53%
- Number of Series A rounds doubled year-on-year
- Late Stage round have compressed and are not as high as expected
- Deal volume fell by 41% and value by 58% year-on-year
- Dispersion in deal size is significantly higher for Series C and Late Stage
- The European market is finally more like the US market
- By number, 60:40 split in both markets between initial funding rounds (Series A and B) and follow-on rounds (Series C and Late Stage).
The data also points to the UK being the largest destination for internet financing in terms of both volume and value of all large HTI deals (i.e. greater than $10m).
The internet is of course a horizontal running across many industry sectors. So which sub-sectors are seeing most investments?
It’s clear from the data that fintech was the most popular in 2016, and particularly B2C fintech, with funding deals in Circle, Nutmeg and Property Partner for example. The key theme is the disintermediation of financial products, with notable fundraisings for P2P business models, nascent challenger banks, and crowdfunding and automated lending models diversifying into untapped markets.
In B2B fintech, investment has grown rapidly, at 80% year-on-year. The most popular theme is SME working capital – with companies like EZBob, iwoca, Lendix, MarketInvoice and Spotcap. There is growing attention for companies applying AI and automating traditional asset management processes – examples include Alphasense, Origami Energy and OpenGamma.
Marketplaces is another key sector, bringing transparency to previously underserved verticals or niches, such as luxury watches (Chronext), peer-to-peer car sharing and hiring (Drivy), and private university accommodation (student.com). While the average deal size of €26m reflects investor recognition of the winner-takes-all dynamic of marketplaces, a notable large deal in 2016 includes the €88.4m Series B for letgo.
Interestingly, strategic investors are most active in marketplaces, with around 50% of deals involving at least one corporate investor – such as Channel 4 (in The Rights Exchange), Peugeot Citroen (in Koolicar) and Vorwerk Ventures (in Juniqe).
Other key internet sub-sectors include travel, human resources and e-commerce.
In travel, demand for real-time travel information on-the-go and booking has seen travel companies focus on mobile offerings. Example deals have been in bus tickets (Busfor); single platform booking for integrated car, bus, flight and train travel (GoEuro); and local attractions and activities app (Musement). The report indicates there is a strong presence of growth equity investors in this sub-sector, with involvement in around 40% of deals. The average deal size is around €45m, with two ‘mega’ deals in 2016 each raising more than €100m (Skyscanner (which was since acquired by China’s Ctrip) and Cabify).
Growth in investment in the human resources sub-sector is fuelled by increasing casual use on mobile and better matching and profiling capabilities enabled by big data analytics and artificial intelligence (AI). In the long term, the AI element is expected to be more widely applied in screening candidates (using matching algorithms), remote assessment (using intelligent interviewing bots) and background checks (using automated ID verification). Key deals in this sector were for Jobandtalent, Onfido and Universal Avenue.
The e-commerce sector appears to be out of favour with investors, with fundraising deal volumes falling 50% in 2016. New entrants are focused on specific niches or verticals (such as Eve Sleep for mattresses and Hawkers for sunglasses). For established players, such as in fashion, Asia is seen as a key long-term end market for future growth, which is why IDG and Temasek backed Farfetch and its Asia-Pacific expansion plan.
In summary, the European internet industry held up well in 2016 based on larger financing deals of over $10m. While the number of transactions was up by 12%, the value of total transactions declined significantly by 40%. The accelerated increase in volume of Series A and B rounds indicates a good pipeline of deal flow for 2017.
In terms of sectors, the fintech sector saw the most number of deals. However, marketplaces, particularly in niche areas, and human resources and travel are emerging as growth areas, especially with increasing deployment of advanced artificial intelligence and big data analytics technologies as well as mobile first versions of traditional businesses.
To view the full Silverpeak European Internet Industry 2016 report, click here.
Note on the Go4Venture European tech Headline Transaction Index (HTI)
Go4Venture is the European deal syndication and venture/growth information platform, publishing the market renowned Go4Venture ‘Headline Transaction Index’ (HTI), which is based on the number and value of transactions over $10m reported in professional publications. The HTI is used to measure investment activity, and as an early indicator of the progression of the private market cycle for European tech companies. For more information, click here.
The Go4Venture Team