Last year, Asian capital into European tech reached an all-time high of $58 billion. According to M&A advisory firm, Magister Advisors, 2017-18 could see a doubling of that, entirely transforming the European tech ecosystem as the focus shifts away from Silicon Valley.
2017 will be a watershed year for Asian investment into European tech, and according to Magister Advisors, there are several factors combining to set the stage for this “tech-tonic” shift.
Asian investors will rethink committing more money to the US
Asian corporates and investors are likely to be less welcome in the US in the next four years.
Much of the sentiment and rhetoric since the US election should concern any Asian corporate. There is a feeling Asian corporates have benefited too much from US trade, and this needs to be redressed. Irrespective of how true or not, the fact is Asian corporates and investors are likely to be less welcome in the US in the next four years than in the last eight. They are also less needed. Significant private equity and the prospects of offshore corporate cash flowing back into the US offers the prospect of huge private liquidity. Finally, US tech valuations aren’t exactly cheap: they are at all-time highs in many sectors.
There is a 25 per cent discount on UK tech
Brexit won’t hamper Asian investments in UK tech.
A $/£ rate near $1.20 is near unprecedented on a trade-weighted basis. While currency doesn’t drive basic investment decisions, it does make previously-logical UK investments 25 per cent cheaper than a few months ago. EU risks that drive this depressed rate are of little consequence to many Asian investors; they are interested in leveraging UK tech assets in Asia, not elsewhere in Europe. Hence the 25 per cent discount is real for them.
There are more growth tech companies in Europe now than ever before
European unicorns generate more revenue on average than American unicorns
There are nearly 50 European tech ‘unicorns’ valued at or higher than $1 billion, up sharply from even five years ago. European unicorns are much better developed than US counterparts; revenue averages $300 million, versus $100 million for US unicorns. While these groups aren’t precisely comparable, the difference is indicative of a European trend away from hype valuations, resulting in performance driving value more than just potential. We see this mind-set having created dozens of sizeable and mature tech assets in Europe, making that sector much more investable than a decade ago.
There’s a gap in the market for European late stage growth capital
While a similar number of tech companies receive initial funding in both Europe and the US, the funding gap is yawning in later stage rounds. For Series C and later funding rounds, total US capital invested in tech companies in 2016 was $26 billion. In Europe that number was only $2 billion. As more European companies mature, this gap will be closed by Asian investors, Magister speculates, as nature truly abhors a vacuum.
Emerging European tech leaders will need funding this year
According to Magister Advisors, many of the European tech companies that have been funded recently have funnelled that capital to achieve scale quickly, not necessarily to break-even. Because of this, the firm believes an unprecedented number of quality tech companies in Europe will need at least one more significant funding round of around $30 million from 2017 onwards. While European VC has increased significantly in recent years, the capital requirements for these companies is happening faster than the local VC industry can mature to handle it. This funding gap will be filled in part by greater Asian capital.
Asian corporates have already bought platform assets in Europe
2015-16 saw unprecedented Asian M&A of platform assets in Europe which will be expanded through follow-on investment and acquisition. From ARM plc being acquired by Softbank, to Midea’s investment in German robotics firm Kuka, to Tencent acquiring Supercell, down to a broad range of $100 million+ acquisitions completed or in progress, Asian corporates are building long-term assets in Europe which will support further capital inflow.
European tech is already more international than the US, making adaptation for Asian markets easier and less risky
European tech companies start out by thinking global, making it easier to scale and more attractive to foreign investors.
Because of smaller home markets, European tech companies build platforms and models which are inherently more international than US counterparts. For example, in fin-tech European companies build multi-currency and multi-lingual capability in their products day one. European tech companies think nothing of creating multiple overseas operations early in their development, something US companies have little need to worry about. This results in European tech targets that are inherently much ‘safer’ to internationalise, in turn increasing their attractiveness.
The firm believes that the time to look East starts now, as foreign investment from Asia may accelerate the development of the European tech ecosystem far faster than it could ever develop by looking West.