It's unclear, though, if they were successful in catching it. While trends haven't completely reversed since the prosperous days of 2021, they have gotten very close.

Nevertheless, during the past ten years, the European startup industry has expanded quickly. PitchBook data shows that over that time, deal volume has more than doubled, and several success stories, like Klarna, Deliveroo, and Arrival, have occurred. It seems sense that North American venture capitalists would like a piece of that market, but it hasn't been simple to establish a long-term, profitable plan there.

In recent months, major players such as Coatue and OMERs have formally exited the region, and the venture funds that have stayed are noticeably less active. According to Navina Rajan, a senior analyst at PitchBook, the number of agreements decreased by 39% and the entire value of European deals involving at least one U.S. investor fell by 57% in 2023 compared to the previous year. In contrast, during the same period, deal count decreased by 31% and overall deal value decreased by 46%.

There are subtleties in the European startup scene that present challenges for investors from North America. Every European nation has its own language and occasionally its own currency. Investing in Texas and California is not the same as investing in both Romania and Italy. Furthermore, networks created by startups and institutions in Europe differ from those in the United States.

When combined, all of those subtleties create a market that is difficult to navigate even in the best of times, not to mention the recent downturn. Thus, it makes sense that investors from North America have had difficulty establishing a firm foundation while attempting to cross the Atlantic.

Better expressed than done
The fact that the European VC market has expanded along with North American VCs' interest in the ecosystem is another factor contributing to their difficulties in the European market. The rivalry for the greatest offers is considerably fiercer now, particularly in the early phases when prices are lowest and there is the highest chance of making a significant profit.

According to Sten Tamkivi, a partner at the Estonian operator-led venture fund Plural, TechCrunch, the startup industry has undergone significant transformation since he first entered it ten years ago. He stated that early-stage European entrepreneurs no longer automatically looked to the United States for investment. "In the last ten years, there has been a significant shift in early-stage investing towards local players; in Europe, 80% of capital deployed is European," he stated.
 

Working with a local investor who would be familiar with the subtleties of the local markets makes more sense, Tamkivi added, unless a firm plans to grow into the U.S. immediately instead of debuting in other European countries first. He went on to say that because there isn't nearly as much venture funding available in Europe in the late and growth stages, firms can attract these investors later on while putting an early emphasis on localization.

Justification for continuing

Even with all of those obstacles, however, American businesses are still making an effort to establish themselves in the area. Andreessen Horowitz and IVP opened offices in London in 2023, but other firms withdrew.

Regulation is one of the main reasons why many businesses continue to attempt to open. Popular startup industries like artificial intelligence and cryptocurrency are still operating in the murky regulatory landscape in the United States, and there is no clear end in sight for these sectors. This makes it more difficult for investors to identify which companies are compliant, or even if they will be in the future, and for startups to develop.

Though they aren't as kind to businesses in these emerging areas as they could be, European authorities are at least explicit about what they want to see, so that's not to suggest that they have everything worked out. This is perhaps the main reason why A16z's London branch is so focused on blockchain and cryptocurrency.

Additionally, U.S.-based LPs have been becoming more and more interested in Europe. In an effort to establish a relationship that might eventually result in an investment, Tamkivi and his group approached U.S. institutions when Plural set out to build its first fund in 2022. To their astonishment, though, a large number of them chose to invest in that fund and write even larger checks for the company's most recent Fund II.