Global Investing Hot Spots

The rise of billion-dollar European unicorns

Elaine Pofeldt, special to
Corey Ford | Getty Images

When Michał Borkowski launched the start-up Brainly, in Krakow, Poland, in 2009, he and his two co-founders did something that once would have been extremely difficult. Brainly, which helps children research tough questions on their homework, raised the $500,000 it needed from private investors in Poland — a formerly Communist country that traditionally has not been a hotbed of Silicon Valley–style deal making — as well as from backers in Germany, where the start-up financing ecosystem is more mature.

Brainly went on to raise $9 million in series A funding from investors in the U.S., Berlin and Moscow in 2014. Fueled by that money, the "pre-revenue" start-up is focusing on growing beyond its 55 million users, who are mostly based in Russia. In a push to win U.S. clients, 10 of its 80 employees now work from an office in New York City.

"In Europe the funds are focused a lot on international traction," said Borkowski.

As more European investors put their own spin on the Silicon Valley venture capital model, Borkowski is among many European entrepreneurs who now find they don't have to look far from home to raise the money they need, even as they go after customers in distant markets, like the U.S.

Private equity investment in European companies — including both venture capital and private equity buyouts — rose 14 percent to €41.5 billion in 2014 (nearly $44 billion, as converted on Dec. 1), according to Invest Europe, which recently changed its name from the European Private Equity and Venture Capital Association (EVCA).

That amount is still smaller than the $50.75 billion that U.S. venture capital firms invested in 2014, as reported by the PriceWaterhouseCoopers and National Venture Capital Association 2015 Moneytree Report. The Moneytree Report's figures do not include buyouts, as Invest Europe's do.

Unicorns reaching sky-high valuations

"The U.S. is a more mature ecosystem. It's been around for a much longer time than the European start-up scene. That leads to a basic difference in risk averseness, differences in funding size and differences in valuations," said Jens Wohltorf, CEO of Berlin-based Blacklane, an Uber-like mobile service that connects consumers with professional drivers who have spare capacity. Blacklane has raised $22.53 million from German and Japanese investors, as well as Daimler.

But many observers believe European venture capital investments are only going to pick up. Many players have been inspired by Rocket Internet, a Berlin firm that builds online start-ups and takes equity, and more accelerators are opening in cities such as London and Berlin.

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"Players like Rocket Internet are doing an incredible job of showing how you can actually roll out any tech business in Europe," said Stefan Beiten, founder of investment firm Argo Ventures in Berlin.

At the same time, European governments, worried about youth unemployment, band together to spark more venture capital investing in a push to support job-creating start-ups. Venture capital is a key element of the European Commission's "Action Plan on Building a Capital Markets Union," released in late September, which aims to channel trillions of euros of financing into Europe's economy. The plan proposes the creation of a pan-European "fund of funds" to pump capital into fast-growing new businesses.

"I think Germany is catching up, and Europe is catching up quite fast," said Wohltorf.

Meanwhile, start-up activity has spread far beyond hubs of start-up accelerators like London. A record 290 companies in Central and Eastern Europe nabbed private equity and venture capital investment in 2014, according to Invest Europe. Funds across the region invested 1.3 billion euro ($1.4 billion), up 66 percent over 2013, according to data released in August. Meanwhile, there was a 32 percent uptick in exits in one year. That isn't confined to Central and Eastern Europe.

"There have been a number of great exits and IPOs," said Robin Eyben, a senior associate in the Berlin office of the law firm Morrison Foerster. "Companies are growing bigger and receiving more funding. It's no surprise to me if we have a client that started six months or a year ago and has 10 branch offices. They set up parallel markets very quickly, with sizable revenue and reach."

Sky-high valuations

Against this backdrop, valuations have skyrocketed. Currently, there are 40 "unicorns," with valuations of $1 billion or more, according to GP Bullhound, a strategic advisory and research firm headquartered in London. As in the U.S., that has led to some concern among investors.

"There is too much money right now looking for the right investments," said Argo Ventures' Beiten. However, the overvaluations tend to be concentrated at the start-up phase, with valuations remaining more balanced in Series A and Series B rounds, he added.

Will Europe's venture capital scene someday rival Silicon Valley's? For now, there remain some obstacles to creating one that is as unified.

Read MoreThe VC slowdown is here: Report

"The biggest problem with Europe is what Kissinger said once: Who do I call?'" said Beiten. "The biggest challenge is, how do you roll out one plan throughout Europe? You have to go country by country."

Finding the necessary talent to grow start-ups is also a challenge in markets outside of big cities like London.

"I wouldn't say it's a talent shortage when you look at the size of cities," said Richard Seewald, founder of Evolution Equity Partners, a growth-stage international investment firm based in Zurich. "It's more statistical, a function of how many people live in a small city like Zurich or Geneva and how many marketing and salespeople you can get for a particular role."

Fintech, foodtech and digital health

For now, though, these challenges haven't dampened competition among venture capitalists to back the next hot start-ups.

As in the U.S., financial technology has been a powerful magnet. "This is generally the area that has been most effective and [which] the most funding has gone into," said Bhanu Choudhrie, executive director of C&C Alpha Group, an investment group in London that often acts as an incubator for start-ups.

Fueling some of the excitement, Choudhrie noted, are successful rounds of financing by start-ups such as LendInvest and Funding Circle. LendInvest, a peer-to-peer mortgage platform in London, raised $34.26 million in January. Then, in April, Funding Circle, a peer-to-peer lender headquartered in San Francisco that facilitates business loans in the U.K., bagged $150 million in a Series E round in April, bringing its total financing to $273.24 million.

Read MoreEuropean tech firms will soon match US

"Robo-advisors" are also catching VCs' attention, said James Berkeley, managing director of Ellice Consulting, a London firm that helps midsize and larger firms accelerate innovation and who often works with insurance companies and large banks that invest in the fintech space. With a similar business model to the U.S. company Wealthfront, London-based Nutmeg, which raised $32 million in a Series B round in June 2014, now has a number of competitors automating investment services for consumers who need guidance on where to put their money. "The future is around making wiser and smarter decisions," Berkeley said.

Delivery Hero food-delivery service in Berlin
Source: Delivery Hero

The foodie craze, not unique to the U.S., has also helped a number of food tech start-ups take off. "Right now food is a huge thing in Europe," said Beiten.

One of the hottest start-ups, he said, is Hello Fresh. The German food-delivery venture just became a unicorn, with its 2.6 billion euros ($2.8 billion) valuation fueled by an investment by Scottish investment firm Baillie Gifford in September. Hello Fresh sends preselected ingredients for subscribers' meals to their homes.

Another start-up that's sizzling at the moment is Delivery Hero, a network of online food-ordering sites founded in Berlin and now active in 19 countries. It has raised $1.39 billion in 12 rounds.

Digital health start-ups, particularly those that use mobile phones for health-related purposes, are also galvanizing interest from European venture capital firms. One Swedish start-up that's attracting interest is Jojnts, which uses mobile phones to help patients through an evidence-based process of managing their arthritis, said Unity Stoakes, co-founder of StartUp Health, an accelerator in the digital health and wellness space based in New York City. Jojnts has participated in a coaching program run by StartUp Health.

"Each region tends to have a different focus, usually around an area of expertise that nation is really strong with," Stoakes said. "In Finland, for example, they are very strong with mobile health tools and applications. Nokia is there. They now have thousands of mobile engineers who are inventing new solutions."

To build on the energy, StartUp Health recently embarked on a partnership called StartUp Finland, a collaboration with the Finnish government to connect start-ups in Finland to U.S. investors and customers.

That bridge to the U.S. will be important, he said. "In the EU, you may have to think beyond your region in order to bring your solution to market," he said. "Really cross pollinating what you're building with other larger markets in health care to demonstrate traction is a priority for a lot of companies."

Armed with increasing amounts of local financing, more European start-ups may have a chance to do just that in coming months.

— By Elaine Pofeldt, special to