Venture capital (VC) investment into European tech start-ups slumped sharply in the third-quarter due to uncertainty around Brexit, but an increasing number of U.S. investors are finding the region's growing firms an attractive place to put money.
A total of 2.63 billion euros ($2.89 billion) was invested across 577 completed transactions in the third quarter of 2016, representing a 38 percent year-over-year decline in capital invested and a 31 percent drop in deal count, according to data from analysis firm Pitchbook.
Still, investment in Europe's start-ups remains resilient when put into context. Pitchbook said that more than 2.6 billion euros of VC has been invested in Europe during each quarter this year, all of which are higher totals than any quarter between 2009 and 2014. And this year is still on pace to record the second-highest level of capital invested in the last decade.
The third-quarter decline in the region has been attributed to a number of factors including uncertainty around Brexit as well as broader macroeconomic factors.
"We've seen a distinct pause in (the third quarter) across exit activity, fundraising and investments. This may represent a return to normal, or we may be seeing some of the effects of Brexit as the VC community navigates an uncertain economic and political environment," Nizar Tarhuni, senior analyst at PitchBook, said in a press release.
UK sees Brexit hit
The majority of the European technology industry has been against Brexit and VCs have been cautious about spending in the aftermath. Many firms are still in the dark about what a Brexit could do to the free movement of workers from across the continent, and start-ups in the fintech industry are unsure about what it means for regulation.
Ireland and the U.K., however, continue to be the biggest countries for deals in Europe, grabbing around 35 percent of total funding activity. Just over 1 billion euros was invested across 207 deals in the countries, reflecting a capital invested figure that comes in relatively flat on a quarterly basis, and a total volume figure that is down just under 3 percent during the same time frame. At the current yearly run rate, 2016 is on pace to see over 4.4 billion euros invested across around 900 deals, which would put total financings on track to come in at the lowest level since 2011, according to Pitchbook.
US VCs attracted to Europe
But one bright spot is the fact that U.S. VCs are increasingly pouring money into start-ups in the U.K. and Ireland. Of the 207 financings completed during the third quarter, 136 involved participation from U.S. investors, accounting for 66 percent of total deal activity and the highest level of involvement by American VCs since 2008. In Europe as a whole, nearly two thirds of closed deals this year have come with U.S. investor participation.
"This is absolutely good," Richard Muirhead, partner at London-based VC firm Open Ocean Capital, told CNBC by phone.
"What we want is to have great entrepreneurs with great companies to get funded well. Investors form the U.S. is a nod to the caliber and potential for global success and underpinned by success in areas where Europe has been transformative – fintech (financial technology) and AI (artificial intelligence) for example."
Muirhead added, however, that there is a need for European VCs to grow in order to fund later stage start-ups.
