So far this year has seen 50%+ more European tech M&A deals above $50m vs. last year, according to Magister’s recent analysis of European Tech M&A (see table below). A big jump in valuations and strong international buyer interest are driving the market. Amazingly VC backed companies are only 15% of this total. Are European VC’s missing out on a liquidity bonanza?

Part of the reason for very low VC backed M&A exits is IPO’s; the stock markets in Europe were finally open to a few companies. However, European stock markets are extremely fickle (witness the recent sharp drop in e-Commerce as one example).

Another reason is ”growth inertia” amongst the VC community. Many VC backed companies are now growing quickly again, as Europe’s economies improve, and VCs have every reason to just let them grow.

We would challenge this attitude. We all know that valuations go in cycles. NASDAQ sits above 4,000; remember its peak at 5,000+ was followed by a nightmarish crash. Inevitably most $50m+ European tech sales go to US buyers, so NASDAQ is hugely important as a barometer of buyers’ ability to pay more.

We think that a number of VC investors in Europe will fail to take advantage of the valuations available today. The result in a few years time is most likely to be larger portfolio companies, but will they really be worth more in 2-3 years time? Arguably they could be worth less even if they are bigger.

In times like these, VC’s with just enough of a ”trading mentality” are far more likely to return significant cash consistently to their LP’s, something Europe’s VC industry has historically failed to do.

Posted by Victor Basta @MaExits

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