Findings highlight despite global pullback on growth, the timing and conditions are ideal for U.S. venture-backed companies to tap Europe’s $18 trillion GDP economy
Frontline Growth, a growth-stage venture capital fund for U.S.-based software companies expanding into Europe, today announced the release of its second European Expansion Report. Published three tumultuous years after the inaugural report, the data confirms that even with capital markets retreating and performance being measured by paths to profitability, Europe remains a critical growth market for any U.S. software business seeking to become a global, category-leading company.
In today’s economic climate, many venture-backed startups have abandoned the ‘growth at all costs’ mentality, focusing instead on efficient growth and controlling costs. While a recalibration to fundamental business metrics is healthy, it has led many U.S. companies to halt their geographic expansion plans. By de-prioritizing European expansion, companies forgo capitalizing on a massive, new market – one that represents one-third of all global revenue for public software businesses. Additionally, given the strength of today’s European technology ecosystem, companies that ignore their competition in this region run the risk of losing valuable market share.
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“When the overriding message is ‘conserve cash and preserve runway,’ prioritizing European expansion can seem counterintuitive. However, for companies that have strong product-market fit, a proven go-to-market motion, and have seen early demand from overseas, our report highlights why now is exactly the time to expand, particularly if they have an eye towards an IPO,” said Brennan O’Donnell, Partner at Frontline Growth.
Frontline Growth’s 2023 report reveals four key expansion trends that have emerged over the past few years:
- The consequences of delaying European expansion are higher than ever. Venture capital raised by European companies has increased tenfold over the last decade, scaling to over $90B in 2022. The number of companies being founded in Europe is now close to that of the U.S., and the quality of these companies has matured significantly. Combined, these factors make Europe a highly competitive market and the decision of when to expand to Europe more critical than ever.
- Europe accounts for over 40% of global revenues for top performing U.S. companies at IPO. For category-leading companies, Europe continues to represent a huge contribution to total revenue, with the top-quartile of companies reaching at least 28% and most successful software companies topping over 40% – that’s roughly $80M ARR for a typical company going public today. When preparing to go public, companies with European revenues arrive at IPO growing 5% faster year-on-year than they would with their U.S. business alone.
- Capital market volatility is a strong predictor of European expansion rates. Throughout 2020, there was unsurprisingly an expansion downturn as the pandemic hit, but in 2021 and 2022 levels quickly picked back up as companies looked to accelerate growth and leverage a seemingly limitless availability of capital. Interestingly, Engineering-focused European expansions remain somewhat stable, whereas Sales-led expansions are generally more volatile and reactive to market conditions.
- London, Dublin and Amsterdam are increasingly dominant as headquarter locations. These three cities now account for 90% of first-office locations for Sales-led expansions – up from 57% only 10 years ago.
“Expanding internationally can be daunting, but Europe has been an important part of Lattice’s growth over the past several years,” said Jack Altman, CEO of Lattice. “Frontline was instrumental in helping us understand the European market and navigate expansion. They are easily one of the most helpful investors I’ve ever worked with, and their latest report data is a goldmine for CEOs with global ambitions.”
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Frontline Growth’s 2023 European Expansion Report includes analyses of more than 200 venture-backed software companies that expanded into Europe since 2010, and over 300,000 data points on these companies’ hiring patterns, headquarter location selections and leadership hires. The report also provides insights from dozens of EMEA General Managers and international VPs, and detailed perspectives on topics including expansion timing, product localization, go-to-market strategies and more.