THE LAND of LIQUIDITY: Europe & US Divergence. Part 4.
A guest piece by Owen Reynolds of Teklas Ventures, the venture arm of the FO associated to Teklas.
This piece is a guest piece written by our good friend Owen Reynolds from Teklas Ventures, the VC arm of a family office associated with Teklas.
Owen is an armchair economist and leads Teklas Ventures, the venture arm of an automotive family office, covering both venture fund investment and direct industrial tech investment strategies. He is a former US Peace Corps Volunteer, founder of a sustainable construction company, and economist at the US FERC. After his MBA, he started in impact investing at an Omidyar fund in the US, then spent two fund cycles with Expon Capital in Luxembourg.
The European tech startups I talk to on a daily basis are almost always aimed towards the US. I should admit I also advice most startups to target US markets. But there are real tangible reasons.
On the surface, America is an easier target. As a large, high-disposable income country with a single language and common regulators, the rules of the game for a Delaware C-Corp are plain vanilla. US corporates are more acquisitive and more likely to create partnerships with even early-stage companies, further feeding its culture of risk.
But perhaps more importantly is that this is the land of liquidity.
Stocks at Scale
Spearheaded by the NASDAQ and the New York Stock Exchange (NYSE), the US equities markets are the largest and deepest in the world. The combined value of the US equities market was estimated at $55 trillion at the end of Q2 ’24.
According to a recent rendition from the Visual Capitalist, the S&P 500 alone makes up a full 51% of the global equities markets. This index, the largest 500 companies listed across these US markets is worth $48 trillion and includes all of the trillion-dollar companies in existence with the exception of Saudi Aramco and TSMC.
Even a year ago, the US markets only made up 42,5% of all the world’s equity valuation, as the graphic below highlights. It was also home to 39 of the 100 largest companies in the world, and surely more today.
This also shows the US’s whopping plurality, which dwarves the EU’s 11,1% and the UK’s 2,9% of global equity markets. Combined, the dozens of stock exchanges on the Continent and British Isles make up only a third of US equity volume.
The graphic above also indicates which types of companies are listed in each market. US earnings growth in equities, at 10%, is twice as high as Europe’s. Read: US markets tilt heavily towards high growth companies.
A supporting indicator is the turnover of the top spots being far more fluid. For example, of the top ten US listed companies in 2000, only Microsoft retains a spot in the top ten today. In Europe, for example, most of those companies have been on the top ten list for years.
There are other articles you’ll find that list decreasing business dynamism indicators in Europe. Decreasing job reallocation, decreasing share of employment in young firms, and less responsive businesses after economic shocks are among them.
Mergers & Acquisitions
Having buoyant markets has an impact on smaller exit scenarios, as well. The Monetary Premium described in Part 3 of this series means that listed corporates have access to more capital at a higher valuation. This gives them more maneuvering room to acquire adjacent or competing businesses.
The result is that European M&A activity is significantly lower. We intuitively know this is the case, but the divergence is wider than I even would have assumed.
Pitchbook can narrow down M&A activity to compare just those companies that had strategic acquisitions and mergers of equals. This excludes traditional private equity buy-outs, venture- and private equity-backed M&A, and reverse mergers.
The run-of-the-mill median US deal size in 2024 is €37,6m. This is 3,8x the EU median deal size of €9,9m this year to date.
It’s no surprise that the market is smaller in aggregate, as well as per deal. US dealmaking has decreased by 66% from a top of €607b in 2019 to €207b in 2024 year to date. EU dealmaking is down 85% from a top in 2019 (about the same as the US’ new bottom) from €218b to €33b today.
United States M&A Activity 2013 – 2024, Pitchbook
Europe M&A Activity 2013 – 2024, Pitchbook
Why Does It Matter?
It initially all seems academic—numbers too big to make a difference to small startups. However, these dynamics change the incentives for companies making decisions even at the earliest stages. Where to locate, where to hire, which partnerships to accumulate, which customers to target and more are up for grabs.
The dollar reserve disparity has set up US markets to gear towards uber-productive technology-driven companies. The monetary premium boosts those home assets by funneling trillions of future cash flow towards capital markets. And the result is that the M&A activity in the US, especially in the tech sector, greatly outpaces Europe.
This is also why most European venture investors encourage their companies to target US markets. Even in the worst of times, it remains the land of liquidity.
This is part of a series on the divergence of the EU and US economies and the impact on innovation and startups from one investors perspective. Feel free to read Owen's previous posts on Culture, Reserve Dollar Discrepancy, and Monetary Premium & Investment.
