Last year was clearly a tough year for European VCs and startups — and fresh data shows just how deep the downturn was in 2023.
Deal value fell nearly 46% in 2023 from the year prior, with European startups raising €57.1bn compared to €105.1bn in 2022, according to a new PitchBook report on the state of European venture. The number of deals also dropped 20% last year to an estimated 10,797 compared to 2022’s 13,557.
Last year, staying alive was many startups’ focus — with raising money a bonus. “If you managed to bring money in at a flat valuation, it was already a great success,” Hendrik Brandis, cofounder and partner at German VC Earlybird, tells Sifted. Like most VCs, his firm was concentrated on “keeping our key portfolio companies afloat”, he says.
Importantly, though, while funding levels were far below the frenzied highs of 2021 and 2022, the long-term trend in European VC is one of growth: 2023’s deal value was still higher than pre-pandemic years and the 10-year average, according to PitchBook.
One area of investor enthusiasm did show up in the data last year: climate tech startups secured the largest deals last year, with Sweden’s H2 Green Steel winning the biggest cheque in 2023, receiving a €1.5bn investment to build its flagship plant.
But companies at the other end of the spectrum — those being acquired or going public — struggled massively last year. Exit activity plunged to the lowest level since 2013, with €11.8bn worth of exits in 2023 — some 70.9% lower year over year. The vast majority of those exits were acquisitions, with public listings down a whopping 90% from 2022.
More exits on the horizon?
The tricky part is that the IPO window may not reopen in 2024. “Weaker macroeconomics and low visibility mean that companies will be cautious about pulling the listing trigger in the imminent future,” Navina Rajan, senior EMEA private capital analyst for PitchBook, wrote in the report.
Others are more optimistic. Earlybird’s Brandis believes we’ll see the “shy start of new transactions” in the second half of 2024, including in his own portfolio — which includes German neobank N26 and AI startup Aleph Alpha. Brandis says Earlybird’s companies that have sufficient cash will continue to look to acquire other startups, and he expects deals will become more attractive as companies who are struggling to raise VC funding face more pressure (and see their valuations come down).
Others, like HV Capital’s Jan Miczaika, anticipate that corporates whose stocks have been performing well in recent months might start snapping up startups. “At the same time, the less successful ones could be pushed to acquire innovation and technology through M&A,” he tells Sifted — which could prompt the “M&A market to pick up again throughout 2024.”
VC fundraising also hit
But 2023’s lack of exits, and therefore a dearth of capital returned to limited partners, means VCs have had a harder time raising money for their own funds. Many struggled with raising capital in 2023, with fewer funds raising less money than the year prior. Just 141 funds raised €17.2bn — down nearly 52% and 39%, respectively, from 2022.
When times are tough, LPs tend to revert to what they know. And unsurprisingly, more experienced VC fund managers continued to take the lion’s share of funding last year, with seasoned VCs raking in 54.5% of all capital raised.
Some of the continent’s biggest funds lapped up a significant portion of that capital; funds of €500m and above — including the €1bn Nato Innovation Fund and €1bn Highland Europe growth fund — made up 28.4% of 2023’s total; almost twice the share in 2022, according to PitchBook.
VCs may be wishing to shake off the last year as we head further into 2024 — and some predict conditions will improve in six months’ time, with dealmaking and M&A picking up. At least, they hope.