It’s been a tough year so far in the venture capital world — and funds are taking the hit of a hard reality check.
New data from industry body Invest Europe seen by Sifted shows that European VC funds raised €7bn in the first half of 2023 — roughly half of the €13bn raised in the same period last year. VC investments into startups also halved compared to 2022 to reach €6bn.
Amid the slowdown, investors have rarely been more pessimistic, according to new research by the European Investment Fund (EIF) published today. The survey of almost 500 funds found that market sentiment is at a record low.
Key challenges include a blocked exit market and difficulties in raising funds — made even harder, according to VCs, by the lack of domestic LPs.
Here are the key takeaways from the report.
70% of VCs say the fundraising environment is bad or very bad
A whopping 70% of VCs surveyed describe the fundraising environment as “bad” or “very bad” — and almost two-thirds think it will get worse or remain the same in the next 12 months.
Not helping is the impact of high interest rates on LPs, who might shift their focus to asset classes that are less high risk. A majority (79%) of fund managers fear that if interest rates remain high, LPs’ appetite for venture capital will shrink.
28% of VCs say their investment activity has decreased
VCs are still investing, but at a slower pace. A record 28% of VCs say their investment activity has decreased — a higher proportion than during the Covid-19 crisis.
The slump in investing activity also means that it is harder to find co-investors, an issue described as “very difficult” or “difficult” by almost 40% of respondents.
Expectations are high that this will change over the next year. Well over half of VCs (58%) expect investments to pick up again — a much more optimistic outlook than last year when this was the case for only 36% of respondents.
Nearly half of VCs say competition for deals has decreased
With most investors less inclined to distribute term sheets, deals have become cheaper and less competitive. Almost half (45%) of VCs say competition for companies has decreased and 77% report that entry prices are lower.
VCs also say that AI, deeptech and cleantech are the most relevant verticals for future investments — and that Germany, France and the UK are the most promising countries to invest in over the coming months.
Two-thirds of VCs say portfolio company valuations have fallen
Portfolios, in short, are not doing well. Two-thirds of VCs — a record high — report that portfolio companies’ valuations have decreased. And a significant 43% of respondents say that at least 1% of their portfolio companies might file for insolvency.
The biggest challenge facing portfolio companies is access to finance, followed by recruitment and customer acquisition and retention.
Exits have gone from bad to worse. According to 72% of VCs, the exit environment has significantly deteriorated in 2023 — although half think it’ll get better next year.
The IPO window has been firmly shut for the past 18 months, while insolvencies, secondaries and sales to financial investors have grown. Exit prices, say three-quarters of VCs, are down.
With insufficient liquidity in the IPO market and a lack of buyers, exits remain a significant pain point in European VC.