August 11, 2022

Lots of mixed signals: The state of early-stage funding in Europe

88% of attendees at a recent Sifted Pro Roundtable predicted some further falls in startup valuations, as opposed to “lots”

An image of a journalist taking notes at a press conference.

News of the funding slowdown, falling valuations and layoffs are dominating tech headlines. But it’s not all doom and gloom at the earliest stages — new funds continue to raise and exciting new companies emerge

We caught up with investors, founders and other ecosystem players about the state of early-stage funding at our recent Pro Roundtable — monthly industry networking forums for the Sifted Pro community, our top tier of membership. Moderated by Sifted journalists under the Chatham House Rule, discussions dive deeper into industry and sector trends covered in our investment-grade Pro Briefings. 

What did they have to say about what’s going on on the ground? 

1/ Deployment speed varies amid uncertainty

It may be a tougher fundraising market for founders, but for products solving a need it’s a “bonanza”, commented one participant. Pace at seed and Series A is still high and rounds are competitive. Now that bigger tickets are much riskier, VCs are looking earlier.


A legal advisor, active right across the startup lifecycle, said it was taking longer to get things done — in other words, term sheets are being dragged out as decision makers are acting more cautiously. Family offices in particular, under less pressure to invest from impatient LPs, are sitting on their hands. One CVC added: “We’re coming from a space where you have to be pretty confident in your bets. We’re holding tight to see things unfold over the next few months.”

88% of attendees predicted some further falls in startup valuations, as opposed to “lots”. There is a danger that such expectations could create a self-fulfilling prophecy, thinks a London-based investor, and waiting for valuations to bottom out could slow activity to a standstill. 

2/ Seasonality and data lags

All eyes are on Q3. 

Especially during August, the number of deals tends to slow as people go away on holiday, before rebounding in September. Early-stage founders know this and time their fundraising accordingly.

“I’m expecting there to be great companies that are going out to fundraise in September, and we’ll continue to see similar levels that we saw earlier this year,” says one participant.

There's lots of dry powder to deploy and now that Q2 data is starting to trickle through, the ecosystem will have a much better idea of where it’s at come next month. 

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3/ Investors are encouraging startups to embrace flexibility, or look elsewhere

The consensus from the roundtable was that VC funding remains the best financing option available to startups. Simply put, there’s way more of it: €19.7bn was raised by funds in H1 alone, according to Dealroom.

Meanwhile, investors are trying to stay flexible. VCs trying to avoid downrounding their portfolio companies are issuing more convertible notes, which can be deployed at a faster rate. Seed-stage startups with less than six months’ runway in need of bridge financing are at the mercy of term renegotiation, and will have to make promises to reduce burn by controlling costs. 

For founders, one size doesn’t fit all and all options are on the table. Neobank unicorn Qonto, what3words, Moneybox, Residently and SPOKE have all raised crowdfunding rounds in recent months. And Dealroom data shows venture debt fundraising on track for a record year. 

Some of the bigger revenue-based financing providers — another non-dilutive option — present at the roundtable have seen the number of inbounds rise.

One founder said: “The perception has been that the equity fundraising market is tighter. We’re seeing more variation in companies’ stages, but the mix of sectors hasn’t changed. It’s still B2B SaaS businesses with signs of product market fit. Expenditure has slowed down a little — two-month sales cycles are being stretched to three or four. Lots of startups need a bit of a buffer on their runway.”


4/ Moving the goalposts at Series A

Are investors and lenders behaving differently?

According to one participant, the focus is still on the team, their vision and what they want to build, before they cement their product-market fit and start to accrue customers.

At Series A, due diligence has become more stringent with greater appreciation of unit economics and capital efficiency — leading to lower and “more sensible” valuations, said an attendee. Ambitious companies can still jump through these hoops; the net is just narrower than it was before.

“There’s been a paradigm shift from growth to value, and emphasis on the path to profitability. Not necessarily reaching it straight away but how are you going to get there?”

In turn, this had led to lower ticket sizes. Series A rounds last year might have ballooned as steep as €50m, but most have reverted to typical €7m-15m levels, participants said. Such a correction could be beneficial moving forward, and make 2021 the outlier. Investors are pushing back on very high cash consumption plans, and modelling payback periods rather than funding growth for growth’s sake.

Yet the market environment is also determined by winning and retaining customers, which is holding firm for now. Startups that quickly achieve the €10m ARR milestone by building something people want will always be able to raise a healthy amount of capital, from both investors and lenders.

5/ Where’s the money going?

Across the six broader markets that Sifted Pro covers — B2B, B2C, fintech, healthtech, deeptech and sustainability — it's the latter that looks in the best shape so far, according to participants polled.

Sectors like healthtech and deeptech, which don't observe typical economic cycles in a similar vein to sustainability — often said to instead follow the “geologic cycle” — look to be less vulnerable this time than they were in 2008.

“There's a lot of momentum around wanting to solve very big problems, and I think investors want to be able to put money behind those”, argued one participant.

Seed-stage companies in these capital-intensive industries typically need 36 months of revenue-free runway, whereas B2B SaaS or fintech startups with an easier route to market can be comfortable with 18 to 24 months.

Economic downturns can usually be characterised by a fall in consumer spending. One of our industry experts pointed out that although it’s the "nice to haves" that suffer the most, spending bounces back after a recession, so now's the time to grab a bargain: “A lot of funds have 10-year horizons, so if there are B2C businesses out there with a strong product-market fit, market size, and if you’ve got the nerve it could be an interesting time to invest.” Some of the most successful consumer-facing European companies such as Spotify, Klarna and Vinted emerged stronger after 2008. 

B2C Series B funding looks set to fall off a cliff but is comparable with B2B investment at earlier stages.

Our next Pro Roundtable will focus on climate tech, to determine how recession-proof the sector is, and compare the potential of early-stage hardware and software technologies. Apply now to become a Sifted Pro member ahead of the discussion on August 23.

Jonathan Sinclair

Jonathan Sinclair is intelligence research manager at Sifted. Find him on LinkedIn