The last few years have brought trying times for much of Europe’s tech ecosystem and in a moment of economic turmoil, it can be difficult to know what is normal when it comes to fundraising terms — especially for founders who lack previous company-building experience.
To give clarity to how term sheets have changed — or not, a new report from HSBC Innovation Banking has tracked the trends from the past year.
“[We wanted to] demystify term sheets and empower founders on what the key terms are and what market standards are,” says Glen Waters, head of early stage Banking at HSBC Innovation Banking UK.
The report draws on aggregated data from 426 term sheets signed across 2023, with 95% based in the UK and 5% elsewhere across Europe.
The value of data
For Natasha Jones, founder at Metris Energy, a key draw of the report is understanding what matters to VCs.
“Getting this benchmarking data helps put a line in the sand, and helps people focus on the topics that there'll be more wiggle room on,” she says.
There historically hasn't been much data available to be able to compare how you're doing versus others on the term sheet aspects.
She adds that the report helps indicate what isn’t normal, so first time founders can assess if the fund is behaving according to market standards.
“On both sides of the table, there historically hasn't been much data available to be able to compare how you're doing versus others on the term sheet aspects,” Jones says. “That means that the rumour mill continues, where you just ask your friends and contacts what they're doing and try and at least benchmark yourself according to that.”
So, as the market starts to show signs of bouncing back, what should fundraising startups be aware of when signing their next term sheets?
1/ There’s been no quantum shift in deal terms
Despite a tough economic climate, the report found that term sheets, on average, did not get more investor friendly as a way to hedge against risk and have stayed broadly in line with the year before.
“While there has been a slowdown in deal volume and activity, term sheets in general did not become more aggressive — even though there was less capital available,” Waters says.
2/ Foreign investors have jumped on board
Later stage startups have seen an increase in international investors keen to get on the cap table — positioning Europe as an attractive geography for VCs elsewhere in the world. The number of domestic investors at Series C rounds and beyond (£50m+) was matched by the turnout of international investors.
We are starting and scaling great technology companies and foreign investors want a piece of that.
At the earlier stage, UK investors dominated with 70% of the seed stage deals.
“The reason why these investors are coming to Europe is because they are seeing the opportunity,” says Sophie Winwood, cofounder and CEO at WVC:E and operating partner at Foxe Capital. “We are starting and scaling great technology companies and foreign investors want a piece of that.”
She adds that having a US investor comes with advantages.
“The US market is huge and very interesting to a lot of European founded companies, but it's a difficult bridge to cross in terms of the navigating regulatory issues and different consumer behaviours,” she says. “So, having an experienced US investor becomes [...] a win-win on both sides.”
3/ AI and climate lead the pack
These two hot topics saw the greatest increase in term sheets signed across sectors, representing 19% of the pool, compared to around 9% in 2022. Perhaps unsurprisingly, AI jumped the most, tripling from 3% to 9%.
More broadly, healthtech, climate tech and AI collectively represented 30% of term sheets surveyed, up from 21% in 2022.
On the other end of the list, fintech saw a 5% decline in the share of overall term sheets surveyed, dropping from a 15% to 10% representation.
4/ DEI grows on the priority list
11% of term sheets in the report included a clause dedicated to diversity and inclusion (DEI) pledges. It comes after a steady year-on-year increase in focus: in 2022, 8% of term sheets included a diversity clause and in 2021, it was just 1%.
However, there were differences depending on funding stage. Seed, Series A and Series B rounds all saw an increase in the DEI inclusion in terms, while Series C+ rounds dropped from 19% to 10%.
5/ Secondaries could become the norm
“A trend that we should definitely, as an industry, continue to watch is secondary transactions being part of the term sheet and/or deal,” says Winwood.
This will become a more common part of the industry as a whole and we'll start seeing that in being standardised in term sheets.
She thinks secondaries are becoming “more normalised” for three reasons:
- Investors wanting to get some liquidity back from their investments in the short term, so they can show some to their LPs.
- Founders, many of which have been running their businesses for a very long time given the expanded timeline to exit, wanting some liquidity to motivate and support them as they continue scale their business.
- Early angel investors who would like to get some capital back from this illiquid asset.
With secondary funds popping up, such as London investment firm Isomer’s launch of a £100m secondaries fund in April, Winwood says the term could be one for founders to become accustomed to.
“I believe that this will become a more common part of the industry as a whole and we'll start seeing that in being standardised in term sheets — rather than just being a side negotiation,” she says.
Explore the full report here.
