Angel and seed funding unaffected by financial volatility

Angel and seed funding unaffected by financial volatility

Insulated and Resilient: Angel and Seed Funding in Europe Remain Strong

by [Your Name]

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The startup market experienced a downturn in recent years, but angel and seed funding in Europe have proven to be remarkably resilient, according to a new study by Pitchbook. In the first half of 2021, median deal values and valuations in these early stages exhibited positive trends. This reveals the insulated nature of early-stage funding, which is less dependent on temporary market frailties and more focused on long-term returns.

The research shows that the median angel deal values saw an impressive increase of 28.8% compared to the previous year. Furthermore, the median angel valuation rose by 10.2%, while the median seed-stage valuation remained flat. These figures indicate that angel and seed rounds are thriving, as they are typically more removed from public markets. Companies in these stages are further away from maturity and exit, which allows investors to be less affected by market fluctuations.

Government Initiatives and Public Funding Image

Public funding programs, particularly in the UK, Ireland, France, and Benelux, have played a significant role in the growth of angel and seed stages. Initiatives like the Seed Enterprise Investment Scheme (SEIS) and the Fonds Commun de Placement dans l’Innovation (FCPI) have provided crucial support for early-stage startups. These programs encourage investors to provide funding to startups and offer tax incentives to mitigate the risks associated with investing in young companies.

The positive growth of angel and seed stages is expected to continue, as valuations in these stages are relatively insulated from near-term market volatility. However, the outlook for later rounds is less encouraging.

Challenges in the Venture-Growth Stage Image

At the venture-growth stage, challenges have arisen. In the first half of 2023, median venture-growth valuations and deal values were 18.5% and 16.7% lower, respectively, compared to the full-year medians from 2022. One factor contributing to this decline is the decreased participation of nontraditional investors, such as investment banks, private equity firms, and pension funds.

In previous years, these nontraditional investors boosted competition, round sizes, and valuations for venture-growth businesses that have operations similar to large public companies. However, their participation in deals dropped significantly from €27.8 billion to €18.7 billion in H1 2023, potentially indicating a shift in attention towards early-stage funding. This shift suggests that nontraditional investors are now focusing on smaller, earlier rounds where deal values are lower.

Navigating the Broader Funding Landscape Image

While early-stage funding shows remarkable resilience, the broader funding landscape in Europe remains immensely challenging. Down rounds, where company valuations are lower than in previous funding rounds, have become more common. In Q2, 26.2% of company valuations experienced a decrease. Notably, Turkey’s Getir faced a significant 42.4% decrease in valuation during Q2 2023.

The pace of unicorn activity has also slowed down. Currently, there are 134 privately-held startups in Europe valued at least €1 billion. However, only five new unicorns have emerged since the end of 2022, a notably lower rate compared to previous years. To mitigate this decline, Pitchbook recommends increased support from government funds for venture-growth companies.

Navigating Uncertain Exit Valuations Image

Exit valuations have experienced a plunge, with the median valuation dropping from €33.9 million in Q1 to €17.3 million in Q2. Macroeconomic factors, such as interest rates, are driving this decline. Pitchbook expects further corrections, which may be lumpier with a lag to public equities. This suggests that the decline in exit valuations may not have reached its bottom yet.

Industry stakeholders will need to exercise patience and prepare for an extended period of managing the industry’s loss of liquidity and capital. Despite these challenges, the positive trends in angel and seed funding, coupled with potentially increasing government support for venture-growth companies, offer hope for the European startup ecosystem to continue thriving amidst the market volatility.

It is crucial for investors, entrepreneurs, and policymakers to stay vigilant, adapt to the changing market conditions, and explore innovative ways to navigate the funding landscape to support the growth and success of European startups.

[Your Name]