Report finds European VC deal value down 61% in H1 2023.

Report finds European VC deal value down 61% in H1 2023.

European Venture Capital Funding Plummets as Investors Cut Costs

VC deal activity peaked in Q1 2022 and has been on a steady quarterly decline since

Venture capital (VC) funding in Europe is experiencing a sharp decline as investors shift their focus from growth to cutting costs. According to a new report by Pitchbook, a financial data firm, European VC deal value in the first half of 2023 was 61% lower than the same period last year. The total capital raised in the continent was €8.9 billion, indicating a potential decrease of 37% compared to 2022.

The decline in VC funding can be attributed to several factors, including surging interest rates, high inflation, fundraising hurdles, and a subdued IPO market. These economic headwinds have forced VCs to adopt new investment strategies, shifting away from prioritizing growth at all costs. Instead, they are increasingly working with their startups to restructure operations and extend runways as far as possible.

While this prudent approach may have its merits, it also has negative consequences such as mass layoffs and hiring freezes at startups. For example, British unicorn GoCardless announced plans to cut 15% of its global workforce as of June 2023. Startups with lower growth rates that need funding to survive are likely to face down rounds and valuation cuts. Additionally, more companies are expected to seek capital despite lower valuations.

One prominent example of this trend is Getir, the Turkish food delivery app. In April, the company raised €435.5 million from Abu Dhabi state fund Mubadala at a valuation of €5.7 billion. However, just a year earlier, the same investor had injected €690.7 million into Getir at a valuation of €9.9 billion. The new funding effectively slashed the startup’s value by 42.4%.

The cautious approach taken by investors has resulted in a decline in both the value and volume of deals. Exit activity has reached decade lows, with corporate acquisitions becoming the most common exit option. Debt-heavy leveraged buyouts have lost significance in the current market conditions.

Furthermore, US participation in European VC deals has significantly decreased, with American involvement in VC deal value in 2023 down 69% year-on-year. The software sector, which played a crucial role in shaping today’s VC industry, has been especially hit hard by the downturn. In the second quarter of 2023, the value of software deals dropped by 71.8% compared to the previous year, surpassing any other sector’s decline.

Pitchbook’s analysts compared the current situation to the dot-com bubble of 2000, stating that the industry is going through a reset phase after the bonanza of deals in 2021 and 2022. However, there are still signs of hope. The investment boom in generative Artificial Intelligence (AI) could potentially drive dealmaking for software startups operating in this space.

Sectors that are less cyclical, such as biotech and pharma, have shown resilience in the face of the economic challenges. Ascend Gene And Cell Therapies, a London-based startup, raised €120.3 million in May for its gene therapy technology, demonstrating the ongoing opportunities in these sectors.

Pitchbook’s data indicates a trend towards larger deals, often as follow-on VC investments that provide extra runway to startups. Venture growth stage and late-stage deals have gained a growing share of the VC deal count, while the proportion of angel and seed stage deals has shrunk.

Although there is hope for a recovery, particularly in the US where the Federal Reserve has hinted at an imminent end to monetary tightening, the situation in Europe may differ. High inflation in Europe has the potential to prolong the contractionary cycle, further complicating the process of securing funding.

Median deal size has doubled in recent years and sits at €2.1m for 2023