Europe suffers a big hangover after the technological investment party of the 2020-2021 period. That said, compared to pre-pandemic levels, venture capital investment in European startups has increased, historically speaking, and reached $60 billion, according to a new report. However, the anomaly of increased investment in the wake of the pandemic stands in stark contrast to that growth and has created significant headwinds, although there are signs of “green shoots.”
Orrick Global Law Firm analyzed more than 350 venture capital and growth capital investments its clients completed in Europe last year.
The total capital raised in Europe was $61.8 billion. 2023 marked a reset and a major correction in investment levels globally. Of the three major global venture capital regions (Europe, Asia and North America), Europe is the only one that will surpass 2019 levels in 2023.
According to the report, with Europe at “record levels of dry powder” and “producing more new founders than the United States,” funding remains sluggish.
Only 11 new unicorns emerged from Europe last year, the fewest in a decade, and a growing number of unicorns lost their status.
Climate Tech overtook FinTech as Europe’s most popular sector
AI’s share of total investment in Europe soared to a record 17%5.
Orrick found that investors, emboldened by the drop in funding, are “tightening the screws,” exerting greater control over investments, with founders being required to provide guarantees on 39% of venture deals.
There was a clear drop in later-stage financings, transaction volume declined, and founders were forced to opt for other strategies, such as alternative financing methods or races for revenue and profits.
There was an “unprecedented surge” in the ability of new investors to enter the technology, as founders sought new lead investors, and an “uptick” in convertible debt, SAFE and ASA, with convertible financings set to account for 23 % of rounds in 2023.
Investors generally focused on managing their existing portfolios, secondary transactions increased, and SaaS and AI remained popular. Interestingly, the number of investments in FinTech decreased.
European technology investment agreements for 2023 (Orrick)
At each stage, deal value declines, with the most dramatic drop being in later-stage deals.
The value of early-stage deals fell 40%, even though early-stage investors remain the most active.
There was a decline in ‘mega waves’ exceeding $100 million or more. However, the IPO landscape showed “signs of life” with the $55 billion ARM IPO, and M&A activity showed “green shoots.”
In the UK, venture capitalists are under pressure to generate profitability, which is likely to lead to increased demand for secondaries, increased M&A activity and consolidation.
In France there has been a shift from “founder-friendly” terms to more investor-friendly terms, in stark contrast to the UK where the opposite is true.
In Germany, a growing demand for liquidity by LPs is expected to “drive the technology M&A process.”