The start of 2023 was difficult for European startups. In the first quarter of the year Business activity slowed, valuations fell and exits occurred remained subdued according to new studies.
PitchBook analystsa financial data company, found that investors’ priorities have shifted from growth at all costs to profitability.
After a boom in VC activity that lasted into early 2022, reports of slower growth rates, downsizing and tighter funding conditions emerged. As a result, due diligence processes have lengthened, with sales, valuations and runways coming under closer scrutiny.
Nalin Patel, the report’s author, noted that investors across the board have become more selective.
“We’re seeing declines across all funding stages, sectors and regions,” Patel told TNW.
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Deal value and unicorn count fell 87.5% and 65.5%, respectively, from Q1 2022.
There were few glimmers of hope in the report, but some shone through the gloom. Angel valuations have been robust, with an average value of €3.7 million – up from €3 million in 2022.
Early adoption may be more difficult for startups in the current climate, but Pitchbook anticipates less mature companies will be protected from the turmoil hitting high-cost companies.
In fact, current market conditions could force investors to focus on ideas that have the potential for long-term success.
As such, Patel believes seed and early-stage companies in long-term sectors like clean energy may remain attractive investments. Overall, however, the financial landscape remains treacherous.
“Companies have slowed down in recent years and valuations across the market are cooling,” Patel said. “We expect valuations to become even stronger as funding needs continue this year.”