European VC fundraising at lowest degree since 2015

It’s been a difficult start to the year for technology investments. European VC fundraising is on track to record its lowest annual total since 2015, according to a new report.

Research by PitchBooka financial data company, found that European VC funds have raised over €20bn in each of the last four years – but only €3.4bn in the first quarter of 2023. The total value of VC deals fell 32% quarter-on-quarter (QoQ) to €11.8 billion. Deals, meanwhile, fell 19%.

Pitchbook called the quarter “the first significant decline” from the pace of the past four years.

“The VC ecosystem may finally show the impact of difficult fundraising conditions,” the study authors write. “Capital investment in startups has slowed and if subdued exit markets continue, returns will be stifled and long-term capital commitments could be impacted.”

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Analysts noted that exit activity had also fallen sharply. Amid unfavorable macroeconomic conditions and weakening valuations, major VC exits virtually halted in the first quarter. Pitchbook expects activity to remain quiet for the next several quarters.

In the first quarter, the preferred exit route was through mergers and acquisitions (M&A). Four of the top five exits in the quarter were through mergers and acquisitions. Such exits tend to be smaller but offer more security and synergies — which can be crucial for startups facing economic uncertainty.

Meanwhile, stock market listings have become less attractive due to the dangers of unsettled markets. According to Pitchbook, they are unlikely to pick up until inflation cools, rate hikes stop and business confidence resurfaces.

In the first quarter of 2023, European VC activity generated just €1.6 billion in exit value – a 69.6% decline from the previous quarter.

Pitchbook’s report reflects the findings of other analysts. According to a study by Dealroom, just over 2,300 European funding rounds were closed in the first quarter of 2023 – the lowest number since 2016.

The decline comes amid concerns about high inflation, monetary tightening and the stability of the financial system. In these challenging economic times, investors and operators are prioritizing capital efficiency and robust paths to profitability.

As the focus shifted from growth to the cost base, large layoffs were implemented in the first quarter. Pitchbook expects this trend to continue as companies look to extend their runways in 2023.

Despite the gloomy mood, there are signs of hope in emerging tech areas. Especially Europe outperformed the US in private space investment in the first quarter, while quantum calculated a continental record $220 million, according to Dealroom.

Pitchbook is also optimistic about the prospects for the resurgent energy sector. Short-term interest and long-term climate goals in Europe create new opportunities for financiers and startups in the industry.

“We believe transaction activity in the clean energy sub-sector will continue to increase as renewable energy sources are developed globally,” said Pitchbook analysts.

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