It’s been a tough start to the year for tech investments. According to a new report, European VC fundraising is on pace for its lowest annual total since 2015.
Research by PitchBook, a financial data firm, found that European VC funds raised over €20bn in each of the past four years — but only €3.4bn in Q1 2023. Total VC deal value fell 32{1652eb1ffa4184925f6a63a9c04ea6b421acb7a78117241e7d4325cdca8339fa} quarter-over-quarter (QoQ) to €11.8bn. Deal count, meanwhile, dropped 19{1652eb1ffa4184925f6a63a9c04ea6b421acb7a78117241e7d4325cdca8339fa}.
Pitchbook called the quarter “the first substantial decline” from the pace set in the past four years.
“The VC ecosystem could finally be displaying the effects of the challenging fundraising conditions,” the study authors wrote. “Capital investment into startups has slowed, and if muted exits markets persist, returns will be stifled and long-term capital commitments could be harmed.”
The analysts found that exit activity had also plummeted. Amid adverse macroeconomic conditions and weaker valuations, substantial VC exits effectively ceased in Q1. Pitchbook expects the activity to remain quiet for the next few quarters.
In Q1, the preferred route to exit was via mergers and acquisitions (M&A). Four out of the five largest exits in the quarter were through M&A. Such exits tend to be smaller, but they offer increased security and synergies — which can be crucial for startups facing economic uncertainty.
Public listings, meanwhile, have lost appeal due to the dangers of choppy markets. According to Pitchbook, they’re unlikely to pick up until inflation cools, interest rate hikes cease, and business confidence re-emerges.
Pitchbook’s report echoes the findings of other analysts. According to research by Dealroom, just over 2,300 European funding rounds closed in Q1 2023 — the lowest number since 2016.
The decline comes amid concerns over high inflation, monetary policy tightening, and the stability of the financial system. In these challenging economic times, investors and operators are prioritising capital efficiency and robust paths to profitability.
With focuses shifting from growth to cost bases, layoffs became extensive in Q1. Pitchbook expects this trend to continue as companies seek to extend runways during 2023.
Despite the gloom, there are signs of hope in emerging areas of tech. Notably, Europe surpassed the US in private spacetech investment during Q1, while quantum computing raised a continental record $220m, according to Dealroom.
Pitchbook is also confident about the prospects for the resurgent energy sector. Near-term interest and long-term climate targets in Europe are creating new opportunities for backers and startups in the industry.
“We believe deal activity in the clean energy subsector will continue to grow as renewable energy sources are developed globally,” said Pitchbook’s analysts.