The State of Startup Fundraising: Focus on Europe

Venture capital has had its ups and downs in recent years, and entrepreneurs are rightly keen to understand what 2024 might bring.

Image: Markus Winkler (Unsplash)

According to the Financial Times, US venture capitalists are sitting on a record amount of 'dry powder' to avoid risky bets on fledgling companies. European VCs are not much different, and first-time founders' entry barriers are higher, as VCs mostly prefer to inject cash into their portfolio companies to keep them afloat.

To get a read on the situation, we dug into the data from Equidam, Crunchbase, KPMG and Atomico to look for patterns. In their analyses of global and regional startup valuations across 2023, the general picture is of increasing resilience as we move away from the fluctuations of previous years, and a nuanced view of an environment shaped by economic uncertainties, technological optimism, and shifting investor priorities.

Global Valuation Trends

Equidam's findings reveal that the global median startup valuation has remained stable at $5 million, reflecting a steady investor confidence worldwide. However, this stability masks regional variations, particularly between the UK, which followed the global trend, and Europe, where valuations have dipped over the last two quarters. This divergence prompts a closer examination of the factors at play. 

A growing disparity in startup valuations is observed globally, likely driven by greater uncertainty, liquidity challenges, and an emerging optimism about artificial intelligence (AI) technologies. This disparity indicates a market that is increasingly segmented, where investors are betting big on certain sectors while pulling back from others deemed riskier or less promising.

Shifts in Startup Projections

In an interesting shift, European startups have become marginally more conservative in their financial projections, whereas their US counterparts have turned marginally more ambitious. This could reflect differing market sentiments and economic outlooks in these regions. The convergence of pre-revenue and pre-seed valuations, particularly after the second quarter of 2022 scare, suggests a return of investor confidence in early-stage startups, potentially due to a lessened demand for proof of traction.

European Market Concerns

Europe's recent valuation dip is attributed to a confluence of factors, including fears of a Eurozone recession, geopolitical tensions stemming from Ukraine, and a general trend towards investor caution. Experts suggest that these elements combined have led to a more risk-averse investment landscape in Europe. According to economic analyses, such as those from the European Central Bank, the region faces significant headwinds, including inflationary pressures and supply chain disruptions, which contribute to the cautious outlook from investors.

Industry-Specific Outcomes

The report underscores significant variances in industry outcomes. For instance, the logistics sector saw a substantial decline in valuations by 31.95% in Q4, with Crunchbase data indicating a decrease in funding from $6.2 billion in 2022 to $1.0 billion in 2023. This sharp decline is attributed to a collapse in the freight market, rising interest rates, and a dwindling investor appetite. 

Conversely, the fintech sector experienced a valuation surge of 21.48% in the same period. KPMG data corroborates this trend, showing an increase in funding from $11.9 billion in Q4 2022 to $14.8 billion in Q2 2023. This rebound is interpreted as a recovery from a challenging 2022, signalling a renewed investor interest in financial technologies.

European Venture Capital Activity

Atomico's analysis paints a broader picture of European venture capital activity, totaling $45 billion, nearly half of 2022's $85 billion. Despite the decline from the peak of 2021/22, the growth trend remains positive when viewed against the backdrop of 2020, albeit at a slower pace. Notably, European valuations are significantly lower than their US counterparts, with median seed rounds in the US at $11.5 million compared to Europe's $5.7 million.

In terms of sector focus, Europe diverges from the US with 27% of venture capital flowing into carbon and energy sectors, unlike the US where AI commanded 26% of venture investments. This indicates a regional prioritisation of sectors deemed critical or promising by investors, shaped by broader economic and societal goals.

These insights collectively offer a complex picture of the current startup and venture capital environment, marked by cautious optimism, sector-specific dynamics, and regional disparities. As the global economy navigates through uncertainty, these trends provide valuable markers for investors, entrepreneurs, and policymakers aiming to understand and engage with the evolving landscape of innovation and investment.

Overall Funding Trends

Crunchbase reports that Q4 2023 was the lowest quarter for global venture funding, totaling $58 billion, marking a 24% decrease quarter over quarter and a 25% decline year over year. However, seed and angel investments have shown resilience, with a slight increase from $7.1 billion in Q3 to $7.2 billion in Q4.

Funding Expectations for 2024

According to the Crunchbase venture capital forecast, while there may be some more pain that awaits startups in 2024 — including market correction, profitability challenges and, more layoffs — investors seem hopeful most of the troubles of the past couple of years are behind them.