It was a rough start to the year for technology investments. European VC fundraising is on track for the lowest annual total since 2015, according to a new report.
Investigate through PitchBooka financial data company, found that European venture capital funds raised more than €20 billion over the past four years – but only €3.4 billion in the first quarter of 2023. The total value of the VC deal fell 32% quarter on quarter (QoQ) to €11.8 billion. The number of deals, meanwhile, fell by 19%.
Pitchbook called the quarter “the first substantial decline” from the pace of the past four years.
“The VC ecosystem may finally be showing the effects of challenging fundraising conditions,” the study authors wrote. “Capital investment in startups has slowed, and if muted exit markets persist, returns will be stifled and long-term capital obligations could be hurt.”
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The analysts found that exit activity had also fallen sharply. Amid adverse macroeconomic conditions and weaker valuations, significant venture capital exits stalled in the first quarter. Pitchbook expects activity to remain calm in the coming quarters.
In the first quarter, the preferred route to exit was through mergers and acquisitions (M&A). Four of the top five exits in the quarter were through M&A. Such exits tend to be smaller, but they offer more security and synergies – which can be crucial for startups facing economic uncertainty.
Public quotes, meanwhile, have lost their appeal due to the dangers of turbulent markets. According to Pitchbook, they are unlikely to pick up until inflation cools, rate hikes stop and business confidence returns.
Pitchbook’s report mirrors the findings of other analysts. According to research by Dealroomjust over 2,300 European funding rounds closed in Q1 2023 – the lowest number since 2016.
The decline stems from concerns about high inflation, monetary policy 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.
With the focus shifting from growth to cost-based, there were massive layoffs in the first quarter. Pitchbook expects this trend to continue as companies look to extend their runways in 2023.
Despite the gloom, there are signs of hope in emerging tech areas. Especially Europe surpassed the US in private investment in space technology during Q1, while quantum increased computer use a continental record $220 million, according to Dealroom.
Pitchbook is also confident about the outlook for the resurgent energy sector. Short-term interest and long-term climate goals in Europe are creating new opportunities for backers and industry startups.
“We believe that deal activity in the clean energy subsector will continue to grow as renewable energy sources are developed globally,” said Pitchbook analysts.