Digging into Europe’s Q1 venture results

Q1 was alright. Q2 and Q3 are going to suffer.

Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.

Today we’re taking a look at a bit of data on the European venture capital scene in Q1. As with our looks at other locales like Silicon Valley and other bits of the United States, we’re taking stock of what happened in the first quarter. Q1 2020 includes pre-COVID-19 results, though as some European countries began to lock-down before the United States, there may be more pandemic-impact in the following results than we’ve seen domestically thus far.

Today’s grip of data is via the folks over at PitchBook, who compiled a venture-focused dig through the continent’s first three months of the year. Let’s parse the top numbers, make a comparison or two and then look to what’s next.

Q1: An ok quarter

Despite COVID-19, China’s broad shuttering and an aged bull market deep, Europe’s venture capital activity in Q1 2020 was mostly fine. It wasn’t great, and there were some less-than-winsome results that could be chalked up to the pandemic, but the first quarter provided an alright start to the year.

According to PitchBook’s summarized data, Q1 saw 937 venture rounds in Europe worth €8.2 billion, or $8.85 billion at present exchange rates. The dollar amount of Europe’s Q1 venture activity was under its 2019 average, with that year’s haul totalling €33.8 billion while Q1 2020’s annualized pace is a slightly smaller €32.8 billion.

That isn’t a huge difference. However, Europe’s Q1 venture deal volume was very light when annualized and compared to preceding year’s results. Indeed, if Europe saw Q1 deal volume for the rest of the year, it would accrete just 3,748 rounds in 2020. That would work out to be the lowest total since 2011; every year since, 2012 and on, recorded higher tallies.

Even more, between 2015 and 2019 every year saw more than 6,000 total venture rounds in Europe, per PitchBook, with a record 6,504 set in 2018. Last year’s 6,089 European venture rounds was still strong when compared to Q1’s deal pace.

In dollar terms, Q1 2020 was good for Europe. In deal terms it was weak. As you can imagine, then, deals skewed later-stage. The same report details that angel and seed deals, as a portion of total venture dollars, were at their lowest ebb in 2020 since 2011, the year we noted earlier for its light deal count. In Q1 2020, late-stage venture rounds took the most dollar share of total VC activity in any period aside from a rough tie in 2014 and a slightly larger share in 2011 itself.

Looking ahead

What’s less than animating is that Q2 and Q3 venture results are expected to be worse in Europe than what it saw Q1, which means that while dollar volume in the opening period of 2020 was tracking 2019’s results, it won’t for much longer. And with deal volume already behind, little ground will be made up.

PitchBook is bleak in its outlook, saying that it expects European “dealmaking to slow considerably as the repercussions of COVID-19 sweep across the globe and highly valued, mature startups taper growth efforts.” That matches my read of the market precisely. So while Q1 was alright, the next six months — at least — of venture results are going to be bleak. 2020 should be the worst year in Europe for venture deal volume since 2012 (3,554 rounds), or 2011 (2,910 rounds), depending on how deep the trough the continent is entering truly is.

Data out this morning isn’t optimistic, sadly.

Any good sector news?

We will not not repine. Instead, let’s peek at sectors where there might be some good news. Turning once again to the report, we learn that software startups accounted for a little under 43% of raised capital in Europe’s Q1. That number, incidentally, is part of the reason why we pay attention in this column to the value of public technology stocks; when they catch cold it can send startup valuations to hospital.

 But it’s fintech, notably, that caught the most side-eye from PitchBook:

Fintech is the most crowded subsector in Europe, and its capital-intensive nature is compounded with relatively slim margins on financial products that need to be competitive. Many of these highly valued startups have accrued financial losses over fiscal years as they’ve focused on market share and scale instead of profitability.

Oof. That just reeks of the late-unicorn era, when huge rounds were pushed through go-to-market machines to drive growth, with profitability something to come later. How fintech will trim spend, cut burn and skate closer to cash flow breakeven (EBITDA neutrality, whichever you prefer) is the new question. Certainly later-stage fintech shops have had enough capital and time to figure it out.

The software figure is good news in that it may prove true that SaaS revenues are as durable as hoped; this could help build a floor under startup health, and, of course, venture returns in the next year. Fintech looks dicier.

Europe’s venture capital Q1 was mixed-to-bad, with impressive dollar volume undercut by low deal count. Ahead the outlook is largely bearish for all but the best companies, especially those in fintech who now have so much more to prove.