With another year of venture capital records in the books, it’s time to look forward.
Global data was clear: The 2021 venture capital startup investment cycle was record-breaking; around the world, startups raised more money than ever before, with individual geographies posting all-time hauls.
Africa had a killer year. North America was hot. Latin America was busy. Asia was alight, even under the weight of a regulatory crackdown in China. But Europe. Europe was very busy, something that we explored earlier this week.
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PitchBook data collected on the European 2021 investment cycle pegs venture activity at €102.9 billion, up around 120% from 2020 levels. CB Insights data indicates that European startups raised $93.3 billion last year, up 142% compared to 2020 results. Both sources reported rising volume as well, indicating that the continent did not merely see late-stage rounds push its numbers up.
But there’s potential market chop on the horizon. The recent stock market selloff of key comps to high-growth, richly valued startups is causing tremors. TechCrunch has explored the concept, but lest you think that we’re playing some sort of subversive Chicken Little routine, the idea that the venture capital perspective on startup fundraising is changing is something that CNBC, Newcomer and other publications are actively investigating.
In late December, The Exchange asked if the era of super-rich software valuations was behind us. Today we want to expand the question to include all startups and narrow our focus to Europe. What’s ahead for the red-hot startup market this year?
To help us with that question, we corralled Nalin Patel, EMEA VC Analyst at PitchBook, and Christoph Janz, co-founder at Point Nine Capital, to help us dig into what’s ahead for European venture activity.
What’s at stake? The health and continued growth of hundreds of billions of dollars of private-market wealth.
Why Europe could accelerate in 2022
The fact that Europe had a great 2021 could mean two things: That it can’t continue at that pace, or that the ingredients are in place for an even greater 2022. It’s the latter that PitchBook’s Nalin Patel is betting on, with observations concerning both sides of the table.
On the investor side, Patel pointed out that there is a ton of dry powder available from a variety of sources. “International and nontraditional investors including corporate VCs, PE firms and sovereign wealth funds, along with larger traditional VC funds, compete fiercely to invest in fast-growing European startups looking to scale globally.”
Janz concurred on this point, noting that “lots and lots of funds have been raised in the last one or two years” and that “that capital has to go somewhere.”
On the startup side of the coin, there’s plenty of deal flow worthy of investors’ interest, Patel said. “Europe now possesses a wide variety of unicorns in different sectors and geographies, and these companies will drive up deal value figures to new heights with substantial late-stage rounds.” And in earlier stages, he predicts that capital from previous exits will be reinvested “in new batches of startups.”
With this in mind, Patel and PitchBook are bullish about VC activity in 2022: “We expect dealmaking in Europe to increase,” the analyst told TechCrunch.
Looking at it more broadly, Europe may not need a correction. According to the Point Nine investor, recent European startup fundraising success has been a correction in the other direction. “VC activity in Europe had been lagging behind until a few years ago, so to some extent, the growth in the last few years was about catching up with other parts of the world,” Janz said.
This is perhaps more subjective, but the quality of best-in-class startups also seems to have increased, making them less susceptible to public market volatility. Amid market selloffs, “the stock prices of the fastest-growing public SaaS companies haven’t declined that much,” Janz said.
That there’s a gap between top companies and others is a takeaway that caught our attention a few weeks ago, when we reported on OpenView’s annual Financial & Operating Benchmarks report. “I think the very best companies will continue to get huge premiums,” Janz said.
What about not-so-great companies, though? Will their public-market fate trickle down – especially in light of a host of failed and failing SPAC deals – and affect early-stage deals? That’s what we expect to see, but Nalin has a different opinion.
“Recent public equity volatility is unlikely to impact … early-stage startups seeking an exit in the coming years,” he argued. Why? Because in his view, “businesses are more developed before an exit nowadays.” He therefore believes that “if exit appetite declines … startups will seek out subsequent financing to extend their investment runways in the VC ecosystem.”
That startups will seek out more funding is one thing, but we aren’t as convinced as Patel that they will find it.
Why Europe could decelerate in 2022
Our general perspective that rapidly deteriorating public markets will impact startup investment found succor with Janz. The venture capitalist said that while “2021 was a spectacular year for venture capital in Europe,” he believes that a “slowdown is likely.”
Just don’t expect a collapse: He’s thinking more along the lines of a 20% to 50%. That’s sharp, but the investor cautioned that he does not anticipate a “huge crash” on the order of “90% reduction in VC activity.” It’s worth recalling that even a 50% reduction in European venture capital activity would result in a tally roughly in line with 2020’s historical results for the continent; any slowdown would hardly prove to be a death sentence, then, even at the upper end of Janz’s expectations.
What’s driving the potential slowdown? We asked Janz if he expects changing exit expectations linked to public market declines to trickle down to early-stage venture investment in Europe. “Yes,” he wrote in an email, if “public SaaS stocks keep going down or sideways, I would expect it to trickle down within the next few weeks.”
That line from the investor stood out given the pace at which he anticipates a decline. A slowdown could be felt in Q1 2022, then, which means we should be able to vet market reaction among European venture capitalists inside the next few months. If the line goes up or down, we’ll have an early signal of the year ahead in not too many days.
Even the somewhat bullish Patel had some caution for the year ahead, saying that “near-term market conditions may cause VC-backed companies to postpone or rethink their exit plans in Q1.” More simply, the IPO and exit market more largely is going to be ice-cold this quarter in Europe. We mostly expected that, but it’s nice to know that we’re not alone in thinking along those lines.
Lest we make Janz appear to be some sort of contrarian bear, we should add that he told TechCrunch that regardless of “short-term ups and downs,” his firm is “incredibly excited about how entrepreneurship is flourishing across Europe, and we’ll continue to be a very active seed investor.”
There’s institutional momentum in the market via funds that VCs have already raised, and FOMO won’t die out overnight. On the other hand, public markets are jitter-inducing and exits are on hold. How precisely that nets out in Q1 and 2022 will set the future climate for European startups. More when the data comes in.