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The start of a new season is always a good time to revisit past predictions and look for new topics to track. Today, dry powder and university spinouts. — Anna
Record levels of dry powder in Europe?
In November of last year, PitchBook made so many predictions on venture capital and private equity in Europe that it is now reexamining them in a fresh report.
The new report, titled “European Private Capital Outlook: H1 Follow-Up,” doesn’t just look at whether PitchBook analysts were right or wrong. It also reevaluates its forecasts and what changed since then to make new assertions.
Several of PitchBook’s new predictions have to do with private equity, but the one that caught my attention relates more directly to startups: the amount of venture capital that may or may not be available to them.
Often referred to as dry powder, the money raised by VC funds that hasn’t been invested yet was expected by PitchBook to reach record levels in Europe this year. Its EMEA Private Capital analyst Nicolas Moura stands by the prediction, but the nuances between then and now are worth exploring.
First, a caveat: PitchBook slightly changed its methodology for calculating dry powder, and as a result, its initial prediction of €60 billion of dry powder in Europe in 2023 is now €45 billion. However, it noted that this “would still be a record number.”
One of the reasons the firm expects its prediction to come true is that this year so far, we have seen €6.8 billion in European fundraising. This refers to capital raised by European venture capital firms, such as the $200 million new fund closed by deep tech VC IQ Capital, Moonfire VC’s $115 million second fund for early-stage startups and Seedcamp’s $180 million latest fund.
Per PitchBook, this amount is “encouraging to see” considering the macroeconomic context, meaning that “fundraising has naturally become costlier with the increase in interest rates.” It also notes that the final tally for H1 could end up being higher due to reporting lag.
Whether we see a record amount depends on factors way beyond what startup founders or even venture capital firms can sway. “We expect fundraising to pick up in the second half of the year if the cycle of tightening monetary policy comes to an end,” PitchBook wrote.
That’s a big “if.” According to Reuters, “major central banks [aren’t] done with rate hikes just yet.” And unlike the Federal Reserve, which chose to temporarily hold off on rate hikes, the European Central Bank increased its deposit rate to its highest level in 22 years, with its president, Christine Lagarde, reportedly “keeping the door wide open for more interest rate rises this summer.”
There’s little that startups can do against this, but VCs do have a way to adjust to this backdrop: Deploy capital more slowly and carefully. They already are: “We are also seeing more caution in capital deployment with VC deal value falling 32.1% QoQ in Q1,” PitchBook commented on its European data.
This caution is the very reason why I shared Lux Capital’s warning against the “mirage of dry powder” earlier this year. At the time, partner Josh Wolfe predicted that “dry powder” would prove to be “wet powder” used to support struggling portfolio companies rather than to make new investments. This hasn’t changed: “Venture capitalists are eager to keep some dry powder to fund runways,” PitchBook wrote in its report.
Will this change over the course of the year? Maybe, and I’ll definitely keep on tracking it, but PitchBook isn’t exactly encouraging me to hold my breath. “We do not expect these record amounts of dry powder to be deployed rapidly in this environment but rather venture capitalists to be more cautious and more diligent in their investment approach.”
Review of British university spinouts
While reading about the $200 million fund raised by IQ Capital, a British deep tech VC firm founded in Cambridge in 2007, the mention of university spinouts caught my eye. I previously wrote that Europe’s deep tech depends on them, but I also know that founders are fighting for better terms from their alma maters.
My colleague Mike Butcher asked IQ Capital managing partner Kerry Baldwin for her view on the topic, and she said, “That’s where Cambridge University has been different.” But she also added that “it’s going to be interesting to see the results of the U.K. government review that’s coming out in early September on this.” After digging, I found out that it is due to end in the summer —another interesting developing topic for me to track!