Venture capital data is backward-looking, a trailing indicator at best. TechCrunch+’s reporting on third-quarter venture capital activity is therefore a lengthy, if earnest look in the rearview mirror. Here’s what happened.
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There’s value to a good retrospective. But what we don’t want to do is presume that what has been always will be, and thus make it seem that the past is actually the present. To that end, European venture capital data is down sharply from prior highs in the third quarter (more here on global numbers), but there’s enough bullish material inside the data that when we look ahead, the European venture capital and startup scene has quite a lot going for it.
Pulling from PitchBook data and a recent Dealroom report, this morning we’re looking for green shoots. After all, by now it’s old news that venture capital totals are down around the world. What can we say about what comes next? Let’s find out!
Down, but not out
PitchBook calculates that European startups have raised €43.6 billion ($46 billion) through the third quarter of 2023. That, per the private-market business database, is off just over 49% compared to year-ago totals concerning the same timeframe. That’s the bad news.
The good news is that European venture capital has managed to grow this year as it has bumped along. The value of European deals has grown in each quarter thus far, growing 5.9% from Q2 2023 to the third quarter, according to PitchBook. Not bonkers growth, but expanding venture capital totals off a local maximum is where recoveries begin.
Looking ahead, Dealroom estimates that total European venture capital activity will reach $77 billion this year. That figure is down from $106 billion and $136 billion that the region saw in 2022 and 2021, respectively. But the 2023 target figure is above every prior year that Dealroom has on file. You only have to go a decade back, and Dealroom reports that European venture capital activity was valued at just $11 billion in 2013. That’s a pretty good compound growth rate through today, if you discount the outlier results of the last two years.
Sticking to the pre-COVID comparison, most countries in Europe have seen the value of venture capital raised expand from 2019. Comparing H1 2023 results to H1 2019 data, Dealroom notes that just four of the top 15 European venture capital markets have seen their dollars raised decline. And the worst figure in that group was –13% (Belgium).
In contrast, comparing H1 2023 to H1 2019, some leading countries in Europe saw their venture capital totals rise by more than 100%, including +153% in Iceland, +161% in Austria and +181% in Norway. Denmark saw a +72% result over the same interval, whereas Switzerland saw its venture totals soar 64%.
Where does all of that leave Europe as a whole compared to the world? Dealroom reports that Europe’s share of global venture capital totals, which fell to 10% in 2015 and 2018, rose to at least a local maximum of 19% in 2022, a figure that it has maintained thus far in 2023. That means that just about one in every five global venture capital dollars that are invested are landing inside Europe.
The fact that Europe is defending that market share, if you will, during a downturn implies material durability.
Where is that venture share defense showing up? PitchBook data indicates that Europe is having a heck of a time in clean tech, where it has seen €9.1 billion raised through September 30, 2023. That figure is not on pace to best the €15.9 billion that European clean tech startups raised last year, but is on pace to beat 2021’s €11.5 billion. In contrast, SaaS-focused venture activity in Europe is down sharply this year.
There’s lots to like in European Q3 venture capital data, but let’s not bullshit ourselves. European startups today are still raising less money than they have in several years, and that’s not great for the continent’s founders. Notably the pain is not evenly distributed; earlier-stage founders are in far better shape than their late-stage peers.
For example, Dealroom data indicates that Europe’s share of early-stage venture capital funding is sticking around the 24% level in 2023 that it has managed in three of the last four years. For “breakout” startups — those that raise Series B and C rounds — has scaled from 15% in 2020 to 16% in 2021 to 17% in 2022 to 20% in 2023. Not bad, right?
That’s right, until European founders try to raise a late-stage round, where Europe saw its share of deal value peak in 2022 at 18%, and then decline to 15% thus far in 2023.
Cautionary signs
The state of Europe’s late-stage deal-making is one of the main reasons why it is too early to predict a full recovery. It’s not just its share that’s declining: $22 billion was raised by late-stage European startups in the first nine months of the year, compared to $49 billion in 2022 and $75 billion in 2023, per Dealroom.
That’s still better than before the pandemic; 2019’s late-stage tally was $23 billion. But what’s concerning is that later stages are performing worse than earlier stages, including on a quarter-on-quarter basis. According to PitchBook, “the stage exhibiting the greatest declines continues to be venture growth, with deal value down 61.9% through Q3 2023 compared with the same period in 2022.”
The cause of those declines is what worries us. If early stages are more resilient, it’s “due to investors taking a long-term investment approach and returns being less imminently tied to exit markets,” PitchBook said. Conversely, later stages are affected by the dire state of exits.
Europe’s exit activity, PitchBook noted, “remains the weakest area of the ecosystem, with limited recovery this year.” As we know, past performance is no guarantee of future results, but based on M&A volume so far, “2023 is on track to be the most depressed year for exit value since 2013.”
The type of exits may also be a concern; we already know about the dearth of IPOs, but buyout exit value also declined in the first nine months of the year compared to the year-ago period. “The majority of exit value and count remains in acquisitions,” PitchBook said.
Acquisitions are not a bad thing per se. But when they happen too early, they come in the way of creating European tech champions. For instance, Dealroom CEO Yoram Wijngaarde recently said it was a shame that Booking sold to Priceline too early for around $130 million instead of staying independent as the $100 billion European company it fundamentally is.
The main thing that tampers our enthusiasm is what it would take for Europe’s venture capital deal-making to fully recover. PitchBook’s analysts believe that “the catalyst for revival will fall to a recovery in broader valuations and public listings specifically.” We tend to agree, and that’s the problem.
If recovery depends on macroeconomic factors, it means that it is not in the hands of startups or of their supporters; no amount of university-trained talent can counter the fact that Europe might still not be done raising its interest rates.
Even more, the fact that Europe appears to be lagging behind the U.S. in terms of macroeconomic recovery won’t help put a stop to the decline in U.S. VC investment in the region. It was tied to uncertainty, according to PitchBook, but any gap between their country and Europe will encourage them to focus on their home turf even more.
As of Q4, there’s a major new uncertainty factor: the Israel-Hamas war, which adds to geopolitical worries at the global level, but arguably even more so in Europe. PitchBook’s European data includes Israel, and any projections for the full year are now inherently less reliable. And sure, the situation could also create tailwinds for some startups. Defense tech slash AI company Helsing, for instance, already raised one of Europe’s largest VC rounds of Q3, and others could follow. But please forgive us if it doesn’t exactly make us fully optimistic.