Duet Partners
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Weekly Briefing Note for Founders

2nd November 2023

This week on the startup to scaleup journey:
  • Europe VC: 2023 could be 3rd largest year on record
  • Exit market still depressed but VC fundraising ticks up

Europe VC: 2023 could be 3rd largest year on record

Venture capital deal value in Europe amounted to €43.6B in the first nine months of the year, according to Pitchbook's latest European Venture Report. This was down 49.1% versus the same period in 2022. But looking back over a 10-year horizon, prior to the outlier years of 2021/2022, the real story is that despite this recent slump, venture activity continues on an underlying path of structural growth across Europe. This correlates with the recent, in-depth market assessment by Dealroom, as we reported 2 weeks ago. If current investment momentum continues, 2023 will be the third largest year on record in Europe. 2019 provides the most objective comparator when assessing this underlying structural growth (given that 2020 was heavily impacted by the pandemic). Overall European deal value in 3Q19 was €9.7B. So whilst 3Q23 at €15.8B was down 23% compared to the 3Q22 high, it was up 62% compared to the same quarter in 2019. Applying this third quarter investment comparison across all stages reveals: Pre-Seed & Seed down 41% vs 2022 but up 35% vs 2019. Early stage (Series A & B) up 8% vs 2022 (yes, up!) and up 65% vs 2019. Late Stage down 11% vs 2022 but up 73% vs 2019. Comparisons with the extremes of 2022 carry a 'wind chill' factor which makes the 2023 figures feel a lot bleaker than the underlying long-term trend. And looking at more recent quarters, we can now see that deal value in Europe has been increasing since 1Q23, with Q3 deal value 5.9% higher than Q2. In fact 3Q23 was the 3rd largest Q3 on record after the peak years of 2021 and 2022.

This re-alignment with the 10-year growth curve should provide reassurance that the sky is not in fact falling in on European VC. But beneath these top-line figures, there are some new and distinct trends that founders should be cognisant of when contemplating their next capital raise. Whilst the overall amount of capital being invested is now rising steadily quarter on quarter across Europe (1Q23: €12.9B, 2Q23: €14.9B, 3Q23: €15.8B), overall deal numbers are still slowing (1Q23: 2,840, 2Q23: 2,403, 3Q23: 2,213 est.). With fewer deals being transacted, average deal sizes are continuing to rise strongly across pre-Seed, Seed and Early stage. Investors have clearly become more picky but when good deals appear there is no lack of capital chasing them. This is especially true at Seed. As the big multi-stage VCs have cut back sharply on £25M+ deals at late stage and 'venture growth' stage over the past 12-18 months, they have begun to move down into the earlier stages to secure 'optionality' on potential future winners. Even though these are small cheques by their normal standards, this action is improving the capital supply as we can see in the figures above. Valuations at Seed are being held up as a result and look like remaining that way for the next 6-12 months, according to one high-profile, UK-based VC. This is becoming a hot issue for some traditional Seed stage investors who are getting squeezed out of an increasing number of Seed deals by these bigger, brand name firms. With deal sizes also rising, smaller Seed funds are finding it harder to participate in the hottest deals. As we highlight below, unless managers can raise bigger funds they will have to turn more to pre-Seed opportunities to find deals they can afford to do.

Behind these numbers there is also a noticeable shift in the mix by vertical market. Compared to 2022, the big winner so far this year is CleanTech and the big loser is SaaS. CleanTech investment stands at €9.1B year to date compared to the all time high of €15.9B in 2022. 2023 deal value through 3Q23, as a proportion of 2022's full year figure, was 57.2%. For the total European VC market, the same proportion is just 40.0%. Pitchbook notes that favourable regulation should support the wider race to net-zero carbon emissions across the continent. Such structural growth drivers should continue to foster deal activity in this growing vertical. And looking at the 3Q23 overall numbers, 5 out of the 10 largest deals in the quarter were CleanTech deals, including the three largest investments. By comparison, SaaS stands at €8.4B invested year to date, which represents just 28.6% of last year’s record figure of €29.4B. At this pace, SaaS in 2023 may struggle to even hit the level of 2019 (€12.1B). This change in SaaS investment across Europe is being most heavily felt at late stage where a glut of mega deals catapulted the 2021/22 figures to extreme highs. That party is now well and truly over. As the Dealroom report highlights, European venture seems to be pivoting back to 'physical tech', claiming that "Deep Tech and Climate Tech have [now] taken over." In sum, despite rumours to the contrary, the European venture landscape appears to be back on the same positive trajectory it was pre-pandemic.

Exit market still depressed but VC fundraising ticks up

The 3Q23 European VC investment figures describe an ecosystem in flux. On one hand, we see increasing deal sizes and valuations. On the other, we see a further reduction in the total number of investments and a clear shift in the mix by sector. The biggest differentiating factor in all this is stage. Late and growth stages are massively out of favour relative to 2022, whilst in the earlier stages, quality opportunities are in high demand. But until there is a greater state of equilibrium across ALL stages, it is unlikely that deal numbers will improve to near their pre-pandemic levels. The whole system needs to be working in harmony - where there is investment demand at every step from pre-Seed all the way to exit. The biggest challenge at present is that exit activity remains weak and this continues to suppress investment appetite for later-stage opportunities. During the first three quarters of 2023, European exit value reached €9.1B, according to Pitchbook, 72.8% below the same period last year. 2023 is on track to be the most depressed year for exit value since 2013.

There are 3 categories of exit: Public Listings, Corporate Acquisitions and PE Buyouts. Every category has been hit since 3Q21 and most severely over the past 5 quarters. Public Listings dominated 2021 exits by value across Europe (€106B out of €137B) even though they were the smallest category by number. Compare that to a mere €2.1B of listings in 2023 to date. PE Buyouts hit €5.5B in 2021 and have only reached around €1B in 2023 to date. Acquisitions accounted for €25.3B in exits in 2021. This number has fallen by 76% to €6B for 2023 to date. However, in the same time period the number of acquisitions has only declined 47% reflecting depressed M&A prices driven by the increasing desire by shareholders to sell certain assets early and recycle proceeds into higher performing opportunities. Analysts agree that the primary catalyst for revival in exits will fall to a recovery in public listings and the single biggest determinant for this changing is interest rates. In Europe we appear to have not hit the peak point yet. Pitchbook expects little respite through the rest of 2023 and early next year, as private asset valuations correct and losses are realised at a lag.

The difficult exit environment has a clear knock-on effect into VC fundraising. Capital raised by European VC funds in the first nine months of 2023 amounted to €13.9B across 91 vehicles. This compares with €27.6B for the full year 2022 across 270 vehicles. Whilst weaker YoY, there has been a positive uptick over recent months, with capital raised amounting to €8.9B in 3Q23. Many VCs are out fundraising at present and are finding the environment significantly more challenging. Median fund closing times are continuing to lengthen in 2023 YTD to 15.1 months, compared with 9.0 months in 2022. This is again due to LP anxiety over returns relative to other asset classes. And just as we are seeing a change in stage emphasis for funds, so too we are seeing a change in optimal fund size to seize the hottest startup opportunities now emerging. LPs are moving away from sub €50M funds given the time, effort and risk profile relative to the size of cheque they want to write. As a result, only 23 first-time VC funds have closed in Europe through 3Q23, compared with 76 for the full year 2022. The result is that the relative share of larger €100M to €250M vehicles, usually run by more established managers, is increasing. No surprise that average deal sizes are also increasing.

Happy reading!

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