This week on the startup to scaleup journey:
State of European Venture 1Q24
Unique fundraising conditions presented startups with both challenges and opportunities in the first quarter. European figures from PitchBook's Venture Monitor First Look show deal count in 1Q24 was down 27% YoY, although it remained flat compared to 4Q23.
But for startups now coming to market with compelling investment propositions, there has rarely been a better time to raise early stage capital in Europe:
Deal Count & Capital Invested
PitchBook estimates that European deal count will hit 2,395 for 1Q24 (there is always a reporting lag, especially for smaller, non-institutional deals). This is down 27% v 1Q23. We need to go back 6 years to see transaction volume this low (1Q17 = 2,420 deals). Now, 2 years into 'the correction', we are witnessing just how much of a hard reset this has been for the entire venture ecosystem.
But on a more positive note, overall capital invested did show a marked sign of recovery in 1Q24. Overall deal value hit €16.4B, up 20% compared to 1Q23 (and up 17% over 4Q23). And, to keep with the same comparison, the 1Q24 figure was 3x the level of investment for 1Q17 (€5.3B). In fact, 1Q24 was the third highest first quarter ever (after 1Q21 and 1Q22).
So yes, the bar is much higher than it has been for years. But for those startups that are now coming forward with compelling investment propositions, the rewards are there in spades:
Deal Sizes & Valuations
The combination of higher capital investment across fewer deals means that median deal sizes across all stages were up strongly in 1Q24 compared to 2023 overall, exceeding all prior records:
Pre Seed €0.8M (up 44%)
Seed €2.1M (up 30%)
Early €1.9M (up 38%)
Late €4.4M (up 41%)
Growth €9.7M (up 61%)
And median pre-money valuations were also up strongly in 1Q24 compared to 2023 overall, again exceeding all prior records (except at Late Stage):
Pre Seed €4.0M (up 58%)
Seed €5.4M (up 9%)
Early €7.3M (up 39%)
Late €10.8M (down 3%)
Growth €22.5M (up 10%)
Early stage appears like an anomaly in the figures - why are deal sizes lower than Seed? 'Early stage' is a catchall that not only includes those deals officially announced as a 'Series A' or 'Series B' round but all other early rounds that were not announced with a 'Seed', 'A' or 'B' moniker. These undefined deals are far more common in Europe than in North America. Why?
North America comparisons
In NA, startups typically raise fewer, bigger rounds at higher valuations in the formative stages. In 1Q24, according to PitchBook:
Seed round median deal size was $3.1M (on a pre-money of $12M)
Early Stage median deal size was $4.8M (on a pre-money of $46.5M)
Across Europe, Seed is not so much a round as a phase, with a collection of smaller rounds leading up to the Series A. This partly reflects smaller fund sizes and markets in Europe but also a more cautious, step-by-step approach to startup creation and funding.
And yet in 1Q24, in stark contrast to Europe, capital invested in North America was down 29% compared to 1Q23 (and down 9% from 4Q23). This was primarily due to Venture Growth (Series E+) deal sizes tanking. Overall deal count was estimated at 3,925 - down just 3% YoY for the quarter, delivering more modest growth in median deal sizes from Pre Seed to Late stage, compared to Europe.
Pre Seed is the new hot ticket
1Q24 European median Pre Seed deal sizes hit a remarkable all time high of €0.8M (up 44%) on median valuations of €4M (up 58%), as shown above. By comparison back in 2017, the same deal size and valuation figures were significantly smaller at €0.2M and €1M respectively!
In fact, today's Pre-Seed figures not only exceed 2017 Seed stage comparisons (€0.6M, €2M) but match or exceed the broader Early Stage 'basket' (€0.8M, €2.7M) of the same period. How quickly we forget the much smaller scale of the venture market of just a few short years ago.
The upshot of this is that just as 'Seed has become the new Series A', so too has 'Pre-Seed become the new Seed'. This is having profound implications for smaller institutional investors and how they now participate in this significantly more vibrant early stage market across Europe.
Changing investor landscape
One of our key observations through 2023 was the marked increase in the number of unpriced rounds. This wasn't just driven by a spike in bridge rounds from existing investors via convertible loan notes (CLNs) but smaller investors securing early positions often via ASAs or SAFE notes. This has become a strong feature at Pre Seed as well as in the earlier Seed rounds.
Many of these smaller funds are being frozen out of increasingly larger and more expensive Seed rounds by bigger funds as deal sizes and valuations push relentlessly upwards. Out of necessity these funds, often in the hands of emerging managers, are investing at ever earlier stages, By happy coincidence this is often proving to be an excellent fit for their particular type of value-add.
These smaller funds are not only able to move fast but are often very founder-friendly. They can punch well above their weight when it comes to networking founders into larger funds, customers, and other players in the venture ecosystem. Consistent founder sentiment seems to be that true investor value-add during the formative stages almost seems to be inversely proportional to fund size.
Often, speed of movement is a function of having small teams. The decision-making process of these smaller funds is typically less bureaucratic than their bigger peers. Plus, in some cases there are no external LPs, with the capital coming from the combined resources of a handful of individuals - sometimes former founders themselves.
The increasing use of unpriced rounds adds additional speed to deal execution. This is the classic modus operandi of these smaller funds, keen to quickly impact a startup's cashflow and leaving the complexity of equity deal terms to a later date. Here we also see far less obsession with the downside protection mechanisms and unnecessary governance oversight (usually via board seats) demanded by larger, more established funds at the very early stages.
Outlook for 2024
Capital investment and valuation levels in venture markets are inevitably a function of macro-market conditions. As we all know, the key indicator now is the health of exit markets, led by IPO activity. In 1Q24 European exits, which fell to a paltry €1.9B, were a tiny fraction of what they were in 2021. You have to go back to the beginning of Covid (1Q20) to find a comparable number and before that, right back to 1Q18.
Even so, most analysts expect VC investment activity to increase through 2024. The latest Kauffman Fellows survey, comprising insights from 262 emerging and established fund managers, who collectively oversee $250B in assets, delivers some promising prospects for founders. "While in 2023 more than 50% of VCs invested less than the year before, this trend is expected to completely reverse in 2024."
An additional influence will be an uptick in fundraising activity by VCs themselves. While 97% of Kauffman respondents believe that fundraising in this environment will be somewhat to extremely challenging this year, half of them are confident they will reach their fundraising goals. A further mitigating factor here is that VC dry powder is generally in a healthy state as outflows have been heavily curtailed over that past 24 months.
But a word of caution. Even with improving investor sentiment, there is zero expectation of a reversion to the extremely positive investment conditions of 2021/22. Against this backdrop, founders should not expect that improving investor demand through 2024 will be a function of deal criteria easing. Rather, this will be due to increasing numbers of startups meeting the more stringent criteria now in place.
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