Startup funding turns the corner in Q2
Following a torrid funding year in 2023 and a shaky 1Q24, second quarter figures show we may have turned a corner.
According to the latest Pitchbook 'first look' data, global investment hit $94.3B in 2Q24, up 25% compared to 1Q24 ($75.4B) and up 12% on the same quarter a year ago.
This arrests an 8-quarter slide from the peak of 2021. It looks like the world of venture hit the bottom in 1Q24 and is beginning to claw its way back to some kind of stability.
One thing is already clear. Unlike the excesses of 2021/22, the funding environment that is emerging from the big correction of the last 2 years is not a temporary aberration. It is a full reset back to the pre-Covid, 10-year trend.
But beneath this improving top line there are some structural differences. The global venture ecosystem is maturing. This means bigger deal sizes and valuations alongside increased investor expectations at every stage.
For those looking to raise capital over the next few quarters, we break down the key trends that are driving these changes. How might these shape the campaigns founders must now devise?
Geographic variances
At the mid-year point we usually analyse the European figures. But to understand the full picture of how the ecosystem is now changing we need to look globally.
In 2Q24, North America (NA) led the way with $56.9B in investment, up a remarkable 47% sequentially and 52% YoY. The 1H24 NA figures represent 56% of global startup investment year to date.
Europe hit $17.4B in 2Q24, up 25% sequentially and 10% YoY. This was a strong rebound from the $13.9M in 1Q24. Europe represents 18% of global investment year to date, so is approximately 1/3 the size of the US market.
Asia, however, is in big trouble. At $16.6B for the quarter, it is down 18% sequentially and down a staggering 41% YoY. For 1H24 this means Asia's share is down 8 percentage points from the high of 30% in 2021. NA has picked up 7 of those points.
The 2Q24 results in Asia are the lowest since 2015. The drop was especially severe in China, where some international investors have pulled back or retreated altogether amid rising geopolitical tensions. These look set to persist.
With Europe growing and Asia falling back, European investment has exceeded Asia for the first time ever. Even more remarkably, the UK has overtaken China as the second-highest funded tech ecosystem globally in Q2.
The knock-on effect is that increasing numbers of Asian startups are now turning to US and European investors. Just from our own deal flow over recent months we have noticed a marked increase in enquiries from Asian startups. Many are now looking to establish a UK/European presence as a stepping stone to the next capital raise when European investors will be targeted.
Deal count tends down
Whilst the total amount of investment picked up strongly in 2Q24, deal count appeared to slide again: down 15% globally compared to the prior quarter and down 26% YoY.
North America was down 10% sequentially and 16% YoY.
Europe was down 18% sequentially and 32% YoY.
Again, Asia witnessed the biggest pull back, down 21% sequentially and down 33% YoY.
But due to the usual reporting lag for deals closed at the end of the June quarter, these figures should improve.
In NA for example, Pitchbook predicts that 2Q24 will be the third straight quarter of increasing activity. Quarterly deal count should climb to the highest level since 2Q22.
In Europe, we are lagging behind this US trend but it is clear that the rate of decline on deal numbers has begun to slow. From 2Q22 to 2Q23 the drop was 24%. From 2Q23 to 2Q24 the drop is predicted to be only 9%.
Of course, it is deal count rather than the total amount of investment that most strongly influences how founders feel about market conditions. If fewer startups are getting funded, this increases the risk factor for a successful campaign.
But the other side of the coin is that deal sizes at every stage - Pre-Seed, Seed, Early stage, Late stage and Venture Growth - are now at all-time record highs.
Notably, European Seed and Early stage (typically Series A) median deal sizes are almost 2x what they were at the height of the market in 2021.
It's therefore no surprise that investor expectations have risen markedly at every stage. Do not expect any change here in the short run.
Valuations at record highs
Just as deal sizes have tracked upwards, so too have valuations. Compared to the peak investment period of 2021, here are the latest median valuations for 2024 at each investment stage. (2021 numbers shown in parenthesis):
Pre Seed €3.8M (€1.8M)
Seed €5.1M (€4M)
Early stage €6.1M (€4.4M)
Late stage €10.6M (€9.8M)
Venture Growth €20.8M (€29.5M)
In all but the most mature scaleups, valuations have continued relentlessly upwards. The impact is dramatic:
Median Pre-Seed valuations are now on par with Seed valuations from 2021.
Median Seed valuations now exceed Early stage (typically Series A) valuations from 2021.
Valuations reflect supply and demand in the system. When there is a lack of high quality deal flow, prices rise.
AI & other hot markets
AI deserves a special mention given its outsize impact on funding markets globally. AI startups are dominating global funding, capturing 30% of all investment in 2Q24, according to Crunchbase data. This is the highest quarterly share on record.
The most notable impact by far is in North America where $27.1B was attributed to AI & ML deals in 2Q24. This represented almost half of the overall NA venture market. A number of significant Generative AI infrastructure megadeals ($100M+) created this surge, with Elon Musk's xAI alone raising $6B.
Across Europe, AI is of increasing importance, but investment is more evenly distributed across several key sectors. Definitions vary (one person's ClimateTech is another's CleanTech) but the overall shape of the European market is clear:
Research by Sifted shows that the top sectors over the past 6 months (in order) have been ClimateTech, Fintech, DeepTech, HealthTech, followed by B2B SaaS and Consumer.
Research by Tech EU shows a similar ranking: CleanTech, Transportation, Fintech, Energy, DeepTech, Software, HealthTech and AI.
Exit malaise
Exit markets shape how VCs and their LP investors think about the timing and scale of returns.
Exit data for 1Q24 confirms how exit markets - at least in terms of the value of deals - have collapsed since 2021. From 1Q21 to 1Q22 exit values fell 51% to €7B across Europe. From 1Q22 to 1Q23 they fell even more sharply, down a further 75% to €3.6B. And in the past year they have tumbled a further 43%, hitting a mere €2.1B in 1Q24.
Interestingly, whilst the value of transactions has plummeted by an overall 93% since 1Q21, the volume of exit transactions has only dropped by 26% - driven by a flood of very low value M&A transactions (and hardly any IPOs as we note below).
This reflects the fact that many investors have been aggressively pushing the M&A or secondary sale buttons in under-performing investments, so they can refocus resources elsewhere in the portfolio.
Sadly, these aren't the kind of exits that those startup teams had once dreamed of. Even the biggest names have not been able to escape this harsh reality.
Outlook for IPOs
European VC-backed IPO value sat at €55.8 million as of the end of May 2024. This almost non-existent market implies 2024 will end the year 64.0% lower than 2023.
2023 was already a non-event, when IPO value was 99.6% lower than 2021 and 88.3% lower compared with 2022 levels.
Volume trends are also depressed, with only nine VC-backed listings in Europe YTD - five of which were IPOs - also implying a decline in counts for the full year.
Analysts expect the picture to improve in the second half of 2024 given interest rate cuts in Europe are now underway, leading to a rally in broad public equity valuations (as well as recovery in private valuations).
It seems as though this will be a long road back. But when markets open up again there will be a strong lineup of quality scaleups ready to capitalise on the next market upswing.
In the meantime, cash distributions - the money flowing back to LPs - continue to decline as a share of assets, sinking to the lowest level since the Global Financial Crisis.
As Pitchbook comments: "The combination of large portfolios and low exits suggests that a massive turnaround in tech IPOs is needed to return VC to the performance that underpins its reputation."
VC Fundraising
Capital raised by VCs has followed a similar curve to VC investments.
At the peak in 2021, European VCs raised €33.7B across 440 vehicles. In 2023 this had fallen to €21.7B across 190 vehicles. At the half-way point in 2024, funds raised in Europe amount to €9.5B across 86 vehicles. By year-end this figure should reach around €19B.
Interestingly, smaller funds (sub €250M) are gaining share over larger funds. Smaller funds, most commonly associated with emerging managers, now represent 57.6% of capital raised so far this year in Europe compared with a 41.6% share in 2023.
Even so, many VCs have failed to raise new funds over recent quarters as LPs have allocated capital elsewhere. With deal numbers falling, several fund managers have thinned out their investment teams. As Pitchbook reports, firms are still trimming the fat, and high levels of turnover reported in 2023 have continued in 2024, on both sides of the Atlantic.
Just last week, Index ventures cut 5 out of its 9 investors in San Francisco. Shortly before that UK-based Octopus Ventures cut 16% of its investment team. The reality is that in the buoyant market of 2020-22 many funds pushed up staffing to levels that are simply no longer required.
Takeaways for founders
For 'the many', unless they can chart a rapid course to investment readiness, the priority remains survival.
For 'the few', this is a period of unmatched opportunity to raise capital as deal sizes and valuations hit record highs.
These companies will have special attributes that make them stand out. They will make compelling investment propositions for the right investors - who are more than ready to fight for a seat at the table.
The underlying determinant will be where on the spectrum of 'consensus' to 'non-consensus' these startups sit. For example, in mainstream SaaS, anything remotely 'consensus' will have to possess top decile performance metrics just to get noticed.
'Non-consensus' propositions - those that break the pattern of all that has gone before - will find a more willing audience. Investors, especially at early stage, are eagerly seeking startups that offer true breakthroughs that will open up big, global markets.
And between the many and the few lies a very special cohort of startups. Those that have almost all the ingredients needed for funding success. But in the face of a changing funding landscape are uncertain. Uncertain about funding strategy. Uncertain about identifying well-matched investors. And uncertain about how to best tell their story to this demanding audience. Helping guide companies like these to great outcomes is our core business at Duet.
For all the differences between regions, markets, and stages, venture investing is still about big bets and big returns. Founders that understand how to feed into this narrative will be best placed to tailor investment propositions that fit the time.
Let's talk!
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