Weekly Briefing Note for Founders 18/1/24

17th January 2024

This week on the startup to scaleup journey:

  • 2024 Europe Venture funding outlook
  • Crossing the Chasm from Seed to Series A - new post

2024 Europe Venture funding outlook

2023 was a brutal year of market readjustment. Comparisons with 2022 confirm a significant pullback in venture capital deployment. The extremes of 2021/22 were such a major aberration that any analysis of this period can't alone provide the answers to where we go next.

Instead, to help discern the funding game plan for 2024, we need to reframe to a bigger picture. The longer term trajectory of venture markets provides a more informed starting point.

Reverting to the 10-year growth trend. Prior to 2021, we had witnessed a steady, year-on-year growth story in venture for almost a decade. But in 2021 the market ballooned way beyond even the wildest predictions. We saw unprecedented YoY global investment growth of 100%. Europe exceeded even that, growing by a staggering 111%. This is why the 2023 'correction' has been more marked in Europe. Compared to 2022, total venture funding was down 45% here, versus 35% globally.

But if we set aside the 2021/22 aberration, we find that 2023 was very comparable to 2020, both in terms of funding levels and number of deals. Looking back at those numbers, we now seem to be picking up where we left off in saner times:

Comparing Pitchbook's 'first look' data for 2023 to 2020:
Global funding in 2023 = $345.7B (-8% v 2020) across 43,559 deals (+8% v 2020).
European funding in 2023 = $62.9B (+10% v 2020) across 10,801 deals (-7% v 2020)

2023 was a close facsimile to 2020, even though average European deal sizes are now marginally bigger, whilst at the global level they are now marginally smaller. In other words, 2023 represented a reversion to the pre-pandemic, 10-year average growth trend on funding and deal count, after the exceptional highs of 2021/22.

European valuations. But what about valuations? There has been constant industry chatter that valuations also took a hammering in 2023. But this is NOT the reality. According to Pitchbook, median pre-money valuations at all stages (with one exception) have continued broadly upwards since 2020, right through 2021/22 and into 2023:

Pre Seed: 2020 €1.4M, 2021 €1.9M, 2022 €2.6M, 2023 €2.5M
Seed: 2020 €3.3M, 2021 €4.1M, 2022 €5.6M, 2023 €5.2M
Early stage (typically A & B): 2020 €3.5M, 2021 €4.5M, 2022 €5.5M, 2023 €5.6M
Late stage (typically C & D): 2020 €8.0M, 2021 €9.8M, 2022 €10.7M, 2023 €11.0M
Venture Growth (typically Series E & later): 2020 €20.7M, 2021 €28.7M, 2022 €31.3M, 2023 €23.9M

Even if we compare the 2023 valuations to the market highs of 2022:

Pre-Seed and Seed were down only marginally.
Early stage and Late stage held steady.
And then the exception, Venture Growth (mega-deal territory), down 23.6%. This is becoming a huge problem as many of these more established companies look to raise again in 2024.

US valuations. What about US market valuations? Have they followed the same path? Not quite...

If we compare 2023 US median valuations to the 2022 figures:
Pre Seed: $5.7M (down 5%, but still the second highest in a decade).
Seed $12M: (up 9%, the highest level in a decade).
Early Stage: $38.3M (down 17%).
Late Stage: $50M (down 18%).
Venture Growth: $143.5M (down 46.9%, double the drop in Europe!).

The big takeaways here are:
Seed valuations up strongly (and Pre Seed still faring very well).
Early Stage and Late stage valuations - a very depressed scene.
Venture Growth valuations - absolute carnage. Capital demand still significantly outpaces supply. Companies at this most advanced stage may never manage to grow back into their 2021/22 valuations.

If you want to know why the narrative coming out of the US during 2023 has been so dire (from Series A onwards), these numbers explain why.

Two important footnotes to the US data:
1. These Late Stage/Venture Growth valuation figures would have been even worse if it had not been for the massive Open AI and Anthropic deals. A remarkable $1 out of every $3 invested went into AI companies during the year, which comprised roughly 20% of US deals.
2. US valuations at all stages are significantly higher than Europe and this means that investment criteria, especially financial metrics, vary too. Be wary of blindly chasing metrics put out by US funds.

2024 outlook for Europe. So, where does that leave us in Europe? The chances of raising capital are approximately the same as they were back in 2020. But the big change is valuations, which are up markedly across the board (except at Venture Growth).

And higher valuations mean higher investor expectations. How does this manifest itself in the funding process?

1. To slow their investment pace (after the profligacy of 2021/22), investors are reapplying rigorous due diligence to every opportunity. Anything that doesn't pass muster is now almost certainly a 'no'.
2. Diligence criteria have now been brought firmly into alignment with today's much higher valuations. In other words, we now have 'parity' between elevated valuations and elevated investment criteria (unlike 2021/22).

In 2024 we expect to gradually see more capital being deployed into startups. This will likely be reflected in larger deal sizes rather than lots more deals. Investors are pursuing 'quality' and will dig deep when they find it.

The good news for many founders is that after 18 months of belt-tightening and increased focus on operational efficiency, more mature, capital-efficient businesses are coming to market. 

Are you ready? This all leaves capital-seeking founders with 2 big questions as we head into 2024:

First, is your startup fundable? Are you confidently projecting the characteristics of a category leader? Are you hitting or exceeding the expected investment criteria in the context of your sector and stage?

2023 funding campaigns have provided some real insights into what investors are now expecting. [Now captured in our latest Investment Analysis scorecards]. Founders must be certain they will look totally solid on every single measure.

Second, are the investors you plan to target still actively investing? Many have slowed down and some completely pulled back from the market in 2023. Some are still only focusing on their current portfolios. This is has become a vital checkpoint on the campaigns we are assisting.

For example, we now include a specific column on the target investor list entitled "Total Investments in last 12 months". Even for funds that have big AUMs and good levels of dry powder, this number has fallen off a cliff for some in 2023. Trying to start a conversation with any of these investors right now for 1H24 deals would almost certainly be a waste of time.

In summary. After the exceptional highs of 2021/2022, 2023 represented a reversion to the pre-pandemic, 10-year average growth trend on funding and deal count. We are not returning to those 2021/22 highs anytime soon.

For founders that have managed to position their business to align with revised investor expectations, 2024 should offer much greater hope. The reward (other than just survival) will be elevated valuations, especially at the earlier stages.

There are big reserves of dry powder still available in the market but they are not evenly distributed. Only those investors that have recently been deploying into new opportunities should be in the crosshairs for early 2024 rounds.

Crossing the Chasm from Seed to Series A - new post

The 14th December newsletter was our most read founder briefing note of 2023. This featured our latest take on a subject we have discussed many times in the past: 'Crossing the Chasm from Seed to Series A'.

This topic clearly strikes a chord, especially following a very turbulent 2023. In response to this interest we have worked this piece up into a longer blog article, complete with a terrific graphic, courtesy of Evolve Agility.

This new article can be found in our blog here: Crossing the Chasm from Seed to Series A.

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