Weekly Briefing Note for Founders 19/10/23

18th October 2023

This week on the startup to scaleup journey:

  • 3Q23 venture funding first look
  • Europe VC: 2023 will exceed pre-pandemic record

3Q23 venture funding first look

Global venture funding in the third quarter of 2023 reached $73B — up 7% quarter over quarter and down 15% from the $86B invested in 3Q22, Crunchbase data shows. Despite the uptick quarter over quarter, this is the second lowest quarter since funding started to slide in 2022. The startup world is now five to six quarters into the current funding decline. For the first three quarters of 2023, global funding reached $221B, marking a 42% decline from the $381B invested in the same timeframe in 2022. It was notable that some of the biggest rounds that drove this recent quarter on quarter growth went to companies with strong AI-driven propositions. These companies raised more than $10B this past quarter, on par with 2Q23, according to Crunchbase. The largest AI rounds went to OpenAI competitor Anthropic, raising $1.3B from Amazon. Cloud data company Databricks raised $500M at a valuation of $43B, which was the largest priced round last quarter. The big takeaway from Q3 is that whilst deal numbers and the amount invested are down year on year, they now seem to have plateaued. And if we take a longer term view (as we note in our second piece below) overall venture investment is now aligning once again with the historic 10-year growth trend.

Looking at the GLOBAL 3Q23 figures by stage: Seed funding totalled $6.6B in Q3, down 27% year over year from $9B — an indication that funding at the earliest stages continues to slow. Early-stage funding (typically Series A and B) showed the steepest decline compared to all other stages, down 38% year over year from $37.6B and down 16% quarter over quarter. Reversing recent trends, Late-stage funding increased in Q3, the second highest quarter for late-stage funding since the third quarter of 2022 when funding slowed dramatically. Late-stage funding was up 30% quarter over quarter and almost 10% year over year, totalling $43B. Large fundings went to late-stage companies in the semiconductor, sustainability, and AI sectors. This is a very positive sign as late-stage activity is a leading indicator of overall investment appetite. Late-stage funding, especially valuations, is heavily influenced by IPO markets. According to CB Insights, 3Q23 saw 126 companies go public via IPO — up 24% compared to 102 in 2Q23. This points to a clear improvement in the IPO market and a signal that things could really start to open up for tech listings in 2024. 

Looking at the picture in EUROPE,  provisional figures from Pitchbook for 3Q23 reflect the global trend on deal value, which is up 6% quarter over quarter, although down 23% from 3Q22. In terms of deal count, this was down 21% quarter over quarter and down 24% YoY. On a positive note, this is the third successive quarter of growing deal value after the collapse at the end of 2022. (1Q23: €12.9B, 2Q23: €14.9B, 3Q23: €15.8B). The implications of this continued rise in overall amounts invested are improving median deal sizes and valuations. We are still awaiting quarterly data but looking at 1H23 versus 2022 as a whole, we see some encouraging signs. First, in median deal sizes: Pre-Seed up 20%; Seed up 7.3%; Early stage is flat; Late stage up 12.9%. Then, in median pre-money valuations; Pre Seed down 2%; Seed down 10%; Early stage (A & B rounds) down 3.8%; Late-stage down 8.5%. These annualised drops are marginal and we know from the 2Q23 data that they are now picking up quarter on quarter, especially at Seed. We will have the detailed quarterly trend data on valuations soon. Meanwhile, the big takeaway at the European level is that it broadly mirrors the global picture: High-quality investment propositions are getting funded but if you are falling short in any area, fix that first.

Europe VC: 2023 will exceed pre-pandemic record

The outlier years of 2021/22 were an aberration in the decade-long trend of steady growth in venture investment. As a result, any analysis of the outlook for 2023 will inevitably talk of a big slowdown (as we highlight in the 3Q23 reports above). But looking back over a longer time horizon helps put today's figures properly in perspective. According to Dealroom's latest report - presented at the Funding Venture Conference last week - investment into European startups is expected to reach over $77B this year. This is well in excess of the previous, pre-pandemic record. Remember that this figure was a mere $40B in 2018, $57B in 2019, and $55B in Covid-impacted 2020. In this context, the $77B projection demonstrates that the market is aligning once more with the overall 10-year growth trend. Dealroom's analysis also shows the inexorable rise in European venture funding over the past decade by investment stage and this is revealing. The vast proportion of the outlier figures reported in 2021 and 2022 can be attributed to the sudden growth in big, late-stage rounds in excess of $100M. In fact, if you strip out all rounds above $40M (typically Series C and up) and look only at those from pre-Seed ($0-$1M) to Series B ($15M - $40M), the overall 10-year trend - although still slightly elevated in 2021/22 - is a smooth upwards curve, right through the current 2023 projection. In other words, the pre-pandemic momentum continues very strongly at early stage, despite all the doom and gloom when comparisons are made with the past 2 years.

A more reasonable data point for comparison with the current year would be 2019. Looking at the total amounts raised in 1H23 and 1H19 shows that most European countries are back to (healthy) 2019 levels. A handful of counties - including the UK, Ireland, Belgium and Finland - are down marginally, whilst other European countries are even showing signs of growth. France, for example, is up 37% in 1H23 versus 1H19. Interestingly, this decade-long analysis also reveals a dramatic change in the mix of startup industry categories. Dealroom segments venture-backed companies into 3 broad categories: 'SaaS', 'Manufacturing', and 'Marketplace & eCommerce'. Between 2015 and 2022, SaaS investment mushroomed from 30% of total investment to 52% but the projection for 2023 shows a heavy reset back to 37%. Meanwhile, European venture has pivoted back to 'physical tech': Manufacturing represented 34% of overall venture investment in 2015. The projection for this year is a whopping 48%. Companies categorised as either DeepTech or Climate Tech seem to have taken over. Leading sub-industries by the end of the year are expected to include Energy Storage ($4.9B projection for 2023), Clean Energy ($4.5B), Vehicle Production/EV ($4B) and Biotechnology ($3.7B). And for those in the early stages of development (pre-Seed, Seed, and Series A) round sizes have continued to rise right through 2021/22 and into 2023 without pausing for breath. Even though deal count is down, there is no shortage of capital to deploy into those startups that present as future 'category winners'.

Looking ahead, the opportunity for VC funds seems as positive as ever. A 10-year perspective on the amount of capital raised by European VC funds shows that after the extremes of 2021/22, we are back on trend in 2023. After a slow start to the year, with $5B raised in 1Q23 and $5.4B in 2Q23, this figured jumped to $8B in 3Q23. And looking at the diversity of different sources of capital across VC funds, Corporates, Angels, PE, Family Offices and other types of private investment vehicle, the number of unique, active investors continues to rise in Europe. A further breakdown of just the VC funds shows that over the 10-year horizon, there has been a massive increase in the number of unique, active players. In terms of stage specialisation, Dealroom now counts 1,962 Seed investors, 627 at Series A, 255 at Series B, and 223 at Series C+ across Europe. And with the mix in startup profile shifting back towards 'manufacturing', driven especially by Climate and Deep Tech, the mix in the investor profile is also shifting back to 2015 levels. Looking at the number of different investors active in 2023 to date, VCs represent 48% (was 55% in 2021), Corporates 20% (18%), with PE, crossover and other types making up 32% (27%). In Europe, the next 20 years won't be like the last. A more diverse and experienced VC ecosystem combined with the rise of engineering-centric entrepreneurialism will foster growth in a whole range of exciting new sectors.

Happy reading!

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