Q1’23 Venture Pulse Report – Europe

VC investors in Europe were increasingly cautious in Q1’23, taking a heavier hand with their portfolio companies—scrutinizing their internal budgets, pressuring them to cut costs and become more efficient, and holding them accountable to agreed-upon milestones. Over the next couple of quarters, VC investors could begin to pick and choose between their portfolio companies, pulling back from making follow-on investments in companies they don’t believe can survive. This could spur M&A activity as startups look to sell in order to avoid failing.

Several government-backed initiatives were initiated in Europe during Q1’23 to support startup growth. The UK’s budget included £3.5 billion to help the country become a scientific and technologic superpower, including funding to support next-gen supercomputing and AI research¹. The UK also released a whitepaper on the regulation of AI². During the quarter, the German government also launched a €1 billion fund to support growth stage deeptech and climatetech companies³, while the European Investment Bank Group and five EU member states announced the European Technology Champions Initiative: a $3.75 billion fund to address funding gaps and support late-stage growth companies in the region⁴.

After slowing down significantly in Q4’22 as a result of both global issues and an unsettled domestic political environment, VC investment in the UK remained subdued in Q1’23, particularly compared to Q1’22. A $601 million raise by fintech player Abound (Consumer Finance) was the UK’s largest deal of Q1’23, followed by a $160 million raise by B2B focused fintech the Bank of London, a $148 million raise by EV automotive company One Moto, and a $140 million raise by autonomous vehicle software firm Oxbotica. Carmoola rounded out the largest of deals with a $125 million series A deal. Business services and energy transition continued to attract significant attention from VC investors in Q1’23, while interest in consumer retail and real estate remained dry. Looking forward, B2B technology enablement is likely to remain a key driver of investment, not only in areas like financial and health services but across every sector imaginable.

Investor sentiment in the UK appeared to turn slightly during Q1’23 with some cautious positivity that the worst of the market turbulence might be over. While VC investment is expected to remain soft into Q2’23, there is hope that some renewed activity will be seen in the second half of the year.

VC investment in Germany remained soft relative to historical norms in Q1’23, despite attracting two of Europe’s largest deals in the quarter, including a $228 million raise by alternative energy leasing company Enpal and a $151 million raise by PE investment platform Moonfare. Corporates in Germany remained active, although they showed far more caution than in recent quarters—focusing their energy, attention, and investments only on startups with very clear value.

Alterative energy continued to be a big draw for VC investors in Germany, driven not only by regional energy concerns but also by the German government’s decision to shut down its nuclear plants and by the growing focus of domestic automotive companies on new energy vehicles.

VC investment in Israel remained subdued in Q1’23 as both global and domestic macroeconomic, and market challenges caused a significant amount of uncertainty. Among the companies that attracted investment in Israel this quarter were hypertension-focused medtech SoniVie ($60 million), subsurface imaging platform Exodigo ($41 million), cloud security company. Sentra ($30 million) and B2B productivity company Titan DXP ($30 million). Given the uncertain policy environment in Israel, VC investment in the country will likely remain soft heading into Q2’23.

A diverse range of startups continued to attract VC funding in Ireland during Q1’23, although at relatively small deal sizes. Arterial closure medical device company Vivasure Medical raised the largest deal in Ireland during the quarter ($32 million)⁵, followed by AI-powered digital pathology company Deciphex ($15 million), social media tracking and predictions company NewsWhip ($13 million), and cybersecurity firm Siren ($12 million).

Q1’23 was a very quiet quarter of VC investment in the Nordics. Denmark-based biotech company Hemab Therapeutics’ $135 million raise was the largest round of the quarter, highlighting the growing biotech sector in the region. Other VC deals during Q1’23 were much smaller—primarily under $20 million—as less International late-stage investments occurred and local investors completed primarily smaller early-stage deals. Given the uncertain geopolitical and macroeconomic environment, many late-stage companies in the Nordics have adjusted their plans to defer new equity funding rounds in to late 2023 or 2024.

Q2’23 will likely be another challenging quarter for VC investment in Europe, given the unrelenting amount of uncertainty permeating the market. Traditional VC investors will likely remain cautious, scrutinizing deals carefully to assess whether business models will be resilient, while also putting more pressure on their portfolio companies to cut costs. Some well-capitalized corporates may start to see the current environment as an opportunity rather than a challenge, particularly when it comes to making acquisitions. Non-core carveouts and bolt-on deals could also increase. Should market challenges intensify over the next few quarters, governments in Europe could step up their supports for startups.