VC investors in Europe continued to play a waiting game in Q2’23, with investors holding back on making major investments, particularly late-stage investments given the amount of uncertainty in the market and the lack of exit opportunities. VC investment did, however, hold steady during the quarter—a positive sign following four straight quarters of declining investment.

Investment in AI continues to be red-hot

Investment in AI and generative AI remained hot in Q2’23 as startups around the world looked to accentuate their AI capabilities and VC investors enhanced their focus on the AI space, seeing it as one of the few resilient areas of investment in the current market.  Corporate investors showed the most interest in the generative AI space, particularly global tech giants with the massive data sets required to underpin robust generative AI solutions.

Both Microsoft and Google have already made major inroads into the space, including Microsoft’s $10 billion investment in OpenAI during Q1’23, along with China’s tech giants—Alibaba, Baidu, and Tencent. As of Q2’23, Alibaba said that it had received a significant number of trial access requests for its generative AI tool Tongyi Qianwen, while Baidu announced that it had submitted its own generative AI tool Ernie bot for regulatory approval.

AI and deep learning technologies were also a hot area of investment in Europe during Q2’23, with UK-based Quantexa raising $129 million during the quarter to earn unicorn status—one of only a handful of startups in the region to do so this quarter. In Q2’23, the European Union also passed the AI Act, a detailed regulation governing the use of AI in the region and requiring generative AI systems in particular to be reviewed prior to commercial launch. The regulation also bans real-time biometric ID systems.  During the quarter, the UK also pitched its desire to become the home of AI safety regulations.

Down rounds growing globally as VC investors continue to shy away from late-stage deals

VC investors continued to hold back from making large, late-stage deals in most jurisdictions during Q2’23, with a couple of exceptions. US-based global payments processor Stripe raised a $6.9 billion, while Singapore-based online fashion retailer Shein raised $2 billion. Both companies took major hits to their valuations as a result of their new funding rounds More broadly, the steep decline in late-stage deal value and number of deals—particularly for Series D+ deals—continued in Q2’23. This continued pullback was not a surprise given ongoing investor concerns about valuations and a lack of exit opportunities.

Softness continues in the Nordics

VC investment in the Nordics region during Q2’23 remained soft compared to the highs seen during 2021 and 2022, although it was relatively consistent to the levels seen prior to the pandemic. While the amount of VC dry powder might be similar in early-stage to previous years the investor characteristics have shifted significantly, and the international growth funding is scarce. The investor focus is more on companies able to show capital efficient growth with optional pathways to profitability. Health and biotech investment remained resilient, while alternative energy and EV technologies continued to attract strong interest.

Trends to watch for in Q3’23

While VC investors in Europe continue to have dry powder available to them, they will likely continue to be reluctant to spend it given both current market conditions and concerns about whether they will be able to raise new funds given less risk-averse LPs now have more investment options available to them. Exit activity is also expected to remain limited, with startups and their investors playing a waiting game in the hope that conditions improve and the market stabilizes.

The entire gamut of alternative energy and cleantech is expected to remain a robust area of investment in Europe, in addition to AI, and health and biotech. Over the next few quarters, the fintech space could begin to see some consolidation in Europe as companies look to achieve the scale needed for their business models to become profitable.

Contact us and read more insights here