Europe saw VC investment fall to its lowest level in seven quarters during Q3’22, amidst continued geopolitical uncertainty, inflationary pressures, and rapidly rising interest rates. Rapidly rising energy costs, concerns about a potential recession, and the ongoing war between Russia and the Ukraine also had a major impact on investor sentiment and VC funding in the region.
B2B and energy attract big funding rounds in Europe
B2B-focused companies attracted major interest from VC investors in Europe during Q3’22, led by a $1.4 billion raise by Germany-based business productivity firm Celonis. Given the very real energy crisis in Europe exacerbated by the Ukraine conflict, interest in alternative energy and energy storage was also very high. The sector attracted a number of large deals, including a $1.1 billion raise by Sweden-based Northvolt—the second largest raise of the quarter in the region.
VC investment in cybersecurity sector remains hot
While a number of sectors saw declining investment in Europe during Q3’22, VC investors continued to show strong interest in cybersecurity. Companies focused on managed services were particularly attractive to VC investors, in addition to those focused on helping companies consolidate their ability to identify, address, and manage cyber threats and concerns.
Israel continued to be a strong hub for cybersecurity investment in Europe, with network management companies Talon and Cymulate raising $100 million and $70 million respectively during Q3’22.
UK sees steep drop in VC investment and deals volume
After six robust quarters, both VC investment and the number of VC deals in the UK dropped considerably in Q3’22. The consumer and retail space saw the sharpest decline as VC investors turned their attention away from the companies in the sector regardless of deal stage in favor of those focused on business productivity, digital enablement, and B2B fintech solutions. Interest in healthtech also remained strong during Q3’22, with the continued growth and expansion of healthtech clusters across the country. The diversity of healthtech offerings — from therapeutics and medtech to the future of healthtech delivery — likely had a role in the sector’s resilience.
Given the declining value of the British pound, the UK is starting to see growing interest from overseas investors looking for attractive deals. This could spur additional investment and M&A activity heading into Q4’22 and Q1’23.
Germany’s VC market shows some resilience tin Q3’22 despite concerns
VC investment in Germany remained solid relative to historical norms in Q3’22, led by a $1.4 billion raise by business productivity company Celonis and a $400 million raise by insurtech Wefox. B2B focused companies attracted the most attention during the quarter, while companies in the B2C space—including grocery delivery and consumer focused fintech—saw a strong pullback from investors. Corporate VC investment in Germany remained relatively strong in Q3’22, particularly in mature sectors like automotive and financial services where the pressure to innovate their business models continued to be high.
Many startups and scaleups in Germany that were considering IPOs early in the year have now pushed plans back significantly. This will likely lead some to seek bridge financing, whether through a traditional VC raise or by using debt financing in the case of those unable to attract interest or who want to avoid or delay a potential down round.
Nordic region bucks downward investment trend, driven by Northvolt and Klarna raises
Within Europe, only the Nordic region showed an increase in funding quarter-over-quarter, propelled primarily by two large deals: a $1.1 billion raise by battery maker Northvolt and an $800 million raise by buy-now-pay-later company Klarna. While VC investment in the Nordic countries remained robust, the number of deals dropped considerably in Q3’22. This highlights the growing polarization of funding in the region, with the strongest companies able to attract investment while others fall by the wayside.
Despite the degrading market conditions globally, the Nordics region continued to see strong fundraising activity in Q3’22. During the quarter, EQT Growth closed a $2.4 billion fund to support European growth startups,6 while Northzone announced a $1 billion fund focused on both Europe and the US markets.7
PE firms make foray into debt financing as companies look to debt options
Over the last quarter, debt financing gained new attention in Europe as large PE firms made forays into offering lending products to startups. With interest rates rising, such activity will likely step up considerably as finance providers consider getting back into the debt market due to the improving possibility of returns. During Q3’22, Ireland-based Wayflyer announced that it had secured a $253 million debt financing facility from Credit Suisse in order to expand and scale their lending offerings to startups.3
Trends to watch for in Q4’22
With geopolitical and macroeconomic uncertainty expected to continue, VC investors in Europe will likely become even more aggressive in their investment decision making heading into Q4’22. early-stage companies could feel the biggest impact, which could hinder the health of the deals pipeline long-term.
Energy and ESG are expected to remain hot areas of investment in Europe heading into Q4’22, particularly as they relate to alternative energy and battery storage. B2B is also expected to remain very attractive to investors, particularly as companies across the board focus on improving efficiencies and enhancing their profitability.
While a number of sectors saw declining investment in Europe during Q3’22, VC investors continued to show strong interest in cybersecurity. Additionally, as we develop quantum computing and it becomes more accessible, the whole area of cybersecurity will ramp up as well. We’ll see a lot more investment – not just in Europe, but everywhere as companies look to take cybersecurity to the next level.
Investment strong in Europe — over $27.3 billion invested on 2,220 deals
Late-state holds strong as investors remain sanguine
Late-stage volume remains healthy
First-time financings slow down; corporates remain active
UK and German VC invested tallies remain healthy
Top 10 deals spread among 6 countries