Both the number of VC deals and the total VC investment in Europe fell for the fourth straight quarter, dropping from $15.7 billion in Q4’22 to $9.8 billion in Q1’23. The decline was particularly stark when set against the record number of VC deals and VC investment seen during the same quarter in 2022.

VC investors more stringent with portfolio companies

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.

Governments enhancing supports for startups

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.

Q1’23 VC investment in UK pales compared to Q1’22

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.

Alternative energy remains big ticket in Germany

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.

Uncertainty in Israel causing VC investors to hold back

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.

Ireland continues to attract diverse range of investments

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).

Nordics region has quiet start to the year

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.

Trends to watch for in Q2’23

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.

Venture financing in Europe

The end of 2021 and into early 2022 was really an outlier period. Now, we’re somewhat coming back to normal— except it’s being compounded by all these a number of other factors that have come up. So it looks like, perhaps, more of an adjustment than perhaps we would have seen if this would have happened in isolation of the economic environment. The dynamic of the two factors together is making the disparity even bigger.

Warren Middleton
Lead Partner for Emerging Giants, Center of Excellence
KPMG in the UK

  • Investment drops again - to $9.8 billion invested on 1533 deals

  • VC down-rounds increase as a percentage of all deals

  • Median deal size for series D+ drops to $60.5 million

  • Median pre-money valuations slide – particularly for later stage rounds

  • UK sees overall slowdown despite outlier rounds

  • Deal value falls in the Nordics following robust 2022

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