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.
VC investors embrace AI; EU passes major AI-focused regulation
AI and deep learning technologies were 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.
Energy and cleantech attracting VC investments across Europe
With no end in sight to the Russia-Ukraine conflict, alternative energy and cleantech continued to attract attention from VC investors in Europe, although ticket sizes were relatively modest during Q2’23. Interest in the space was incredibly diverse both geographically and at a product and solutions level with Germany’s 1Komma5 raising $232.1 million leading the way followed by German energy storage company Jolt Energy raising $165.1 million, London-based atomic technology company Core Power raising $100 million, Austria-based cleantech Neoom raising $44.9 million, Israel-based thermal sensing for autonomous electric vehicles firm Adasky raising $30 million, Ireland-based renewables-focused energy transmission company SuperNode raising $17.35 million.
VC investment in UK finding a new normal
VC investment in the UK picked up quarter-over-quarter—although it remained subdued compared to the banner quarters seen in 2021 and early 2022—helped by a $475 million raise by delivery service Getir, and a $250 million raise by mobile app building company Builder.ai. Given the political and economic turmoil in the UK and high interest rates raising the bar on return requirements and causing investors to question their capital asset allocations, the more moderate level of investment could represent a new normal for the UK until there is a reasonable period of stability. VC fundraising has also slowed down considerably in the UK, with some funds closing at much lower levels than initially envisioned.
Germany sees steady investment in Q2’23
Germany saw VC investment hold relatively steady in Q2’23, led by a $232 raise by energy firm 1Komma5, a $194 million raise by GetYourGuide and a $165.1 million raise by Jolt Energy. Solutions focused on ESG continued to be quite attractive to VC investors in Germany, in addition to AI and solutions focused on business productivity. There was also a small renaissance in health and biotech in Germany in Q2’23, with a $109.8 million raise by medical records company Patient21 and a $52 million raise by drug discovery company Ariceum.
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.
Startup ecosystem in Ireland extends reach
VC investment in Ireland remained slow this quarter, despite a $53.6 million raise by unified payments company NomuPay and a $32.5 million raise by medical device company Neuromod. Ireland’s ecosystem showed its reach across Europe in Q2’23. Jolt Energy, which raised $165.1 million this quarter, was founded by Irish entrepreneurs—who focused their startup on the German market given its much larger EV potential.
VC market in Austria evolving rapidly
While total VC investment in Austria remains quite small compared to other jurisdictions in Europe, the country’s VC market is evolving and maturing at a rapid pace—with a growing number of scale-ups in sectors ranging from crypto (BitPanda) and edtech (GoStudent) to proptech (PlanRadar). The first, BitPanda, was the country’s first tech startup to achieve unicorn status. The breath of VC funds operating in the market has also grown, with new funds being introduced on a regular basis—most focused on early-stage investments. Similar to other jurisdictions, Austria’s VC market faced some pressure in Q2’23, with a number of startups choosing to conduct extension rounds rather than all new funding rounds.
VC investment soft in Israel during Q2’23
VC investment in Israel remained soft in Q2’23 as tech startups continued to focus on becoming more efficient and profitable, cutting head count and reducing their costs. Despite smaller deal sizes, Israel continued to see a diversity of companies raising funding; during the quarter, network management firm Coronet raised $75 million, medical device company Magenta Medical raised $55 million, healthtech Healthy.io raised $50 million, and fintech Novidea raised $50 million.
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.
Rising interest rates have dampened some of the enthusiasm globally for venture capital investments. While we continue to see record amounts of dry powder around the world, much of this has previously been driven by the influx of ‘tourist’ investors seeking higher returns in a low interest rate environment. In the current market, higher interest rates, we may see the opposite effect, giving many tourist investors pause before doubling down on VC.
Investment remains cool in Europe - with $13.5 billion invested on 1861 deals
Enterprise and healthcare related offerings draw investor attention
First-time financing volume stronger than anticipated
Capital continues to concentrate in follow-on funds
Germany, UK and Switzerland dominate top 10 deals