Q3'23 Venture Pulse Report – Europe

As investors raise the bar, not all companies will survive

In light of the uncertain market conditions, many VC investors in Europe have raised the bar in terms of their investment criteria. This has likely contributed to some of the slowdown in deal volume as VC investors narrowed their focus to supporting the biggest bets and highest quality companies in more mature sectors and ones that have shown less resilience in the current market climate.

AI has been one notable exception; VC investor interest in the space only continued to accelerate during Q3’23, with quite a range of startups raising funds, including France-based AI platform company Poolside ($126 million).

Fintech investment softens in Europe

Fintech investment in Q3’23 was quiet in Europe as late stage fintechs in the region continued to avoid funding rounds given current economic conditions and concerns about depressed valuations. Many have also been working to get their own house in order, improving the efficiency of their operations amidst increasing pressure from their investors to achieve or accelerate the path to profitability.

France-based embedded finance company Defacto’s $182 million raised the largest fintech deal of the quarter, followed by a $150 million raise by UK-based investment firm Astaris Capital Management. VC investors did continue to show interest in B2B-focused fintechs during Q3’23, particularly solutions aimed at improving the back office financial activities of small businesses.

VC investment in UK soft during Q3’23; ecosystem activity remains strong

While VC investment in the UK remained subdued in Q3’23, ecosystem activity continued apace. During the quarter, UK FinTech Growth Partners announced the launch of a FinTech Growth Fund aimed at filling a recognized funding gap by providing support to growth stage fintechs working to scale.⁵ The UK government also announced a bespoke deal to allow for UK scientists to participate in Horizon Europe—a collaborative research program they have been unable to participate in since the UK exited the EU. It is expected that the program will help spur scientific collaboration and innovation efforts and increase access to research opportunities and funding.⁶ The EV and automotive space also saw continued activity; in recent quarters, a number of large automakers announced or made major investments in EV vehicle production, ancillary activities, and EV battery production in the UK—including BMW, which announced a £600 million investment in EV production.^{7 8} 

Germany VC investment remains muted

VC investment in Germany remains muted in Q3’23 as VC investors enhanced their focus on due diligence and took a tougher stance on making potential deals. In particular, VC investors have become more risk averse, increasingly scrutinizing startups’ expected milestones and planned pathways to profitability. During Q3’23, AI focused startups attracted significant investments in Germany, including GenAI focused Aleph Alpha ($225 million) and AI-powered robotics firm Neura Robotics. Business productivity solutions providers and companies focused on cleantech, energy, and medtech also continued to attract attention from VC investors.

VC investment in Germany holds steady quarter-over-quarter

While VC investment in the Nordics region continued to be soft in Q3’23, there were a number of indications that suggested that the tide might be ready to turn heading into Q4’23 and Q1’24. In particular, the quarter saw Sweden-based Green Steel raise $1.6 billion in equity funding.⁹ From a fundraising perspective, the Nordics region saw two major new funds closed during the quarter, including the £1.1 billion hard cap close of Verdane’s Capital XI fund –focused on supporting growth companies looking to digitalize and decarbonize the economy in Europe.¹⁰ NordicNinja also announced a $214 million fund with a focus on climatech, deeptech and digital society.¹¹

Ireland continues to see deal activity at smaller deal sizes

With the exception of a major $200 million raise by critical minerals investment company TechMet, VC deals in Ireland were quite small this quarter. While companies continued to attract attention and funding, deal sizes were particularly modest as investors remained cautious and hesitant about writing significant cheques given the current environment. Investor caution has likely also been partly responsible for the slowdown in fundraising activity as VC firms look to avoid pressure to spend funds raised.

Trends to watch for in Q4’23

VC investment in Europe is expected to remain soft in Q4’23, as companies continue to face difficulties raising funding. The high interest rate environment could also see VC fundraising activity remain subdued, which could have long-term consequences for the VC market. If the VC market remains tight, there will likely be more focus on consolidation as industry winners continue to raise funds and other startups lose momentum or fade into obsolescence. Despite a general slowdown in investment, AI will likely remain very attractive to VC investors, in addition to cleantech and health and biotech.

It will be important to watch the IPO market over the next quarter or two; while the IPO of UK based Arm was a positive signal after a lengthy drought, more successful exits are needed to revitalize the market and give LPs more confidence in potential exit opportunities.