3.2
Investment levels
Adjusting to a new normal
The venture capital industry experienced a further slowdown in 2023 following its peak years in 2020 and 2021. This deceleration has affected both sides of the venture capital ecosystem.
On one side, venture capital firms have faced challenges in raising fresh capital, primarily due to macro factors such as a higher cost of capital and, consequently, a lower risk appetite among limited partners. On the other side, venture capital firms deployed less capital into European companies.
Even though the numbers were lower throughout the year, there is hope for venture capital investments to pick up. The fourth quarter showed the most promising signs for funding. This suggests we might see an improvement of investment levels in the second and third quarters of 2024.
Key insights
Despite a 38% drop from 2022, the amount raised is still the highest for venture capital funds in Europe in the last five years.
This amount represents a 37% drop in total capital deployed compared to 2022 and a 48% decrease from the peak year of 2021.
While overall investment levels in Europe fell in 2022 and 2023, the fall was largely driven by the drying up of late-stage mega rounds of €100M+. Earlier stage investment levels have remained more stable during this period.
European venture capital funds raised €17.1B in 2023
With high interest rates and alternative lower-risk investment options have become more attractive for limited partners, making fundraising for venture capital funds in Europe challenging.
However, despite a 38% drop in funding levels from 2022, the total amount raised by European venture capital funds is still the highest in the last five years.
Size of capital raised by European venture capital firms in 2023
Size of venture capital raised by European VC funds in 2023
€17.1B
Source: Dealroom
Total size of fresh capital raised by venture capital funds, 2019 to 2023
Tap on a bar to reveal the exact amount
Notes: Whole of Europe.
Source: Dealroom
Fabio Mondini de Focatiis
Italy
"Traditionally, a well-performing fund would have its next fund ready by the time its investment period expires.
However, in 2023, we have seen a shift in this dynamic due to changes in the entire investment landscape. Many funds have faced difficulties in raising new capital, which has reduced the number of new funds more than the total amount of money available for investment. But while there's still a lot of dry powder in the market, the dynamics of how this capital is being allocated, and the types of funds receiving it, are changing.
Over half of Limited Partners say they made fewer investments in the past 12 months
In our survey, we wanted to assess the extent of the slowdown in capital deployment by asking limited partners about the current pace of their investment. We asked if they had noticed any changes in the rate of capital deployment over the past twelve months.
The response was that 53% of the participating Limited Partners reported a decrease in their investments in 2023, with 47% making fewer and 6% making significantly fewer investments.
Has there been any change in the number of investments made by your fund in the past 12 months?
LP investors only
Notes:
Venture capital fundraising levels drop across Europe
Venture capital fundraising levels have dropped in all but two European countries within the scope of this report - only Italy and Finland experienced a moderate increase in capital raised by venture capital firms.
These statistics effectively demonstrate the broader impact of uncertain market conditions and the increased attractiveness of alternative investment options for limited partners.
Total size of fresh capital raised by funds (€B) per country, 2019 to 2023
Tap on a bar to reveal the exact amount
Notes: 18 countries in scope only.
Source: Dealroom
Founding Partner, Cavalry Ventures
Claude Ritter
Germany
"There's been a noticeable contraction in the venture capital this year, largely driven by factors like higher interest rates.
Can we manage our liquidity? Can we predict our portfolio performance? I think the mindset of the investors this year has also been about understanding whether the management teams have the ability to predict future cash flows and liquidity events. If you can manage your cash flow efficiently, you can be extremely successful. It also has a significant impact on your profitability."
The number of new European funds is also falling
In 2023, there were 121 new venture capital funds raised in Europe.
Even though we might get a clearer picture of the total number of funds that raised in the coming months due to the reporting lag, we are expecting so see the totals for 2023 to be significantly lower than 2022.
To put this in context, venture capital fundraising has been on a downward trend over the past three years: 208 new funds were raised in 2022, a 13% decrease from 2021, which saw 124 new European funds.
Number of new European venture capital funds announced in 2023
121
Total number of new funds per country, 2019 to 2023
Tap on a bar to reveal the exact number
Notes: 18 countries in scope only.
Source: Dealroom
Total capital deployed by venture capital firms drops to €53.2B
Venture capital firms across Europe deployed €53.2 billion of fresh capital into companies in 2023.
This amount represents a 37% drop in total capital deployed compared to 2022 and a 48% decrease from the peak year of 2021.
Total capital (€B) deployed by European venture capital firms, 2023
Capital deployed by European venture capital firms in 2023
€53.2 billion
Total capital (€B) deployed by European venture capital firms, 2019 to 2023
Tap on a bar to reveal the exact amount
Notes: Whole of Europe.
Source: Dealroom
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Head of Venture and Growth Banking, HSBC Innovation Banking
Sonya Iovieno
United Kingdom
"In 2023, we have seen a growing consensus in the market that companies should demonstrate the ability to run profitably, not just focus on top-line growth.
This shift towards profitability has led to more stable financial company profiles and has been, in general, positive for companies, providing them with more funding options, whether through equity or debt. Companies with stable profitability profiles but without an immediate need for an equity round are now more appealing to lenders. They are able to secure additional funding that allows them to extend their growth by another six to twelve months, and to increase their valuation."
"No significant change in the pace of deployment over the past twelve months" - say venture capital firms
In our survey, we wanted to see whether the macroeconomic climate has fundamentally impacted the pace of capital deployment by European venture capital firms over the past twelve months.
While the majority of venture capital investors have seen no change, the trend suggests that some funds have been making fewer deals as a consequence of the wider market shift.
Looking at the past 12 months, how does the number of all investments made by your fund compare to the number of investments made in the previous year?
VC investors only
Notes:
Geographical distribution of venture capital investment
across Europe
Gain a clearer picture of how European venture capital funding has evolved over the last five years.
Total capital (€B) invested by VC firms per country, Europe, 2019 to 2023
Tap on a country to reveal the exact amount
Note: Whole of Europe.
Source: Dealroom
The UK, Sweden and Switzerland see the biggest drop in venture capital investments in Europe compared to 2022
Year-on-year European capital deployment data shows that the rate has slowed down considerably across the continent with the UK, Sweden, and Switzerland experiencing the largest year-on-year drops.
Total capital (€B) invested by VC firms per country, 2019 to 2023
Tap on a bar to reveal the exact amount
Notes: 18 countries in scope only.
Source: Dealroom
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Founding Partner, Expon Capital
Jerome Wittamer
Luxembourg
"One of the key questions for this year has been how founders and startups are adapting to the changing landscape.
First, the competition has been fierce, and the bar has been raised. Startups now need to demonstrate a higher level of traction than before, along with stronger unit economics and a compelling equity story. It's worth saying that the founders who were setting fundraising records in the past may not necessarily be the stars of tomorrow."
The amount of capital deployed remained relatively constant throughout 2023
The distribution of capital deployed remained relatively constant throughout the year, with September witnessing the highest amount of capital deployed, most likely influenced by the cumulative effect of the summer break.
Month-by-month analysis of capital invested (€B) in 2023
Tap on a bar to reveal the exact amount
Notes: Whole of Europe.
Source: Dealroom
Energy and health sectors received most funding in 2023
We examined various sectors to get a clearer picture of capital allocation among them in 2023.
The energy sector emerged as the leader with almost 25% of the total capital deployed. Health captured 17% of all capital, transportation 15%, and fintech 13%.
Total capital invested (€B) by sector, 2023
Tap on a bar to reveal the exact amount
Notes:
Source: Dealroom
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Partner, Target Global
Bao-Y Van Cong
United Kingdom
We have been seeing a significant paradigm shift in company profiles at point of their exit in 2023.
Two years ago, even unprofitable companies could be acquired based solely on the promise of their future value. This landscape has shifted; now, only businesses with solid unit economics and a sustainable growth trajectory have the potential to be acquired or go public. Achieving sustainable growth has become the primary goal for founders today.
I anticipate that 2024 will follow this trend. In the coming months, I expect we'll see a rise in profitable companies and resilient founders."
The last quarter of 2023 saw a pick-up in capital deployment for most countries compared to the previous year
When analysing the quarter-by-quarter change in venture capital deployed per European country, it's clear that the last quarter of the year witnessed the highest peak in capital invested compared with 2022, across the countries covered in this report.
Trailing 12-month capital investment change (%) per country, per quarter, 2023
Tap on a bar to reveal the exact percentage change
Notes: 18 countries in scope only.
Source: Dealroom
Denmark is the only European country that saw total venture capital deployment increase in 2023
In 2023, all European countries except Denmark experienced a decrease in venture capital deployment.
Despite the global slowdown, Denmark actually saw a 7% increase in capital deployed compared to the previous year.
Among the countries with declines, Estonia faced the steepest year-on-year drop, with a 75% decline, followed by Portugal at 64%, Finland at 63%, and both Poland and Austria at 50%.
Year-on-year change in capital invested (%) per country, 2019 to 2023
Tap on a bar to reveal the exact percentage change
Notes:
Source: Dealroom
Late-stage investment rounds and mega-rounds are those the most impacted by the deployment slowdown
While overall European investment levels fell in 2022 and 2023, this fall was largely driven by the drying up of late-stage mega rounds of €100M+. Earlier stage investment levels have remained much more stable during this period.
Capital invested (€B) per stage per quarter, 2019 to 2023
Tap on a bar to reveal the exact amount
Notes: Whole of Europe.
Source: Dealroom
Strong H2 fundraising for energy, wellness and sports
Energy, transportation wellness, telecoms and sports companies had a particularly strong second half of 2023 in terms of raising venture capital, more than two thirds of their funding came in the third and the fourth quarter of the year.
Capital invested (%) per sector, per quarter, 2023
Tap on a bar to reveal the exact percentage
Notes: