The Positive Horizon
2023 has been a turbulent year for both startup founders and investors in Europe. Amid rising interest rates and high inflation, the sentiment among Limited Partners leaned towards making measured bets, with a preference for lower-risk options like bonds. This, combined with a slow exit market, significantly reduced liquidity across venture capital.
Operating in a high-interest rate environment also meant increased capital costs for many growth-stage companies ripe for an exit. As a result of reduced valuations, many growth-stage companies decided to hold off on their IPO plans, which is reflected in the low number of IPOs in 2023, down by 35% from 2020.
However, despite the challenging conditions, many investors and founders remain optimistic.
Challenging times often make great vintage years, bringing more resilient founders and innovative ideas to the fore.
Key insights
High interest rates have been making other asset classes carrying much lower risk, such as bonds, an attractive investment option for Limited Partners, making big players like pension funds move away from venture capital.
The traditional investment exit routes—mergers and acquisitions, buyouts, and Initial Public Offerings—have all become more challenging over the past year. This is due to the intertwined issues of rising debt costs for acquiring companies and the difficulty in calculating valuations in a volatile public market, compounded by fewer private transactions.
With higher interest rates and a greater emphasis on profit rather than revenue growth, dozens of big tech companies have announced layoffs since the beginning of 2023.
The Environment
3
3.1
Macro foces
European economy is now growing but slowly
After several years of economic downturn, Europe is finally experiencing more economic growth. In 2022, Europe saw modest growth, with real GDP per capita increasing by 2.7%. During the same period, countries with a strong manufacturing base, like Germany, saw slower growth, at just 1.8%. On the other hand, emerging economies, such as Poland, surged ahead with a 5.3% growth rate.
The expected overall reported growth for 2023 is around 1.3%.
GDP per capita growth rate adjusted by PP
Notes: Accessed on 22 January 2024, Analysed by Insead.
Source: World Bank
Inflation is coming down
The rising costs of imported energy, an increase in company profits, and more recently, growing wages, have been driving inflation up, especially in the first two quarters of 2023.
As of 2024, however, inflation rates are expected to come down considerably.
For example, the United Kingdom reported headline inflation of 4.7% at the end of the third quarter of 2023, a notable drop from the 9.6% seen in the same period in 2022.
However, core inflation, which strips out volatile food and energy prices, remains stubbornly high and is only expected to ease down gradually. The International Monetary Fund predicts that most European countries are unlikely to hit their inflation targets before 2025, indicating that the path to economic stability might be longer than initially expected.
Year-on-year inflation in Europe
Notes: Accessed on 22 January 2024, Analysed by Insead.
Source: OECD 2024,
Inflation (CPI) indicator
Founder, Twinco Capital
Sandra Nolasco
€50m debt facility
and €11m Series A round in January
Spain
"Twinco is a lending business. When you operate in a high interest rate environment, your business model is put to the test.
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."
High interest rates provide Limited Partners with more options
The impact of high interest rates over the past twelve months has made a major impact on the venture capital industry.
With high interest rates, other asset classes carrying much lower risk, such as bonds, have been an attractive investment option to Limited Partners, making big players like pension funds move away from venture capital.
Euro Area saw a jump from a mere 0.25% in interest rates in the third quarter of 2022 to 4.25% in the same period of 2023.
While impact of high interest rates on venture capital funds seems to be now stabilising, we are yet to see any evidence of the return of Limited Partners' appetite for venture investments.
Policy relevant central bank interest rates
Notes: Analysed by Insead
Source: Central Banks'
websites
.jpg)
Generl Partner, LightPace VC
Chenelle Ansah
Fundraising
United Kingdom
"It's clear that the macroeconomic situation in 2023 has influenced my fundraising efforts.
Even though most of my conversations with LP investors have been positive, what I have found frustrating has been the absence of clear rejections. I believe I have only received three rejections, despite engaging with LP investors for almost a year now. When you hear a clear "no," it provides clarity, allowing you to recalibrate your strategy. Determining whether it's a market-related issue or if it's linked to my track record or thesis is a puzzle because I hardly ever receive a direct response. I believe that investors have been very apprehensive this year, due to the uncertainty in the financial ecosystem."
Dormant IPO market means less liquidity
While macroeconomic headwinds may be subsiding, they are still stifling the ability of Private Equity and Venture Capital funds to exit their investments.
The traditional exit routes—mergers and acquisitions, buyouts, and Initial Public Offerings (IPOs)—have all become more challenging over the past year. This is due to the intertwined issues of rising debt costs for acquiring companies and the difficulty in calculating valuations in a volatile public market, compounded by fewer private transactions.
There were 107 IPOs across Europe raising €10.2bn in 2023, a fall of €5.4bn on the previous year which saw €15.6bn raised from 102 IPOs.
Fewer IPOs, mean less capital flowing back to LPs. This is having two key knock-on effects: less fundraising and less deal activity.
Number of IPOs across Europe in 2023
107
Funding raised by European IPOs in 2023
€10.2B
Reduction in capital raised compared with 2022
35%
Source: PwC’s 2024 IPO Watch
Number of IPOs, by European exchange, per year, 2019 to 2023
Source: Bloomberg
M&A shows signs of rebound
While 2023 saw a notable slowdown in mergers and acquisitions (M&A) across Europe, the S&P 500 ended the year near record highs, a peak last seen in January 2022, signalling a potential rebound.
And so, while the strength and speed of this recovery remain uncertain due to ongoing macroeconomic and geopolitical challenges, market sentiment suggests that corporate acquisitions will increase in both value and number of transactions in 2024.
Number of M&A deals in Europe, per quarter, 2019 to 2023
Notes: Data as of January 8th 2024. Includes announced or completed M&A deals.
Source: S&P
Global Market Intelligence
Europe is searching for more talent
Navigating the European labor market has become a complex puzzle for many companies.
Advanced economies like Germany and the United Kingdom are experiencing an interesting phenomenon: there are more job vacancies than unemployed people. This scenario reflects the challenges companies face in finding new talent.
Labour market demand: ratio of vacancies to unemployment
Notes: Analysed by Insead
Source: Eurostat, UK Office
for National Statistics
.jpg)
Founder, Fyma
Karen K Burns
€2m round in November
UK / Estonia
"Managing a company in the 2023 market conditions has been stressful.
Making hiring plans has been particularly challenging, especially when we had to make decisions based on limited and evolving information about the tech ecosystem. With constant news about layoffs and other companies' successful fundraisings, it was essential for me to keep our team's morale high and maintain open communication."
Big tech layoffs
With higher interest rates and a greater emphasis on profit rather than revenue growth, dozens of big tech companies have announced layoffs since the beginning of 2023.
It's estimated that over 250,000 people lost their tech jobs in 2023. This trend is likely to continue into 2024, potentially drawing more highly-skilled talent to technology startups and possibly leading to a new wave of ventures being created as a consequence.
Number of lay-offs at big tech companies from April 2022