Opportunity funds fall out of favour
12 April 2023
25 April 2023
In recent years, VC investors have invested in start-ups at an unprecedented rate, injecting liquidity into the market. However, according to Pitchbook data, there has been a noticeable slowdown in deal activity across the continent towards the end of 2022 and this trend is set to continue in 2023. In the current challenging economic environment, characterised by inflation and tighter monetary policy, it is becoming increasingly difficult for start-ups to achieve growth as capital inflows have dampened.
European VC fundraising this year is expected to reach its lowest annual volume since 2015. The first quarter of 2023 showed a significant decline compared to the pace set over the past four years, suggesting that the venture capital ecosystem is starting to feel the impact of challenging fundraising conditions. This slowdown in equity investment in start-ups, coupled with fewer exits, could reduce returns and put long-term capital commitments at risk.
In the first quarter, only €3.4 billion was raised (fundraised) in the European VC market. If the same pace continues for the rest of this year, this will be the lowest volume since 2015. As new funding becomes increasingly difficult to raise, VC funds will face challenges in raising capital for investment, even from existing sources. This problem is exacerbated by the fact that the number and size of VC-backed European exits has been significantly reduced since last year.
The first quarter of 2023 saw a reduction in significant venture capital exits due to unfavourable macroeconomic conditions and weaker valuations. Exit activity is expected to remain subdued in the coming quarters as the volatility witnessed in equity markets over the past 12 months continues to negatively impact the market environment. For this reason, there has been a change in trend, with initial public offerings (IPOs) often representing the largest exits for startups (by value) in a given quarter. Instead, four of the top five exits in the first quarter of this year were through M&A, so we may see an increase in M&A activity in the coming months. Although these exits tend to be smaller in scale compared to IPOs, they offer greater certainty and potential synergies, which can be invaluable for smaller businesses in the current economic uncertainty.