Market turbulence: It’s not just startups that have money worries in 2023, but also VCs

VC mit Geldsorgen. © Canva Magic Studio
VCs have money worries. © Canva Magic Studio

The new European venture report for the third quarter of 2023, published by PitchBook, shows that the value of deals in the VC market at the end of 2023 will be significantly lower than in 2022 (no big surprise), but signs of recovery could be visible.

According to the report, the value of venture capital deals in Europe amounted to €43.6 billion in the first nine months of 2023, down 49.1 percent compared to the first three quatera of 2022. The total value of deals in 2022 reached €109.0 billion, so the recovery by year-end is not expected to be enough to increase the 2023 total compared to the last two years.

Large declines in late-stage funding

Although deal value prior to 2020 was almost similar or lower than in the first three quarters of 2023, this suggests that venture activity has experienced structural growth over the long term. In the short term (quarterly) we can see that the deal value has increased since the first quarter. The data shows that deal value increased 5.9 percent in the third quarter compared to the second quarter.

Late phases continue to show larger declines compared to early phases. Late-stage activity fell 61.9 percent in the first three quarters of 2023 compared to the same period in 2022. Early-stage activity has increased sequentially since the first quarter of 2023 (four of the ten largest deals in the third quarter fall in this phase).

Cleantech and AI technologies were heavily featured in notable deals (five of the ten largest deals in the quarter were cleantech deals, including the three largest investments). Commercial services and France and Benelux show the greatest resilience in terms of industry and regional trends. Still, the United Kingdom and Ireland clearly lead, accounting for 33.2 percent of deal value in Europe in the first nine months of 2023.

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Sharp drop in exits

According to the report, the exit value in the first three quarters of 2023 was €9.1 billion (72.8 percent less than the same period last year). Therefore, it is no surprise that 2023 is expected to be the year with the lowest exit value since 2013. This is of course a problem for VCs because profits cannot be realized this way – yes, they are needed to achieve fund returns.

As for the types of exits, the value of IPOs remains the lowest this year (with a decline of 79.8 percent compared to the same period last year), while buyouts show the most resilience (but still a decline of 56, 4 percent compared to the same period last year). The majority of the exit value and number is in acquisitions.

By industry, IT hardware is showing the most resilience, while energy has seen the largest decline in the first nine months of the year. In the third quarter of 2023, most of the ten largest exits were in the software industry.

VC fundraising also fell sharply

In the first nine months of 2023, capital raised was €13.9 billion (compared to the 2022 total of €27.6 billion). Although the data shows a year-on-year decline, there has been an increase since the first half of 2023, with capital raised rising to €8.9 billion.

As stated in the report, this year is not expected to exceed the highs of 2022, even with the notable increase in funding throughout the year. There are many reasons for this, including the lack of mega funds in the asset class that can skew totals.

Regionally, the largest share of capital raised in the first three quarters of 2023 compared to 2022 was achieved by France and Benelux (27.8 percent), followed by the DACH region (24.3 percent). With this share, France and Benelux are approaching the United Kingdom and Ireland, the largest region in terms of capital.

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