The European VC market experienced mixed results in Q1 2023, according to figures published by Pitchbook on Tuesday. On one hand, lower growth rates, workforce reductions and tougher funding conditions appeared as new challenges, while valuations that had previously ballooned, particularly at later financing stages, largely plateaued. Founding teams began taking steps to improve capital efficiency as they shifted their focus from growth at any cost to profitability.
On the other hand, due diligence processes lengthened, with revenues, valuations and runways under renewed scrutiny. Deal value with nontraditional investor participation in Q1 2023 decreased by 65.3% year-on-year, with venture-growth stages experiencing the largest decline in median deal value, Pitchbook reported. The economic uncertainty worsened, resulting in subdued activity among nontraditional investors in private markets.
Furthermore, flatter valuations were observed in Q1 2023, and it is expected that substantial rounds at lofty valuations will be rare in 2023. Unicorns with high burn rates will be the first to show signs of duress if recent costly investments combined with current market conditions hamper growth.
Exit strategies: acquisitions and public listings
Although exit valuations declined, acquisition deals remained strong while public listings were lackluster.
In terms of acquisitions, the median acquisition valuation increased nearly threefold quarter-over-quarter to €29.6m, while public listing valuations declined 47.1%.
Pitchbook anticipates that acquisition-driven exits will gain ground over public listings as valuations in the public markets stay subdued and weakened asset values provide prospects for buyers.
However, the public listing counts remained subdued in Q1, despite some recovery in valuations. The median valuation increased 5.8% year-over-year to €42.7 million, but the outlook for public listings is still remains uncertain.
Pitchbook predicts that public valuations will not recover completely, resulting in depressed listings and a constrained liquidity pipeline for late-stage companies.
Overall, VC exit activity is likely to remain challenged throughout the year, with smaller exits more insulated. Acquisitions will likely take share of exit activity as public markets remain muted and the macroeconomic outlook remains uncertain.
Higher interest rates mean conventional exit strategies such as leveraged buyouts may continue to fall out of favour, limiting exit opportunities for larger companies. This could increase the demand for smaller transactions, which can be financed by cash and stock.
Despite having the advantage of scale, larger entities such as LBOs or public listings are likely to remain limited, and hence late-stage players will still need to be prudent with costs and cash burn.
In conclusion, the European VC market is facing several challenges in Q1 2023, as startups at various funding stages are being affected by macroeconomic pressures, economic uncertainty and shifting funding conditions.
Find Pitchbook’s full Q1 2023 European VC valuations report here.