“Factors including inflation, high interest rates and weak growth have impacted on sentiment across financial markets,” said Nalin Patel, venture capital analyst at Pitchbook, in a report on the European VC market published on 4 October 2023. Photos: Pitchbook, Shutterstock; Montage: Maison Moderne

“Factors including inflation, high interest rates and weak growth have impacted on sentiment across financial markets,” said Nalin Patel, venture capital analyst at Pitchbook, in a report on the European VC market published on 4 October 2023. Photos: Pitchbook, Shutterstock; Montage: Maison Moderne

After a decade of robust growth, the EU’s venture capital market experienced a sharp contraction in the third quarter of 2023, marked by significant declines in deal activity, fundraising and exit rates amid economic uncertainties, according to a Pitchbook report published on Wednesday.

from Pitchbook has revealed a sudden drop in European venture capital deal activity, fundraising and exit rates, after a decade of steady growth and occasionally remarkable surges. Nalin Patel, lead analyst for EMEA private capital at Pitchbook, a research and data provider, attributed this downturn to a combination of factors, including inflation, high interest rates and market volatility.

Boom and bust in deal activity

From 2012 to 2022, the EU saw unprecedented growth in VC deal activity. Deal values soared from a modest €1.85bn in the first quarter of 2012 to a staggering €35.5bn by the final quarter of 2022. This meteoric rise was particularly notable between 2018 and 2022, as deal values tripled from around €33.3bn to over €109bn.

The number of deals also peaked at 4,016 in Q1 of 2022, marking a nearly 46% increase from the same period in 2018. However, by the third quarter of 2023, deal values had shrunk to €15.8bn, almost half the Q1 2022 figure, and the number of deals had plummeted by nearly 60% to 1,629.

Faltering fundraising

Similarly, fundraising in the European VC sector expanded from €5.1bn in 2006 to €29.2bn in 2021. The fund count reached an all-time high of 383 in 2021, signifying not only more funds but also larger fund sizes. Yet the outlook for 2023 is far less optimistic. Capital raised as of 30 September year-to-date stood at just €13.9bn across a mere 91 funds, marking a drastic decline in the industry.

Exit dilemma

Between 2012 and 2016, exit values typically remained below €10bn per quarter, showing moderate fluctuations. The second quarter of 2018 was rather remarkable, with an exit value of €31.95bn, although the quarterly exits again fell below the €10bn mark until the end of 2020. Exit activity then gained momentum and peaked in Q3 2021, where the exit value skyrocketed to an astounding €55.92bn, a leap that dwarfed any previous figures. The exit count similarly saw an upward trend, hitting an all-time high of 338 deals in Q3 2021, up from a modest 116 deals in 2012 Q1.

However, 2023 signalled a distinct cooling-off period for the EU’s VC exit landscape. Exit values dropped substantially to €4bn in Q3, albeit showing a modest improvement from €2.89bn in Q1 and €2.22bn in Q2. Even more tellingly, the exit count declined to 160 in Q3 2023, representing a substantial decrease compared to the peak of 338 in the same quarter of 2021, according to Pitchbook’s data.

Patel noted that dealmaking had slowed in line with market expectations as a more challenging growth and funding landscape for start-ups persisted. Counts were also down quarter-over-quarter, further indicating that fewer deals were getting over the line as general partners became more prudent in their capital deployment. Moreover, Patel predicted that exit rates will likely remain subdued until there is greater valuation and macroeconomic clarity.

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