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A new Pitchbook report suggests Europe is on track to raise nearly 37pc less in VC funding this year, while the software sector has taken the biggest hit so far.
The number of venture capital deals in Europe have dropped significantly this year, while the level of fundraising remains “muted”.
That’s according to a new report by Pitchbook, which suggests that higher interest rates, inflation and tough fundraising conditions have been “significant decelerators” for Europe’s VC market.
The company’s latest venture report claims European VC dealmaking dropped in the first half of 2023 by 60.8pc compared to the same period last year. This is also 34.2pc lower than the number of deals recorded in the second half of 2022.
Pitchbook said investors have accepted that dealmaking has slowed and that exiting unprofitable businesses through IPOs has “fallen out of favour”.
“This has shifted company strategies from growth at all costs to prioritising cost management, which has translated into layoffs and hire freezes across the entire start-up ecosystem,” the report said.
The level of fundraising has also taken a hit, with €8.9bn raised in the first half of 2023. The report said that Europe is on track to raise 36.7pc less than last year, based on the current funding rate.
Pitchbook said a key challenge in VC markets is the decline in exit values – the value a company is expected to be sold for.
“Activity in H1 continues to remain markedly depressed, as both value and volume signal more caution amongst companies and investors.”
Software sector takes a hit
In terms of sectors, Pitchbook said the software sector is currently “suffering”, with deal values dropping by 71.8pc in the second quarter of the year compared to the same period in 2022.
This was the biggest drop for any sector in the report and is significant as software represented more than 40pc of 2022’s overall deal value. This has dropped to 29.3pc so far this year.
Pitchbook compared the current “reset” to the dot-com bubble reset that the sector endured in the year 2000, but noted that certain parts of the sector could see growth in the future.
“Despite this trend, start-ups within the software segment that are linked to AI may see significantly more dealmaking in future quarters given the recent investment boom in the space,” the report said.
Europe’s IT hardware showed the most resilience in terms of exit valuations, while the energy sector was shown to have the least resilience.
These sectors both took key roles in Europe’s VC market last year, with IT accounting for nearly half of all VC deals in 2022 and the energy sector’s average deal value rising significantly.
Earlier this month, Pitchbook data suggested that the UK is leading the VC funding space in Europe, with Norwich-based SFC Capital topping the list.
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