In 2022, Europe experienced market volatility unprecedented in modern history; businesses had to deal with the knock-on effects of a pandemic, followed by Russia’s war on Ukraine, an energy crisis, supply chain crises and an extreme summer of drought and wildfires. How does this affect the outlook for private capital in Europe? What’s the outlook for climate tech startup investing in 2023?
Despite the market turmoil in 2022, fundraising remains very strong. Venture capital investment in Europe has exploded over the past decade, from €60 billion in 2013 to more than €300 billion in 2022, Pitchbook predicts, due to “strong fundraising and less capital allocation from capital allocators combination.”
Overall, investment in European startups remained at almost $59 billion in the first half of 2022, just $1 billion below the level of investment in the first six months of 2021, according to Dealroom.
Yet European venture capitalists have been advising the startups they invest in to cut costs as much as they can and halt hiring to boost runway through an expected downturn in the coming years.
Some of Europe’s most valuable start-ups have been cutting jobs, downsizing and revisiting expansion plans. Others have been raising more money to extend the runway.
Notably, climate tech stood out as an outlier in the market slowdown, with climate tech, deal counts, and valuations picking up from 2Q22.
Pitchbook VC analysts don’t expect major changes to the European VC investment scene next year. From a macroeconomic and political perspective, 2023 could bring persistent inflation, central bank interest rate adjustments and the continuation of the war in Ukraine.
This has led to a paradox in the fundraising world – VC firms are holding more cash than ever before, while taking a cautious approach to investing to see how the economy plays out.
According to Pitchbook, as company valuations take a hit in 2022, we may see fewer unicorns emerge in 2023; fewer companies approach unicorn status than in previous years. Many companies are delaying exits in 2022 due to low valuations. A recession could also cause non-traditional investors to turn their attention to opportunities to take advantage of lower valuations in a weak stock market.
Due to the instability of the macro economy, VCs have always adopted a more cautious attitude towards capital allocation, resulting in higher dry powder. However, once the macro economy and markets stabilize, Pitchbook expects the IPO market to pick up and unicorns at risky growth stages to exit. In a world with a less severe recession in Europe, business confidence would pick up and venture capitalists would use their cash reserves to funnel money into new investments.
In the 2020s, we have witnessed a unique dynamic, with businesses hit by unprecedented volatility while every sector of society—from transportation to manufacturing, commerce, energy, finance, and agriculture—is transforming. Investors continue to be eager to cash in on the opportunities presented by this transition, but the level of investment in 2023 will determine how strong Europe’s startup ecosystem has become, and how well it can weather the storm.