How Have Europe’s Macroeconomics Impacted VC Investment?

In 2022, Europe was rocked with market volatility unprecedented in modern history; businesses had to manoeuvre the cascading impact of the pandemic, followed by Russia’s war on Ukraine, energy crisis, supply chain crisis and a summer of extreme drought and wildfire. How has this impacted the European private capital outlook? And what lies ahead for climatetech startup investment in 2023?

Despite the market volatility of 2022, fundraising remained very strong. Venture capital has exploded in Europe in the past decade, growing from €60 billion in 2013 to over €300 billion in 2022, Pitchbook forecasts that the European VC ecosystem will hold on to a record €60 billion of dry powder in 2023 due to “a mix of strong fundraising and less capital deployment from capital allocators.”

Overall, investment in European startups held up in 2022 at nearly $59 billion invested in the first half of the year, according to Dealroom – only $1 billion less than investment levels in the first six months of 2021.

However, European venture capitalists have been advising their portfolio startups to do what they can to cut costs and freeze hiring to increase the runway to get through the next years of expected recession.

Some of Europe’s most valuable start-ups have been laying off a good portion of their workforce, scaling back, and revisiting expansion plans. Others have been raising more capital to extend the runway.

It’s worth noting that climate tech stood out as an outlier for the market slowdown, for climate tech, deal counts and valuations picked up from the second quarter of 2022.

Pitchbook VC analysts don’t expect the VC investment scene in Europe to change significantly next year. From a macroeconomic and political standpoint, 2023 will likely bring continued inflation, central banks adjusting interest rates and a continuation of the war in Ukraine.

This is leading to a paradox in the fund-raising arena – with VCs holding onto more cash than ever before, while taking a cautious approach to investment to see how the economic situation plays out.

According to Pitchbook, we could see less unicorns emerging in 2023 due to the valuations of companies taking a hit in 2022; fewer companies are close to achieving unicorn status compared to previous years. Many companies held back on exits in 2022 due to lower valuations. The recession could also lead to nontraditional investors shifting their focus to take advantage of lower valuations in a depleted stock market.

Due to the instability of the macroeconomics, VCs have been taking a more cautious approach to capital deployment, leading to higher dry powder. However, once the macroeconomics and markets stabilise, Pitchbook expects the IPO market to pick, and unicorns in the venture growth stage to exit. In a world where recessions across Europe are less severe, business confidence will pick up, and venture capitalists will use their cash reserves to pour capital into new investments.

In the 2020s, we are witnessing a unique dynamic where businesses are rocked by unprecedented volatility at the same time as every area of society – from transportation to manufacturing, commerce, energy, finance and agriculture are being transformed. Investors continue to be eager to cash in on the opportunity this transformation represents, but 2023 investment levels will determine how robust Europe’s startup ecosystem has become and the extent to which it can weather the storm.