In Europe at least, the VC outlook is still pretty rosy

A public market crash, geopolitical turmoil, soaring global inflation and U.S. interest rates don’t seem to have lessened optimism among European venture capitalists for investing in the near term.

Why it matters: European VCs have historically been more conservative than their American counterparts — but that may be changing.

The big picture: After a record €103.5 billion invested across more than 12,000 deals last year, 2022 appears to have the potential to reach the same level. It may even surpass 2021, according to new data from Pitchbook.

• The proportion of late-stage investment dollars is similar to 2021 so far, reinforcing a European startup market that’s matured in recent years.
• And like their American peers, European VCs have continued to raise new funds this year.

What they’re saying: “Fundamentally, the job of a VC is to invest in trends that will outlive any financial down-or-up cycle,” Seedcamp managing partner Carlos Eduardo Espinal tells Axios via email.

• “Large problems, such as climate change, health management, automation, clean energy, democratization of financial services globally … have large outcomes, not just because there are boom times that drive valuations, but also because they fundamentally shift the value-creation equation for societies permanently,” Espinal says.

Between the lines: European VCs expect to see a similar reversion to the mean — that is, a return to the pre-pandemic trend line — like in the U.S. market. But they also believe the continent’s growth is driven by secular trends that aren’t going away.

• “The driver of this growth has been the exceptional talent that we’re seeing in the region, and like everything, it compounds,” Accel partner Philippe Botteri tells Axios.
• Europe also now has more startup hubs across the continent, creating a robust market that can continuously pump out quality companies.
• Botteri, who focuses on business software and applications, also points out that the European cloud-based software market now moves in tandem with the American one, signaling that it’s all one global ecosystem, not separate markets.

Yes, but: It won’t be the free-for-all of 2021, even in Europe.

• While they won’t stop investing, “VCs can either become more cash-conservative to help defend companies that might need a bridge in the near term, or revisit the fundamentals of what they will be interested in investing in during this period,” says Espinal.
• For example, they might avoid backing companies dependent on discretionary consumer spending, which won’t recover quickly in the foreseeable future.

The bottom line: “I don’t think we’ll get back to where it was in 2021, but we’ll get back to a more normalized funding environment,” says Botteri.