20.09.2023 12:03 PM

Venture Horizon 2023: A Decade’s Voyage and the Dawn of a New Era in European Venture

Embarking on a new journey for European Venture Capital

Over the past decade, the venture capital (VC) sector globally has undergone a significant transformation, spearheading the growth of many innovative companies, particularly within the technology sector. This article focuses on the trends, challenges, and potential solutions that have characterized the European venture capital industry within the last ten years, with a nuanced look at the global context to offer a rounded perspective.

Historically overshadowed by its American counterparts, the European venture capital industry has demonstrated a rapid expansion and a shift in focus, nurturing several unicorn companies. From London to Berlin, the continent has fostered hubs of innovation, driven notably by advancements in FinTech, HealthTech, and GreenTech sectors. Despite the buoyant momentum, the industry also grapples with intrinsic challenges such as fragmented markets and limited exit opportunities, calling for nuanced strategies to spur further growth.

As we delve deeper, this article will explore potential strategies for fostering a more cohesive, innovative, and inclusive European venture capital landscape. Drawing from case studies of remarkable successes and notable failures, we seek to chart a pathway that enables the European venture capital sector to thrive, facilitating a prosperous ecosystem where innovation meets investment efficiently.

Not only has venture capital been the lifeblood of numerous startup ecosystems globally, but it has also revolutionized the way we perceive business growth and innovation. Within the labyrinth of financial markets and investment portfolios, the venture capital industry has emerged as a vibrant field where risk meets innovation, fostering an environment where fledgling startups transform into behemoths of the corporate world. Once perceived as a nascent player in the venture capital scene, Europe has metamorphosed into a powerhouse, nurturing innovation, fostering talent, and giving birth to a new generation of unicorn companies.

A decadal retrospective: The global Venture Capital industry

Over the past ten years, the global venture capital landscape has undergone a significant transformation, shaping and being shaped by the rapidly evolving technological ecosystem. A vivid tapestry of innovations, market fluctuations, and groundbreaking strategic shifts has woven itself into the very fabric of the investment sector, heralding a new era of opportunities and challenges. As we embark on a journey to uncover the nuances of this dynamic decade, we delve deep into the core trends that have characterized the venture capital industry worldwide. This sets a firm foundation, further preparing us to zoom into the distinctive narrative of the European venture capital sphere in subsequent sections. Let’s start on this retrospective voyage, retracing the footsteps of the global venture capital trajectory from 2013 to 2023.

Innovations and market transformations

In a period marked by dizzying technological progression, the venture capital sphere has witnessed a dynamic and transformative journey. From ground-breaking technologies such as artificial intelligence (AI), machine learning, blockchain, and the Internet of Things (IoT) to the booming interest in startups pioneering these realms, the last decade saw a variety of hype-generating innovations.

Industries like finance, healthcare, and transportation embraced the wave of innovation. With data emerging as a new kind of currency, enterprises dedicated to big data analytics, cloud computing, and cybersecurity became the focal points of considerable investments, indicating a paradigm shift in market dynamics.

The evolution of investment priorities and strategies

The past decade has seen venture capital investment strategies undergo remarkable shifts. Initially dominated by a fervent focus on IT-driven startups, investment patterns soon embraced a more diverse portfolio including biotechnology, clean energy, and ventures committed to sustainability.

In the investment community, a heightened awareness of societal and environmental implications began to shape investment decisions, fostering a substantial rise in ESG (Environmental, Social, and Governance) investments. As the scope broadened, venture capital started reaching out to untapped potentials in emerging markets across Asia, Africa, and Latin America, breaking free from the conventional boundaries of established hubs like Silicon Valley.

Furthermore, a concerted effort to endorse diversity and inclusivity emerged, giving rise to a culture that sought to cultivate innovation from a broader spectrum of demographics and geographical landscapes. To find out more about global venture capital ecosystems, please take a look at the following report published by the Startup Genome.

Overcoming obstacles: The changing faces of investment landscapes

The journey wasn’t without its hurdles. As the venture capital industry expanded, it encountered a series of challenges that compelled a rethink and adaptation of strategies. A surge of new entrants, business angels and crowdfunding platforms, stirred the waters, bringing in a democratic element to the investment sector.

These developments propelled an intensification of competition, spawning a cautious and detailed approach to venture selections. Parallelly, a growing matrix of regulatory frameworks started to shape investment trajectories, introducing complexities related to data privacy, intellectual property rights, and shifting geopolitical dynamics.

The global COVID-19 pandemic ´severely affected advanced nations (including Europe) immensely. Thus signaling a global wake-up call to channel considerable investments to the health sector. The pandemic has accelerated many digital business models, especially in the wake of low interest rates. However, current uncertainty about the economy, projected interest rate hikes, and the lingering aftermath of bank failures continue to weigh on the startup ecosystem. Due to these issues, investments in startups are comparatively riskier and therefore investments are declining. Global VC investment in Q2 2023 dropped to $29.4 billion, down from $44.4 billion in Q1 2023, a decline of 34%. The same trends can be observed for the European VC landscape.

However, in the face of challenges, VC firms begin to adopt innovative strategies, utilizing cutting-edge data analytics and machine learning tools to pinpoint lucrative opportunities and manage potential risks.

The European Venture Capital landscape: A detailed analysis

VC serves as a vital artery fueling the growth and innovation within Europe’s bustling entrepreneurial ecosystem. As we stand at the brink of a new era for startups and the finance industry, it becomes pivotal to step back and analyze Europe’s VC landscape. It has been a bastion of tremendous growth, fostering innovations and nurturing startups into industry leaders.

We will rewind to witness its historic growth and then move forward to unveil the key players and hubs steering the industry. A focal point of this voyage will be a deep dive into sectors that have magnetized substantial investments – FinTech, HealthTech, and GreenTech, standing as pillars of innovation and growth. Simultaneously, we will dissect the regulatory milieu and its profound influence on the venture capital industry, followed by a panoramic view of the roles and impacts of various EU initiatives fostering this dynamic ecosystem. A look into the mindset of European VCs can be found here!

Emerging and evolving: The progressive trajectory of European VCs

A keen analysis of recent developments in Europe’s fund generation showcases an impressive average fund size hovering around €120 million in 2023, with the front-runners commencing at a substantial €267.5 million marker. While these values might seem a bit restrained when compared to the monumental multi-billion dollar reserves cultivated by American peers, it undoubtedly heralds a forward momentum that promises larger strides in the near future. The graphic below illustrates the growth in the European venture capital scene.

This positive growth narrative is reflected harmoniously in the escalating total assets under management (AUM) overseen by European firms, steadying at a solid median of €300 million, and the upper echelon beginning at an impressive €750 million.

Embarking on early-stage investments: A marked preference in the European domain

One striking trend emanating from the European venture capital landscape is a significant penchant towards fostering nascent enterprises. Roughly 65 percent of VC firms in Europe demonstrate a preference for investing in Seed or Early-Stage (Series A) ventures. This tendency, although possibly influenced by the selection dynamics of firms and investors surveyed, seems to resonate well with the broader market viewpoint, which identifies a significant portion of growth capital originating from regions outside of Europe.

In the past, a rather limited faction of European investors took the helm in spearheading substantial Series C to pre-IPO rounds, a narrative that has gradually changed over recent years. As we find ourselves at a crossroad laden with macroeconomic complexities, the venture capital domain in Europe stands poised for potential shifts, keenly anticipated to observe if this emerging trend will sustain and continue to shape the venture capital discourse in Europe.

The industry focus of European VCs over the last decade

As previously detailed, the focus of the European venture capital industry has narrowed down to a few promising sectors in the past few years. Fintech has been a prominent sector, with startups emerging that revolutionize how financial transactions are conducted, steering towards a more inclusive financial ecosystem.

HealthTech has also seen a remarkable surge, with initiatives aimed at revolutionizing healthcare delivery, including telemedicine and AI-driven diagnostic tools, which became particularly crucial during the COVID-19 pandemic. Driven by the pandemic, in 2021 and 2022, over $5 billion was invested, with 2023 being on track to increase the investment sum.

Furthermore, the GreenTech sector has come to the fore, receiving substantial investments. This sector embodies the collective movement towards sustainable living, focusing on developing technologies that are environmentally friendly and can potentially combat the pressing issue of climate change.

FinTech: The new epicenter of finance

The European landscape has witnessed exponential growth in the Financial Technology, or FinTech, sector, garnering substantial investments and positioning itself as a leader in innovation. Between 2013 and 2022, this sector saw an influx of investments escalating year by year, with figures revealing a commendable jump in both capital infusion and percentage changes. When it came to fintech news, we saw a pretty sluggish first half of 2023, however, the numbers are still impressive! S&P Global published a report that highlighted the downturns in funding for global fintech companies. It dove 49% year over year, to $23 billion during the first half of 2023. Round values declined, on average, 12% for seed firms and 14% for early-stage firms in 2022. These negative numbers are largely driven by the missing mega rounds of funding that happened before and throughout the pandemic. One area in particular that had a positive upstream movement was B2B SaaS solutions. B2B SaaS attracted 44% of money invested in 2023, supporting the long-term trend of shifting away from B2C and moving into direct B2B in fintech.

Three companies that have notably shaped the contour of this sector include:

  1. Revolut: A veritable giant in the FinTech sphere, Revolut has redefined banking with its revolutionary approach. Revolut offers banking services including GBP and EUR bank accounts, debit cards, currency exchange, stock trading, cryptocurrency exchange and peer-to-peer payments. Revolut’s mobile app supports spending and ATM withdrawals in 120 currencies and transfers in 29 currencies directly from the app. With over 19 investment rounds, and over 52 investors, the company has been a value driver for a lot of stakeholders.
  2. Adyen: Renowned for offering seamless payment experiences, Adyen has cemented its position as a frontrunner in the financial technology space. Ayden offers end-to-end payments, data, and financial management in a single solution. The company continues to carve niches by enhancing its technological footprint, offering integrated payment solutions that are both efficient and secure. Ayden has attracted a lot of institutional investors, the extensive list of different shareholders and their stake in the company can be seen here.However, also Ayden lost over a quarter of their valuation, after missing financial KPIs in the first quarter of this year.
  3. Klarna: With its innovative take on e-commerce and retail banking, Klarna has emerged as a force to reckon with in the FinTech landscape. The company has managed to foster a robust presence in 2023, characterized by its user-friendly payment solutions that are reshaping the retail experience. Last year, Klarna raised $800 million of funds at a valuation of $6.7 billion, down around 85% from the $46 billion price-tag it attracted last year. This also shows that investors are more conservative with valuations now, and even larger VC-backed companies need to pay closer attention to cost control and profitability. The topic of buy now, pay later is of high interest to us at neosfer, so we have dedicated a whole podcast to the topic, so listen closely.

GreenTech: Steering the green revolution

Investments in the GreenTech sector have seen an appreciable escalation, with figures indicating a robust growth in terms of both capital allocation and yearly percentage advancements. Here, Europe for sure is outpacing the US in investments. The US venture capital firms raised $43.9 billion in 2022 compared to $35.6 billion raised in Europe representing a 33% year-over-year increase in Europe, compared to only 7% in the U.S.! So, in Europe this vertical is growing 26% faster compared to the software-focused U.S. counterpart. Transport ($815 million), Energy ($647 million), and Circular economy ($438 million) attract the most funds in Europe. Even though GreenTech still plays a smaller role for the European VC landscape in total, steady growth in investments and funding amount can be observed. From 2013 to 2020, the share already doubled from 5% of all deals to over 10% being in the GreenTech industry.

For a detailed analysis of the investments into European GreenTech, have a look at the EIF working paper about this industry right here.

Three companies that have significantly influenced this sector include:

  1. Northvolt: Northvolt is a big name in the GreenTech sector. They have been at the forefront of projects that aim to produce batteries sustainably. Their strides in 2023 have been marked by innovation and expansion, setting new benchmarks in the green technology domain. In their latest funding round this year, Northvolt has raised $1.2 billion from investors including BlackRock and several Canadian pension plans as it prepares to build new factories in Europe and North America. Reuters reported that at the beginning of the year, the company planned an IPO with a valuation of $20 billion.
  2. Ørsted: Championing the cause of renewable energy, Orsted has established itself as a leader in the development and management of wind farms. Their journey in 2023 exemplifies steadfast commitment to steering the green revolution, fostering a future that is both sustainable and environment-friendly. Orsted is a great example of a company that experienced incredible growth through European regulatory bodies. There have been two “investments”/grants made by the European Commission and the European Investment Bank.  Currently, they are taking the role of the investors themselves and have started to fund other sustainable ventures. Currently, their market value is right around the $167 billion mark.
  3. Volocopter: This German aviation company is working on building electric air taxis, aiming to revolutionize urban transport. In 2023, the company has been focused on obtaining certification for its air vehicles and has begun testing its air taxis in various cities around the world whilst partnering with other regulatory and private institutions to bring their vision to life. They had quite some investments rounds: Volocopter closed its last funding round on Nov 1, 2022 from a Series E round with an additional investment of $ 182 million. This mean that based on their last funding round, they are at a $1.87 billion post-money valuation.

This deep dive into different industries paints a vivid picture of the dynamic and rapidly evolving landscape of venture capital investments in Europe, where FinTech, HealthTech, and GreenTech sectors are emerging as prominent players, steering the continent towards a future marked by innovation, sustainability, and growth.

Navigating tomorrow: prospects and pathways in European VC investments

The venture capital market in Europe is gearing up to navigate through a time characterized by demanding market conditions and swift technological advancements. In the forthcoming sections, we delve deep into the anticipated trends and shifts in investment priorities, including the budding industries slated to be at the forefront.

Technological trends sculpting investment directions

AI & Machine Learning Proliferation: The consistent evolution in the sectors of AI and machine learning is all set to hold its momentum. Investment strategies are envisaged to gravitate towards enterprises integrating these technologies to overhaul various facets of industries, ranging from healthcare to finance, and extending to manufacturing and supply chain logistics. Generative AI is one of the many advances on the horizon that could drive sustainable, inclusive growth and solve complex global challenges. This technology has high potential and applicability across most industries and is poised to add as much as $4.4 trillion in economic value1. Other trends include process automation and virtualization, digital connectivity, distributed infrastructure, and next-generation computing.

Decentralized Finance and Digital Assets: With a growing number of European countries fostering conducive regulatory climates, the decentralized finance and digital asset sectors are braced for a spike in venture capital interest. Innovations encompassing decentralized finance (DeFi) and non-fungible tokens (NFTs) represent vibrant opportunities for stakeholders in the investment ecosystem. We have talked about the future of blockchain technology and the metaverse extensively in other blog articles, but again, we want to highlight that the technology is not dead. Rather, companies must focus on creating real and usable value with these digital innovations. A rise in funding and a revival in hype will then follow!

The Advent of Quantum Computing: As commercial applications of quantum computing become increasingly tangible, this sector is poised to magnetize substantial investments. This revolutionary technology is set to permeate several domains, including secure communication, healthcare innovation, and material science, offering a thriving platform for venture capital engagements. At neosfer, we also see the potential for Quantum Computing and its impact on the economies of the future – to find more information about the technology, check out our blog article about Quantum Computing.

Unveiling industries marked for investment spotlight

Sustainable and renewable tech innovations: In sync with global initiatives to mitigate climate change impacts, the domain of sustainable and renewable technology stands on the brink of an investment surge. Key focal points could encompass ventures in renewable energy, carbon sequestration technologies, and eco-friendly transportation initiatives. The energy-intensive industry is another potential area for investment focus. The transition to climate-neutrality will require transformational efforts in all sectors of the economy. Energy-intensive industries, which make up more than half of the energy consumption of the EU industry, are expected to play a crucial role in this transition.

Space technology: The New Frontier: Although still in its infancy, the European space tech sector exhibits indicators of potential exponential growth. Investments are forecasted to zero in on satellite innovations, space exploration initiatives, and ventures into space tourism. According to PitchBook, this year $1,6 Billion has been invested across 85 space tech deals around the world. Compared with last year– $527 million– this growth was outstanding!  New technologies have indeed made the universe more accessible and the European Union government supports this technology development as well!

AgriTech innovations: In response to the burgeoning global populace, the imperative for sustainable agricultural practices is escalating. The AgriTech sector, nurturing developments such as vertical farming and precision agriculture, is anticipated to be a focal point for venture capital investments.

Innovations in Urban Infrastructure: With the trend of urbanization escalating, the segment of smart infrastructure and urban planning emerges as a lucrative investment avenue. Attention should be directed towards startups facilitating intelligent urban development, efficient waste management, and innovative transportation solutions.

In summation, the horizon of the European venture capital environment appears vibrant and dynamic, gearing towards a phase marked by unparalleled growth and diversification. The amalgamation of revolutionary technological trajectories and the inception of new industries is anticipated to craft a flourishing investment landscape, fostering innovations with a global footprint and ensuring robust returns.