Skip to content

Spotlight Interview: Pitchbook Analyst Nalin Patel

"VC is, by definition, a long-term game so right now there is no need to panic."

After the funding fest of the past couple of years, 2023’s complicated economic and geopolitical context has meant that Investors have been less forthcoming. News of tech layoffs amid plummeting valuations and deal transactions make for a bleak outlook.

Have we hit rock bottom on the European startup financing front or is there light at the end of the tunnel? As PitchBook has just released their Q2 State of European Venture Capture report we tracked down Nalin Patel, lead analyst EMEA Private Capital at PitchBook to find out.

Q: What are the biggest takeaways of the state of European venture report for the first half of 2023?

NP: Overall, as we move into Q3 we’re continuing to witness a global downturn in dealmaking, fundraising, and valuations driven by higher interest rates, continually high inflation, and a stricter monetary policy. Deal value in the first half of 2023 dropped by 34.2 % in comparison to the second semester in 2022 and is down 61% compared to the same period in 2022. Capital is generally harder to come by and startups are finding it harder to grow.

Q: Which startup stages are the most affected by the downturn?

NP: Current indicators are pointing towards a trend of larger deals and later-stage startups. Deals between €10 million and €20 million dropped less steeply than Seed deals; -39% year-on-year compared to -64%. Meaning an increased deal share for later-stage and venture startups and a reduced share for seed startups. These larger deals are mostly follow-on investments made by VCs looking to provide their later-stage participations with extra runway.

Q: Is the funding fest over for the long haul?

NP: Not necessarily. Investors are saying this is a new roadmap. The last couple of years have seen valuations rising to unrealistic levels. Some have been pretty crazy. Things are now normalizing. Investors are expecting a five-year dip, but venture capitalism is a long-term strategy so the sector is less impacted by the short term.

VCs are not too panicked, many are investing more time and energy into supporting their startups and ensuring they have enough cash whilst also cutting costs.  As concerns new deals, there is definitely a lot less FOMO. Investors are doubling down on due diligence with profitability and sound governance now key investment criteria.

Q: Which sectors are faring better than others?

NP: I would say long-term sectors that are less impacted by recessions: clean energy, emissions targets, green deal, ESG, etc. We’re also seeing increased interest in healthcare, biotech, and pharma companies as the population gets older. These are mostly defensive sectors. This said, there is also obviously huge interest right now in generative AI especially, productivity based tools. One UK startup specializing in AI-generated video content managed to raise €90 million recently.

Q: How does France compare to Europe’s other tech communities in the current downturn?

NP:  As far as deal activity is concerned, deal numbers and deal value, the UK is still leading the way, followed by France, Germany, Sweden – Spotify is still the largest ever European exit – Israel and then the Nordics. Southern Europe is the most untapped region so it's interesting to note that Spain has been attracting a lot of interest from VCs in recent months and we’re seeing increased deal activity. Spain’s population is comparable to that of other key European countries, so it could be a bit of a sleeping giant!

Q: How is France fairing compared to its continental neighbors?

NP:  After a fairly resilient first quarter, VC investment has started to slow in Q2 and deal value in the region decreased by 32.1%, a more significant step down compared with other regions such as the UK & Ireland, which was 12.7% lower quarter on quarter in Q2. However, France gained share of deal value in H1 2023; with 16.5% share up from 12.7% in 2022. The increase in deal share was driven by key deals such as the crypto security tech company Ledger’s €108 million deal and Ynsect’s €160.8 million round.

It's worth noting, too, that France’s tech ecosystem receives a lot of support from Bpifrance, France’s public investment bank, which will no doubt be key in bolstering activity. 2023 measures include a pact with France’s major corporations to encourage them to partner with French startups and a further €5 billion for investment in tech startups.

Q: As concerns exits and IPOS & MA in Europe, can you break down the main trends?

NP:  More generally, there has been a sharp decrease in exit volume and values across Europe, a trend notably driven by lower valuations. After a record high in 2021 – €139 billion for 1,291 deals – exit value levels are now the lowest they’ve been for a decade. This is notably due to lower valuations. In 2022, exit values totaled €39 billion for 1,105 deals. And at the end of Q2 2023, exit values are at €3.5 billion for 495 deals. We’re therefore estimating exit values to be down 83% compared to 2022 at year-end. So far, acquisitions account for circa 75% of all exits with four out of five of the largest deals taking place in Q1.

Q: So have we hit rock bottom? Do you predict things will get worse or do you see any signs of an upturn?

NP:  This is the most difficult time to predict anything given the macroeconomic context. There are signs of an uptake in the US, but Europe is always slower to follow. This said, on the upside, inflation is at last slowing, dropping below 8% in the UK and 6% in France so it's having less of a negative impact. As concerns the VC market, as 2020/2021 were record years in terms of activity, I would say that what we are seeing is actually more of a flattening of the curve rather than a huge decline in activity. If you exclude these two years, activity over the past decade is fairly comparable. As mentioned, VC is, by definition, a long-term game so right now there is no need to panic.