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It's Wednesday, Nov. 22, and this week we examine the risk profile of European startup investments, amid shifting economic conditions.

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European Startups as Investments

European startup investors & founders currently face a cautious investment market: funding is down, returns are uncertain, and IPOs less viable. With a significant decline in European startup investments from $83B (2022) to $51B (2023) the market has become highly competitive for both funding, as well as investor returns.

The subsequent content will present a data-driven analysis of the risks and opportunities associated with investing in European startups. The central question we aim to address is whether the potential returns from venture capital investments can justify the inherent risks associated with startup ventures.

This Week’s Data

Data insight 1/3

🌱 Startup Investment Returns

European VC Returns vs Euro 50 Index

The graph compares an initial €10,000 investment in 20 leading European venture capital firms benchmarked against the Euro Stoxx 50 index over five years. The benchmark, European VCs, with an average Internal Rate of Return (IRR) of 12.4%, significantly surpassed the Euro Stoxx 50's average IRR of 7%.

While the Euro Stoxx 50, indicative of major Eurozone blue-chip companies, showed steady growth, the European VC sector demonstrated a more dynamic trajectory. Notably, VC investments in startups achieved a peak average return of 25.2% in 2021, though this higher return potential is coupled with greater volatility, reflecting a more nuanced risk-reward balance for European startup investments.

Key Insights

> European startup investments, as shown by the VC trend line, have outpaced the Euro Stoxx 50 index (av. 7% IRR) with an average IRR of 12.4%

> VC investments exhibit notable volatility, reflecting the high-risk and dynamic nature of the startup market.

> The difference between European VC investments and the Euro Stoxx 50 index demonstrates the balance between high-growth potential and market stability for investors.

Recent Startup News

• Open AI Effect – Update on European AI, CEO of Open AI laid off.​
   

• TRIVER – London-based TRIVER raises €22.9 million for SME finance access via Open Banking
   

• VaultSpeed Cloud – Belgium-based VaultSpeed secures €15.1 million for cloud data warehouse automation​
   

• Berlin AI Fund– Berlin-based AI venture studio Merantix is raising a €100m fund, previously backed by SoftBank

Data insight 2/3

⚖️ Startup Funding Risks & Success

Funding & Exit Likelihood

Analyzing 5,417 European startups, only 14% progress from Seed to Series A, reflecting early-stage market fit and capital challenges. Progression improves to 39% for Series B, suggesting better prospects for startups gaining traction. However, advancement rates decrease in Series C to E (34%, 26%, 31%), indicating a competitive market and a tendency towards early exits.

Key Insights

> Only 14% of startups advance from Seed to Series A, emphasizing early-stage growth challenges.

> A progression rate of 39% to Series B indicates increased opportunities for traction-gaining startups.

> Tapering rates in later stages (Series C to E) highlight the intensifying challenges of market scaling and competition.

European Startup Data List

We're providing early access to our European Startup Data List, a comprehensive resource featuring over 4,500 startups across Europe.
📌 Name, Location
📌 Latest Funding, Valuation, Investors
📌 Size, Industry, Employees

Data insight 3/3

⚖️ Valuations Across Funding Rounds

Funding Decline & Late Stage Focus

The chart shows a notable trend: while overall startup funding has decreased, investors have consistently funnelled money into later-stage startups during recent quarters, particularly Series C and larger mega-rounds (100-250m and 250m+), which have held strong into Q1 2023.

Investors are favouring later-stage startups, prioritizing those with proven growth and nearer to exit events for more immediate returns, especially in uncertain economic times.

Key Insights

> Late-stage startups attract the bulk of investment, with mega-rounds persisting, signalling investor confidence in more established ventures.

>Despite a funding dip, Series C and beyond maintain strong investor interest.

> 2023 total startup funding has declined by 38% reducing the capital opportunities for early-stage startups.

SearchVentures Insights

Investments in European startups, demonstrating an average Internal Rate of Return (IRR) of 12.4%, provide a promising landscape for high returns. However, these opportunities are counterbalanced by the inherent market volatility. For investors, this environment presents a dual-edged sword: the potential for significant financial gains exists, but it necessitates a comprehensive approach to risk assessment and strategic investment decision-making.

In the funding landscape, data shows the competitive reality for startups: only 14% successfully transitioned from Seed to Series A funding. This highlights the challenges of capital management and attaining product-market fit for early-stage startups. Interestingly, 39% progress from Series A to Series B, suggesting mid-stage investments, with lower risk profiles, could provide a balanced investment opportunity.

A key insight is that while risks and opportunities coexist in European startup investments, data serves as a crucial tool for investors to assess the investment risk of startups with increased precision.

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See you next week

Cheers,

Odin Lund & Hariprasad Mohandas