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In this week’s data… VC firms are hoarding cash, returns are at a record high and VC’s define their challenges for 2024. 

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State of European Venture Capital

This week we analyze the increase in unallocated funds for European venture capital, the historic returns of startup investments vs stocks, and a comprehensive survey showcasing the pressing challenges for Venture Capital over the next 12 months. 

Last week we uncovered key trends for startups in 2024. Missed our 2024 expectations? Catch up here

Startup Insights

Venture Capital Cash 📊

European venture capital has had significant increase in cash reserves, with dry powder hitting nearly $58 billion for VC firms and growth funds holding $50 billion this is a 14% rise from the previous year's $95 billion.

The data underscores an enduring fundraising uptrend for startup funds. However, the lag in fundraising response times means current dry powder levels are at an all-time high, positioning European VC with a significant capital cache that may enter the market in 2024.

Key Insights

> The rise in dry powder denotes a more cautious venture capital funding scene focused on early profitability and clear product market fit.

> A 14% year-on-year increase in deployable capital marks unprecedented readiness for investment across Europe.

> Despite market sentiment shifts, European VCs maintain a historic high in available funding, emphasizing the region's investment strength.

Featured Startup Digest

The €3.75bn European Investment Fund to back late-stage VCs

Europe's new €3.75bn European Investment Fund, part of the European Tech Champions Initiative, aims to reshape the venture capital landscape by focusing on late-stage investments. This fund, backed by the European Investment Bank and five EU governments, targets 10-15 VC funds, each over €1bn, to bridge the 'scaleup gap' and encourage technological sovereignty.

Aimed at empowering European startups to compete globally without relocating, this initiative addresses the need for substantial late-stage funding. For investors and founders, this development signals a strategic shift, offering enhanced opportunities for growth and reinforcing Europe's position as a competitive hub for technological innovation and market leadership.

VC Returns vs Stock Index 💹

Short-term VC returns have turned negative, reflecting market corrections with increased down rounds and valuation adjustments. This trend aligns with expectations given the market's recent shifts.

Despite this, the long-term perspective remains critical. Over two decades, European VCs have matched or outperformed long-term benchmarks, indicating a robust and consistent track record. This contrasts with the short-term volatility. VC invesments have a direct lag time to profitabilty and as such the record years of 2021 and 2022 has been a key driver of recent out-performance for startup investments

Key Insights

> Recent VC returns are negative, consistent with market recalibrations.

> Long-term returns for European VCs demonstrate outperformance, confirming the sector's enduring strength.

> European venture capital exhibits a proven track record, suggesting strategic resilience and long-term growth potential.

Recent Startup News

• EU's Major Investment in Northvolt – The EU approves a €902m deal for Northvolt's gigafactory in Germany, near the Danish border.​
   

• Pitch's Major Staff Reduction – The Tiger-backed software startup Pitch lays off two-thirds of its workforce, with its CEO stepping down.
   

• Paris-Based AI Startup's Series B – Nabla, an AI startup providing an AI assistant for doctors, raises $24m in Series B funding.​
   

• France's Nuclear Startup Bet – The French government invests €1bn in startups developing small, bus-sized nuclear reactors.

VC-LP Challenges 📝

Venture capitalists (VCs) and limited partners (LPs) agree on major challenges ahead, primarily in fundraising and exit strategies. The graph shows a shared awareness of liquidity concerns and distributing returns, with LPs showing heightened concern about exit strategies.

There's a notable divergence in perspectives regarding follow-on capital management and market competition; LPs emphasize the importance of financial stability in managing follow-on capital, whereas VCs are more concerned with the competitive dynamics of securing investments and efficient deal execution.

Key Insights

> Both VCs and LPs see fundraising and exits as top challenges, reflecting concerns about raising capital and realizing gains.

> LPs prioritize follow-on capital management, underlining its role in long-term investment success.

> VCs focus more on investment competition, highlighting the pressure to secure profitable deals.

SearchVentures Insights

In Europe's VC landscape, significant reserves are coupled with a record of resilient long-term returns, counteracting recent short-term performance dips. VCs and LPs align on challenges in fundraising and exits, differing in perspectives on follow-on capital and competitive investment dynamics. This balance between short-term realities and long-term strengths defines the current state.

This scenario presents a strategic opportunity for investors and founders. The combination of ample capital and a historically strong performance landscape indicates growth prospects for European ventures in 2024. Stakeholders can leverage this to position themselves aptly in a market characterized by resilience and potential.

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See you next week

Cheers,

Odin Lund & Hariprasad Mohandas