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It's Wednesday, Dec. 27, and this week we're examining the year-end review of European startups and investment trends.

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Startups of Europe

2023 marked a challenging phase for European startups, with investment levels declining due to economic challenges. Despite these hurdles, the market witnessed proactive EU funding measures targeting emerging sectors.

Notable developments included increased support for AI with the EU's €220 million commitment to startups in that sector, highlighting the strategic direction of the market. These actions have shaped a landscape where resilience and targeted growth go hand in hand.

For the final edition of 2023, we will analyse the downturn in investment, the EU's role in funding startups, and the consistent performance of venture capital in Europe, drawing on data insights that we gathered throughout the year.

This Week’s Data

Data insight 1/3

📉 European Startup Investment

Startup Funding in Decline

The European startup ecosystem experienced an investment downturn in 2023 with capital investments dropping to $45B, a 38% decline from 2022. This was primarily due to rising interest rates, increased economic uncertainty and cautious investor sentiment.

The record investments in 2021 and 2022 were driven by post-pandemic recovery, low interest rates, and investor confidence. However, 2023 saw a shift as central banks raised rates to combat persistent inflation. Investors turned risk-averse, impacting startup funding.

Key Insights

> 2023 saw a notable decrease in investment compared to the peaks of 2021 and 2022.

> Economic instability and higher interest rates drove a cautious approach from investors.

> Despite the downturn, the European startup market saw an 18% increase since 2020, outperforming the US’s -1%.

Recent Startup News

• Dutch Startup's Seed Funding – Bubty, a Dutch startup, secured €1.75 million in seed funding to transform the freelance workforce industry.
   

• EU Support for AI Startups – The EU is expanding support for AI startups, allowing them to utilize its supercomputers for model training.
   

• Revolut's Performance Report – Revolut recently reported a pre-tax loss of £25.4m back in 2022, influenced by the crypto market downturn​.​
   

• Medtech Startup from Lithuania– Lithuanian medtech firm, Sentante, securing €6 million in funding for an innovative robotic system.

Data insight 2/3

⚖️ EU Funding Impact on Startups

EU's Role in Startup Funding

Initiatives by the European Union helped stabilise funding in early-stage startups amid the investment slowdown in 2023.

With significant allocations such as the €12.4B through the Horizon Fund, the EU has actively countered the market's cautious sentiment, with a primary focus on driving growth in sectors like renewable energy, AI and climate tech.

Key Insights

> Horizon Europe with a total capital fund of €12.4B is the largest EU early-venture fund, investing the majority of EU’s financial contributions.

> Per the Horizon Europe initiative, the EIC invests in European deep-tech companies operating in capital-intensive industries

> Startup investments in Europe have a less cyclical investment market due to 26% of total funding attributed to government programs & initiatives.

Data insight 3/3

🌱 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.

While the Euro Stoxx 50, indicative of major Eurozone blue-chip companies, showed steady growth with an average Internal Rate of Return (IRR) of 7%. The European VC sector, with an average IRR of 12.4%, demonstrated a dynamic trajectory, reflecting a more nuanced risk-reward balance for European startup investments despite economic challenges.

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.

SearchVentures Insights

2023 witnessed a downturn in European startup investment with total funding of $45 billion, a 38% decline since 2022. Despite this, the market showed resilience with investments still outperforming the $38 billion from 2020. The EU’s Horizon Europe fund directed €12.4 billion to counter private sector caution and boost purpose-driven sectors. Notably, European VC investment returns outperformed the Euro Stoxx 50, showcasing the startup market's potential amidst uncertainty.

Looking ahead, these patterns highlight opportunities in the European startup landscape, emphasizing adaptability and strategic funding as key to navigating the investment climate of 2024.

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See you next week

Merry Christmas,

Odin Lund & Hariprasad Mohandas