VC Market: 3 takeaways from ‘23 and 4 predictions for ‘24
... and one silver lining
3 takeaways from the European and Nordic venture market in 2023
1. The tide went out
Globally, startups raised $319bn in 2023, a return to pre-pandemic levels and the lowest total invested since 2017. VC investments in European tech fell >40% YoY to $58bn.
The crunch is largely driven by receding growth- and crossover funds investing at the later stages – but also by a decline in overall deal count at the early stages.
2. But no funding retraction at European Seed and the Nordics remained remarkably resilient
Funding (in $ amount) for European early-stage companies (pre-Series A) held steady, surpassing $16bn for the third year in a row. With the absolute number of deals declining, valuations at pre-Series A companies actually increased.
More locally, the Danish ecosystem was the only larger European one to not experience a slide in funding this year - and Sweden held up well too.
3. In the New Nordics, climate tech was king and frontier tech the new shiny thing
At byFounders, we track all the announced rounds at the earliest stages (pre-seed to Series A) in the New Nordics (Nordic and Baltic countries).
Climate tech was the sector attracting both most funding (€195m) and most investors (23 rounds), more than doubling compared to 2022. Other upward trending verticals were Digital Health (from €47m invested in ‘22 to €108m in ‘23), and Frontier/Deep tech (€14m to €101m).
Fintech held steady while Future of Work and Crypto/Web3 took a tumble from top 5 to scraping the bottom.
4 predictions about 2024
Prediction is very difficult, especially about the future
- Niels Bohr
1. The IPO market will open up (slightly) and fintech will be the main sector (forced) to go public (or otherwise exit). We’ll see at least one blockbuster listing.
With a 54% increase last year, the Nasdaq had its highest annual gain since 1999. With rates stabilising and rate cuts starting to be priced in for 2024, the next year will offer some companies the opportunity to test the public waters (and some will have to as a last resort).
Who will be candidates? Blockbuster names are Stripe and Databricks, while Plaid, Figma and maybe Deel could be interesting outsider bets.
In Europe, there are a handful of fintechs poised to eventually list and leading candidates would probably be Klarna and Revolut, while the likes of Monzo and Pleo could spring a surprise, although 2025 seems like a more plausible scenario for most if not all of these companies.
When we do get one or two household names on the exchanges, it will help late-stage investors to price pre-IPO deals and that will eventually trickle down to more price certainty around Series Cs and Series Bs as well.
2. There Will Be Blood and a Fundraising Frenzy
While 2023 provided a backdrop of cost-cutting and runway extension, 2024 will be pivotal for many companies. Rough back-of-the-envelope math suggests that the majority of startups currently have less than a year’s worth of runway and will have to raise in 2024 – or die trying.
We’ll see the ZIRP-era companies come back to market, some with solid business models and great products being able to raise but still privy to a valuation haircut – and a lot more with neither and no line of sight of future funding.
We’ll also witness the post-ZIRP startups (Class of late-’22 and early-’23) trying to raise their first follow-on round of funding and gauging how far the goalposts have moved for investors to bite at the level of de-risking they might have achieved.
VCs won’t be immune either and a number of firms will have their model and performance tested by LPs, as they come back to the fundraising market. 38% of investors disappeared from US dealmaking in 2023(!) and we’ve already seen the public deaths of a few reputable funds.
2024 is poised to bring more of this kind, as firms fail to raise or performances dwindle — a few will be in the public spotlight but a lot more will be quiet-quitting and winding down under the radar.
3. Pre-seed & Seed will continue to be highly competitive – and valuations steady but dispersed
The valuations of pre-seed and seed companies have remained remarkably resilient during 2023. This is probably due to a variety of reasons, including increased competition (later-stage funds moving earlier), AI as an enabling factor, and the fact that the earliest rounds are once again the only place where narrative can combat the scrutiny of numbers.
But truth be told the main reason is probably that the labels of “pre-seed” and “seed” have long seemed obscure and when peeling back a layer, it becomes evident that there is a wide dispersion of round structures and valuations within these buckets, making it hard to generalize (Ed Sim from Boldstart has written a good piece on “inception rounds”).
While those circumstances make it hard to predict anything, I don’t think 2024 will bring fundamental change to the “pre-Series A” category.
We’ll continue to see a messy and “barbell-ed” ecosystem with seed rounds being everything from €500k on €5M to €5M on €25M (and beyond). And we’ll continue to see very high levels of competition for the (presumably) best founding teams, while others have to settle for lower valuations and less investor appetite.
4. Fewer early stage deals, as the bar for getting funded will be higher due to downstream pressure
It’s quite evident that the New Normal (which is, in fact, the Old Normal) means longer time between rounds and a lower valuation uptick from one round to the next.
As stated by Tomasz Tunguz, “The typical software startup raised their Series A 15 months after raising their seed at 2x their seed valuation. A year ago, that Series A would have been raised three months earlier at 3.5x the valuation.”
During 2023, the median time between the Seed and Series A round shot up to almost two years, the highest in a long time.
I don't think this trend necessarily will continue upwards (but rather revert to the mean) but I’d wager that the reality of today, where companies once again have to de-risk themselves and prove things before raising the next round (that’s a good thing, by the way), will result in more scrutiny from the first sets of investors. As a consequence, fewer early-stage companies will get funded in the first place.
My bet: 2023 saw 35k pre/seed rounds completed (data from Dealroom). I’ll take the under on that for 2024.
One silver lining
While it can all seem like doom and gloom, there’s a silver lining or two.
We all probably heard something along the lines of “the best companies are started in tumultuous times”. I don’t think that necessarily is true. But I do think that the signal-to-noise ratio improves and makes it a better time to be an early stage investor.
On balance, when it is harder to start companies and get funded, the result is fewer but better founders. And when time is cheap and capital is expensive (and not the other way around), the result is better returns for investors.
Couple that with ridiculous amount of innovation and progress happening across many verticals (it only took three days of 2024 for Season 2 of "Potential Room Temperature Superconductor” to drop), and we should be in for a treat.
Bring on 2024 🔮
I have never seen an environment with more innovation in the forty years I have been in the tech sector. It is breathtaking to see.
- Fred Wilson
What is driving the "hype/popularity" for Climate Tech in New Nordics?