2023 was tough for startups as funding dried up and valuations fell. In Europe, 20% fewer funding deals took place, while exit activity fell to the lowest level since 2013.
But the signs for 2024 are looking a lot more encouraging. European tech unicorns are making positive sounds when it comes to profitability, with Klarna saying it has now hit this goal and fellow fintech Monzo also announcing its first annual profit.
Funding activity has been ticking upwards too, with European startups bagging €16.3bn in Q1 — up 19.1% on 2023 levels.
What else can we expect for the year ahead? We asked three partners at Latham & Watkins to help us understand what’s going on in the data.
1/ Competition for new deals could heat up in 2024
In a sign that investor interest is returning, Q1 2024 saw average deal values increase from €1.3m in Q4 2023 to €2m in Q1 2024, according to Pitchbook.
A slew of new funds and investors announcing intentions to invest also suggests deal activity — particularly at the early stages — will heat up in 2024.
At the hype end of the scale you can see there’s a lot of capital.
In June, Spotify backer Creandum announced a new €500m fund to back seed and early-stage startups. It joins German VC Earlybird Health, which closed a new €173m fund targeting healthcare startups in February, and US investor Accel, which has raised a $650m fund to back early-stage European and Israel-based startups.
Meanwhile, sectors like AI and climate tech have continued to generate buzz. French AI startup Mistral raised €600m in its Series B funding round, valuing the company at €5.8bn, while green steel startups Electra and H2 Green Steel also raised chart-topping tickets.
“The GenAI fundraises — the OpenAIs, the Mistrals — were seeing incredible competition from people who can invest in large fundraisings,” says Mike Turner, a London partner at Latham and Watkins who specialises in venture capital and startups. “At the hype end of the scale you can see there’s a lot of capital.”
2/ Late-stage capital is becoming more readily available in Europe
Europe is maturing when it comes to the availability of late-stage funding, which saw the sharpest declines in 2023 but rose almost 16% in value in Q1 2024.
More unicorn companies are also being minted. While 2023 saw just seven companies pass the $1bn valuation mark in Europe, in Q1 2024 there were already four such companies, including companies based in France, Italy and the Netherlands
One trend we are seeing is late-stage companies raising money from debt providers through recurring revenues.
“European private capital has really developed over the last few years,” says Turner. “We’ve gone from a paucity of later-stage capital to an availability of quite a lot of later-stage capital.”
Increased activity from non-VC players across the board also means more options for late-stage companies. In Q1 2024, the number of deals where nontraditional investors participated rose 45.6% in Europe, as corporate venture capital, private equity and hedge funds turned their attention to startups.
“One of the things we talk about is an emergence of a different type of funding in the market,” says Shing Lo, a London-based emerging companies partner at Latham & Watkins. “There’s a lot of different avenues for a company to stay private. They could raise money from a multitude of investors instead of going to the public market.
“One trend we are seeing is late-stage companies raising money from debt providers through recurring revenues,” adds Lo. “This can be an attractive option that can help to extend their runway.”
3/ A busy periods for startup IPOs and exits could be ahead
Exit activity remains subdued, as startups and investors wait to see how big elections coming up in Europe impact economic stability. More late-stage capital being available has also given startups the opportunity to hold off on exits, using the money to get in the best shape possible before going to market.
I would expect that Q1 2025 will be the busiest quarter we’ve seen in several years.
But Turner notes startups can’t stay like this forever. “The merry-go-round stops at some point and companies have to look at public markets for their next fundraise opportunity,” he says.
A flurry of exits are expected to take place in 2025, as inflation stabilises and startups that raised funding in 2021’s bumper year — where $413bn was at the Series C stage and beyond across the world — become IPO ready.
Turner says startups planning market debuts in the next 12-18 months are now approaching advisors. He adds that companies are placing greater emphasis on profitability and stable revenue generation, with tough market conditions having shown these companies “what a good IPO looks like”.
Reddit would be one example. The US social media platform, founded in 2005, debuted in May. Its shares rose 30% in the week following its debut. Its success could prompt an IPO “ripple effect”, says Sarah Axtell, a San Francisco-based partner at Latham & Watkins, who worked on the deal.
“I would expect that Q1 2025 will be the busiest quarter we’ve seen in several years,” she says. “There’s a huge backlog of companies that are ready to go.”
Read the orginal article: https://sifted.eu/articles/ipo-data-funding-market-brnd/
