Published on

The European VC Downward Trend Continues - Q1 2023 Round-up

An analysis of Q1 2023 VC activity and the underlying reasons driving the continued downward trend.

A coin jar on a table
Market Insights

PitchBook and CrunchBase recently published their Q1 2023 reports on the latest European venture capital activity. It is apparent that Q1 2023 solidifies the downwards trend across the market that started last year which certainly wasn’t helped by the Silicon Valley Bank and Credit Suisse crisis. These results clearly highlight the uncertainty of investors and the impact that tightening monetary policy, volatile public equity markets and a distressed financial system are having on the venture capital ecosystem.

2023 VC Deal Activity
Figure 1: The evolution of VC deal value and deal count

Representative of the quarter’s dampening performance is figure 1 depicting a 32.1% decrease in total VC deal value relative to Q4 2022 and a 19.2% quarter-over-quarter decrease in VC deal count. Similarly, European VC exit activity deteriorated to €1.6bn in exit value reflecting an extraordinary 69.6% quarter-on-quarter decline (lowest figure since Q1 2020).

Driving forces

Frozen exit market

The narrative remains the same. The primary factor driving this performance is the lack of exit opportunities amid stagnant public equities and tight monetary policy. In Q1 2023 alone, the European Central Bank raised its key interest rates by 1%. This not only creates unfavourable macroeconomic conditions but decreases company valuations, since modelling future value requires higher discounted rates.

In Q1 2023 Europe saw only nine VC-backed public listings, which sets the pace for a 50% annual decrease in 2023, while four out of the five of the largest VC-backed exits went through the M&A route staying clear of the risky public markets which systematically represent the most lucrative exits. As a result, investors’ unmet return expectations drive them to focus on supporting their portfolio companies, and founders prefer to remain private switching to capital-efficient approaches to manage their cash runways.

Impacted by the diminishing exit appetite is the late-stage VC activity which was also trending downwards throughout last year and continuous so this year with €5.4bn deployed in late-stage VC deals, a 72.5% year-over-year decrease. However, the effect has trickled down to early-stage VC deals which experienced a 34% quarter-on-quarter decrease despite early-stage start-up Abound, a lending platform, raising c.€570m and being the largest deal of the quarter.

American VC pullback

Another trend exacerbating the drawdown was a reduction in US VCs investing in Europe. Francois Veron, managing partner at French VC Newfund, estimated that only around 5% of French Q1 deals involved US VCs, down from 40% in 2022. Combining the hostile geopolitical environment in Europe with a weakening US dollar relative to the GBP and EUR making European absolute valuations for USD-denominated funds less attractive potentially provide a reasonable explanation for US investors’ behaviour.

Financial system distress

During the first months of 2023 the financial system underwent major changes. In particular, the collapse of Silicon Valley Bank, established as the leading lender and banking partner across the VC space, and the acquisition of Credit Suisse by UBS resurfaced the need for risk mitigation and strict regulation for VC banking given the higher risks the space entails. 

Fortunately, the short-term consequences of SVB’s fallout in the UK regarding the funding, payroll and logistical issues for depositors and start-ups were avoided when HSBC agreed to acquire the bank’s UK subsidiary. However, the increased scrutiny in the financial system is expected to have a spill-over effect, compounding the existing restricted credit access and liquidity for start-ups. The fintech sector which has a leading position in Europe’s VC is naturally expected to face additional obstacles expressed by discounted valuations in upcoming investment rounds.


The necessary cyclical capital flow underlying a healthy and effective VC ecosystem is evidently disrupted. Limited opportunities for VC-backed start-ups to capitalise on their investments hinders the GPs ability to attract and confidently deploy new capital which in turn creates an asymmetry between investors and founders’ expectations. For investors, 2023 will be a year of highly selective investment strategies with cash-generating start-ups being prioritised and on the other side founder’s will be forced to delay expansionary business plans and focus on navigating the liquidity shortage by optimally exploiting their funds. The important question now is whether the recent downturn reflects an uncertainty-induced period of below-average results or a market correction bringing valuations and funding volumes back to normal after an outlier year of capital abundancy.

Written by
George Leivadas
Investment Analyst
Written by
Subscribe to The Spark

Sign-up to The Spark newsletter for the latest insights, case studies and industry news.

By subscribing you agree to with our Privacy Policy.
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.

You may also be interested in

Where AI goes next

Read more
Innovation China Conference 2024

Understanding France's DeepTech start-up scene

Read more
Louvre Museum Paris

Breaking barriers, building bridges: Women in business

Read more
International Womens Day 2024