This article originally appeared in the 2023 State of European Tech report.
After a tough year for many in private capital, sentiment is trending back up. But as the recently released State of European Tech 2023 shows, the path forward is not without obstacles.
A time of cautious optimism
Investors almost unanimously predict that deal volume will rise in 2024 compared to 2023. According to our research, 89% of global VCs foresee doing the same or more deals in 2024. The optimism is equally strong in Europe, at 87%—a stark change from last year when only two-thirds of European investors forecasted a better dealmaking environment in 2023 compared to 2022.
Still, market conditions remain uncertain. Exits are down, one-year VC returns are in negative territory in both the US and Europe, and US investors are withdrawing in record numbers from the European market.
But private capital investors are resilient. A VC deal now averages 10 more hours of research compared to last year. Investors are continuing to reset their portfolios with stronger investments that meet a vastly stricter set of investing criteria—transitioning away from hype and growth-at-all-costs to proven business fundamentals, durable long-term growth, and profitability.
Returning to offense
Total VC fund count globally is up 33% over the past decade. Venture capital has never been more competitive than it is now, amplified by all of those investors chasing a much more select group of startups.
While international VC firms may be withdrawing from the region, Europe benefits from a strong and significant base of local investors. They’re taking advantage of this situation by finding and closing the highest quality deals with a pivot from a defensive to an offensive approach.
Venture capital is intrinsically relationship-driven: the best deals are often sourced and closed through an investor’s network. Top European VCs ranked by volume of unicorn investments are growing their networks faster than their peers by 11%—they know this is a move that drives increased and high-quality deal flow.
A year of innovation
Internally within firms, VC is on the cusp of reinventing itself thanks to an explosion of investment in data and AI. More than 60% of European investors plan to increase their productivity by automating internally manual and repetitive tasks. Almost 45% plan to leverage AI to accelerate their market research and due diligence.
Investors are looking forward to reallocating that time they save to the activities AI will never do—building strategic relationships, and playing a more active role in portfolio company support and success.
Externally, AI is ushering in a wealth of innovative products and services. Speaking recently, Kelly Graziadei, Founder & General Partner of F7 Ventures summarized the opportunity: “There are a couple of moments we can look back on where we saw the advent of big platforms and the billion dollar companies that spun out from them. We're going to see the same thing happening with AI."
Whether it is operational innovation to drive efficiency, or product-led innovation creating exciting new investment opportunities, there’s plenty to look forward to in 2024.
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