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Recovery on the horizon? Investor predictions for European VC

We reached out to investors active in Europe to see how they expect Europe’s VC market to perform in 2024.

European startups just suffered through a particularly challenging year. So what’s ahead?

Deal-making, valuations and exit activity were all down in 2023 with many investors sitting on the sidelines instead of deploying capital. But the outlook for European VC is expected to improve in 2024 as VCs hope that the worst of the downturn is behind us.

We reached out to investors active in Europe to see what they predict will be the big themes of 2024. Here are the key takeaways.

European venture deal-making on the rebound

VC deal-making in Europe is expected to pick up this year as investors find themselves sitting on large piles of dry powder due to a lack of activity in 2023.

But Eric Liaw, general partner at IVP, believes that there won’t be a return to the heady days of 2021 as startups and investors act with more discipline going forward.

“Growth at all costs is over,” Liaw said. “Hopefully, we all remember that next time, and there will be a next time.”

He added: “With the rate and capital environment steadying, companies will be more comfortable making responsible investments for forward growth. I expect to see more funding activity in the seed, A and B landscape and very little in D and beyond, largely because private companies have found levels of efficiency heretofore thought of as impossible.”

A bigger unicorn herd for 2024

With increased pressure on valuations last year, Europe’s 2023 unicorn cohort looked relatively thin compared to previous years. Only 10 new unicorns emerged, compared to 46 in 2022, according to PitchBook data.

But as dealmaking picks up, 2024 is likely to see more startups reach a €1 billion valuation, according to Rosh Wijayarathna, head of innovation economy, UK and Ireland, at JP Morgan.

“Last year was a difficult valuation environment, making it inopportune to raise capital with an increased volume of down rounds for those companies that needed to raise,” Wijayarathna said. "(But) with seed and Series A company investment holding up OK in the last 18 months, my hope is that we have a good stable of growth companies that will be knocking on the door of unicorn status when they come to the market to raise capital.”

Blossom Capital general partner Imran Ghory added: “We’ll see an increase, but we won’t be back at 2021 highs. However, the quality of unicorns will be much higher—based on real revenue numbers with good economics rather than the hype of the last cycle.”

All eyes on AI

Generative AI was at the forefront of investor’s minds in 2023, and this year is expected to be no different. But the focus is expected to shift away from large language models toward real-world applications.

“It’s easy to underestimate AI and just see it as another hype cycle, but we’re going to start to see real value created,” Adam Zobler, general partner at Foundamental, said. “If phase one of the AI revolution has focused on the development of foundational models, we think phase two will entail the verticalization of AI. AI will revitalize old industries by uncorking a variety of use cases, unshackling data silos and aggregating data across software systems.”

Concept Ventures founding partner Reece Chowdhry warns that AI startups will need to pay particular attention to how they can balance innovation with compliance this year.

“2023 was the breakout year for Generative AI,” he said. “Consequently, 2024 will be the year of AI safety and regulatory tech. AI startups will find themselves under increased scrutiny regarding transparency, accountability, and bias mitigation. ... Companies must proactively adapt their strategies to not only comply with existing regulations but also anticipate and prepare for future developments, thus positioning themselves as responsible and sustainable contributors to AI, particularly if they hope to secure next round investments.”

Uptick in M&A

Exit activity for European VC-backed companies was muted last year, particularly for public listings. While a rebound in IPOs is unlikely this year, LocalGlobe partner Ziv Reichert believes that acquisitions will become more prevalent.

“This will be a great year for buyers,” Reichert said. “The fundraising environment will remain difficult, and companies that struggle to push towards profitability or significant growth will ultimately have to resort to winding down or selling.”

Featured image by Tetra Images/Getty Images

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