In 2022, capital invested into Europe-based startups  fell from the record set in 2021. A combination of high  inflation, rising interest rates, weak economic growth, and  renewed geopolitical tension affected investor sentiment  in Europe. Despite the pessimism surrounding financial  markets, venture capital (VC) deal value remained  broadly resilient. European VC deal value has been on an  aggressive upward trajectory in the past three years, but  2022 signalled the end of the annual expansion in capital  deployment within the asset class. Fewer large-scale  deals at lofty valuations closed in H2 2022. Risk appetite  has shifted as concerns around costs and growth rates of  mature businesses have surfaced in the second half of the  year. Nonetheless, investors have predominantly remained  bullish in the current climate, citing lower valuations and  a scarcity of competitors as dynamics that will improve  opportunities, deal terms, and potential returns.

VC deals with nontraditional investor involvement  remained solid in 2022. Although looming recessions have  dampened appetite in financial markets, nontraditional  investors have continued to pump capital into VC rounds,  even with capital allocation requirements and competing  primary investment strategies. VC ecosystems must  continue to develop high-growth companies that can  offer innovative technology, research and development  (R&D) possibilities, or intellectual property (IP) that can be  leveraged by nontraditional investors such as corporate VCs  (CVCs) or generate significant returns upon exit for financial  institutions. Nontraditional investors may look to younger  companies several years away from an exit that are focusing  on long-term industries to insulate from near-term volatility.

Despite a combination of challenges, exit value  registered its third-largest total in 2022. Exits dried up  as macroeconomic conditions and potential exit valuations  worsened deeper into the year. VC-backed companies with  high burn rates, which pursued aggressive growth targets  in search of lofty valuations amid an overheated market, are  now faced with tougher funding and tougher exit routes. 

Startups are looking to extend funding runways, cut costs,  and ensure they are well positioned for a potential exit when  markets rebound. Lower valuations in public markets and  reduced appetite for listings from investors have meant  general partners (GPs) and founders have avoided public  listings in the current climate. With public listings halting  in 2022 and expected to remain subdued in 2023, startups  could seek corporate acquirers to fold their operations into  instead of testing public markets alone.

In 2022, VC fundraising remained flat from 2021. Bear  markets emerged in 2022; however, capital raised landed  in a similar position to its performance in the past three  years, illustrating that GPs were still able to attract sizeable  limited partner (LP) commitments and close substantial VC  funds. Fundraising could become challenging in 2023, as  capital allocations tighten and portfolios are recalibrated  due factors including the denominator effect. However, the robust showing in 2022 gives cause for optimism.