In the past few years, VCs have been deploying capital into startups at an unprecedented rate. Larger funds and the injection of nontraditional capital have increased available liquidity for new companies.
A buildup of dry powder has led to more capital leaving VC funds than coming into them, and the difference has grown significantly in recent years: €84.2 billion in 2021 and €74.6 billion in 2022, according to PitchBook’s Q1 2023 European Venture Report.
While this imbalance may not have been an issue in previous years, Europe’s cooling venture market has left many VCs with capital trapped in portfolio companies.
Fundraising in 2023 is expected to slow after years of stability. Only €3.4 billion was raised in Q1, putting the year on track for its lowest annual figure since 2015. With fresh funds harder to come by, VCs will have to rely on existing capital for investments, but that too will be more challenging.
Since last year, European VC-backed exits have been significantly reduced in both number and size. Public listings in particular have all but disappeared from the market in 2023, impacting the ability of investors to realize returns on their investments.
Without new funds or an increase in exits, European VC firms could struggle to provide further support to their existing investments, hindering startups’ ability to grow and leading to down rounds, or even collapses, which in turn damage fund returns.
In response to a more cash-conservative environment, investors have been reducing deal flow. European venture round count and value fell 19.2% and 32.1%, respectively, quarter-over-quarter. But in the long term, just reducing activity may not be enough.
VC funds may need to explore new ways of generating returns for their LPs. One option is to pursue partial share sales, in which an early investor sells their stake in a company to other investors. This can provide a cash infusion to the VC fund, while also allowing the early investor to realize a return on their investment.
Read more: Q1 2023 European Venture Report
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