KEY FINDINGS

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Fundraising becomes difficult

Global VC fundraising is trending downwards, after reaching an historic high in 2021. The number of funds closed in Q2 this year was the lowest seen for the past five years, once Q2 2020 is excluded. Recent entrants to VC – drawn in by the allure of a quick exit at high valuation – are retrenching, and some LP investors are now less able to make or increase commitments due to the denominator effect.

Europe is a bright spot

More than half of all the unicorns in Europe – start-ups with a valuation at or above $1bn – have been created in the last year, and VC investment here is slowing at a lower rate than in the US. VC firms are now operating across a handful of hubs on the continent – from London to Berlin, Paris and Scandinavia – but covering so many countries will present a challenge to even the largest investor.

New tech cycles loom

Fintech start-ups – where $1 in every five VC dollars went last year – may look less attractive to some VC firms as valuations continue to reset. But given VC dry powder has increased by $100bn in 2022 already, and now stands at $539bn, a focus on Web3, deep-tech and blockchain, among other areas, is opening up new channels of VC funding in other parts of the tech economy.

Valuation ‘reset’ is not over

VC funds face an uphill struggle to deliver above-average returns in the coming quarters as valuations are slashed at the late-stage. Seed stage valuations are holding up and have not fallen from the previous quarter since the onset of the pandemic, attributed to the high participation of non-traditional investors and micro-funds still active at seed stage.