Q4’23 Venture Pulse Report – Europe

AI attracted strong investment in Europe during Q4’23, accounting for a number of the largest deals of the quarter, including a $486 million raise by Germany-based large language model focused company Aleph Alpha, a $434 million raise by Mistral AI in France and a $208 million raise by Israel-based enterprise AI systems company, AI21 Labs.

In addition to AI, the energy and ESG space continued to see good momentum during Q4’23, with investments ranging from Seed deals to those with larger ticket sizes — such as Sweden-based battery manufacturer Northvolt’s $145 million raise and Estonia-based energy storage company Skeleton Technologies’ s $114 million raise. Given the commitment to net zero targets and the need to rapidly scale funding in order to address the energy transition, the sector is likely to remain on the radar of investors for the foreseeable future.

VC investment in the UK fell significantly between Q3’23 and Q4’23 amidst a continued flurry of geopolitical and macroeconomic challenges. The lack of stability, which is not expected to end soon given an expected UK general election in 2024, has eroded the confidence of VC investors that a recovery is forthcoming. This has led many VC investors to hold onto their cash and to focus any investments on companies with proven market traction and recurring revenue. Over the course of 2023, and particularly in Q4’23, startups had to be particularly strong in order to attract investment.

While a number of startups in the UK continued to prepare for future IPOs, the exit market remained shuttered in Q4’23, along with the M&A environment. It is expected that any reopening of the IPO market will require more economic and geopolitical stability than currently exists.

While VC investment dropped across much of Europe in Q4’23, VC investment in Germany held steady quarter-over-quarter, primarily due to a $486 million raise by AI firm Aleph Alpha. VC investors in Germany remained very conservative with their investments given the tough macroeconomic circumstances and the fact that the IPO window remained firmly shuttered.

During Q4’23, there was a wave of layoffs as startups continued to feel pressure from their investors to bury their growth plans and focus on profitability. Many startups also continued to prioritize obtaining alternative sources of funding, such as convertible bridge loans, in order to avoid down rounds. Germany also began to see insolvencies among startups unable to attract fresh funding. Sectors like last mile grocery delivery and buy-now-pay-later were among the hardest hit, with a number of companies struggling.

VC investment in the Nordics region continued to be subdued in Q4’23. While early-stage funding remained relatively stable, funding for later stage deals remained very dry, with Sweden-based battery manufacturer Northvolt’s $145 million raise accounting for the largest deal of the quarter. Cleantech and biotech attracted some of the largest tickets in the Nordics during the quarter; in addition to Northvolt, Sweden-based green heating company Aira raised $90 million, while Denmark-based NMD Pharma — a developer of novel treatments for neuromuscular diseases — raised over $79 million.

VC investment in Ireland was quiet in Q4’23, although a number of companies attracted solid funding rounds, including EV charging company Easy Go, drug discovery company Shorla Oncology, and AI-focused pathology software company Deciphex. VC investment in Ireland could start 2024 very strongly, however; during Q4’23, Softbank announced plans to acquire a 51 percent stake in Ireland-based connected vehicle software firm Cubic Telecom for approximately $510 million.

Given the current headwinds, including the ongoing conflicts in Europe and the Middle East, the continued lack of exit opportunities for VC-backed companies, and uncertainties related to a number of elections planned or anticipated to occur in 2024, VC investment in the region is expected to remain relatively soft heading into Q1’24. VC investors will likely continue to focus on ensuring companies have a strong path to profitability so that they are better positioned to return capital to their LPs. While more companies will likely fail in Q1’24, this will likely drive attention to quality companies able to contribute to a heathy ecosystem long-term.

Collaboration is expected to be top of mind for many participants in the VC market in 2024, particularly between CVCs existing VCs, and accelerator programs looking to make headway on their strategic objectives while also managing their costs more effectively. The number of joint CVC funds could also rise as large CVCs look to bolster their ability to invest capital by working in tandem with others.