Early-stage European SaaS startups are expected to experience a rebound in funding during the second half of this year, according to a report by London-based AlbionVC and Google Cloud. The report is based on the findings of the aVC index, a new monitoring tool that surveyed 40 investors actively investing in the European ecosystem.
The survey respondents anticipate investing £2.4 billion (€2.8 billion) in early-stage SaaS startups by the end of 2023. This projected recovery comes after a period of stagnant investment activity in Q2 2023, where 25% of venture capitalists (VCs) opted not to issue new term sheets, despite having sufficient capital available. On average, UK funds issued three term sheets, while their European counterparts issued two. Furthermore, only 4% of all portfolio companies received externally-led term sheets.
Interestingly, 40% of VCs believe that valuations will continue to decline in 2023, with a quarter predicting a drop of 20% or more. However, respondents expect more investor-friendly terms overall.
Despite these challenges, there is optimism for the second half of the year. The aVC index revealed an increase in the number of companies within investors’ active pipelines during the second quarter. The index’s score for Q2 was 54, with a rating below 50 indicating a contraction in the market. In particular, the index for Series A funding stood at 57.1, pointing to higher funding activity in this stage.
Surveyed VCs also reported significant capital reserves, with two-thirds of funds earmarked for new investments and the remaining one-third intended for follow-on investments.
Robert Whitby-Smith, a partner at AlbionVC, noted that the funding market seemed to have bifurcated, with some companies attracting levels of interest similar to 2021. This could be due to various factors such as being in high-demand sectors like gen AI and climate tech or experiencing strong investor demand despite a limited supply of exceptional companies. Whitby-Smith added that while such deals are still the exception, VCs are optimistic that the tide is turning, as evidenced by the expansion in the aVC index for Series A funding.
Overall, the report suggests that early-stage European SaaS startups will see increased funding activity in the second half of 2023 after a period of stagnation. Despite concerns about valuations, VCs remain positive about the market’s recovery, especially in sectors with high demand and limited supply.
