European VC Funding Takes a Hit as Investors Flock to Bonds
The European market for financing startups is facing a significant setback as investors shift their focus to bonds. Banks and lenders worldwide are investing trillions of dollars in bonds, driven by the belief that the cooling economy won’t completely collapse, and bonds offer high yields. However, this aggressive pursuit of safety is impacting funding for riskier ventures, including European startups.
Until recently, European startups were thriving. In both 2021 and 2022, VC deal activity in Europe accounted for over $100 billion in investments. However, the first half of 2023 has witnessed a sharp decline in the European VC deal count and value, with approximately 4,000 VC deals totaling around $24 billion, according to market researcher PitchBook. Even US investors are pulling back in the European VC sector.
Instead of supporting startups, many investors have joined the bond-buying frenzy. Banks have already sold more than $2 trillion in bonds this year, setting a record pace, as reported by Bloomberg. Bonds are attracting investors due to their relatively low-risk nature. Furthermore, with interest rates rising and bond prices dropping, they are yielding some of the highest returns seen in over a decade.
Though general startup funding may be facing a decline, there are still winners in specific sectors. Generative AI startups, for instance, are continuing to attract significant investments. Mistral AI, France’s answer to America’s OpenAI, received $113 million in its first-round seed funding after just four weeks in June. Moreover, France’s President, Manuel Macron, recently announced a spending bill of €500 million to support AI champions in the country. Despite the overall challenges faced by startups, the AI sector seems to be in good shape.
Overall, the European VC market is experiencing a downturn as investors divert their attention to the safety and returns offered by bonds. This shift has led to a decline in VC deal activity and value, impacting the financing options available to European startups. However, there is still hope for specific sectors such as generative AI, which continue to attract significant investments. As the global economic landscape evolves, it will be interesting to see how investors balance their pursuit of safety with the support needed for innovation and growth in the startup ecosystem.