Startups

Bullish or bearish? What to expect for Europe VC activity in 2022

Comment

Image Credits: Nigel Sussman (opens in a new window)

With another year of venture capital records in the books, it’s time to look forward.

Global data was clear: The 2021 venture capital startup investment cycle was record-breaking; around the world, startups raised more money than ever before, with individual geographies posting all-time hauls.

Africa had a killer year. North America was hot. Latin America was busy. Asia was alight, even under the weight of a regulatory crackdown in China. But Europe. Europe was very busy, something that we explored earlier this week.


The Exchange explores startups, markets and money.

Read it every morning on TechCrunch+ or get The Exchange newsletter every Saturday.


PitchBook data collected on the European 2021 investment cycle pegs venture activity at €102.9 billion, up around 120% from 2020 levels. CB Insights data indicates that European startups raised $93.3 billion last year, up 142% compared to 2020 results. Both sources reported rising volume as well, indicating that the continent did not merely see late-stage rounds push its numbers up.

But there’s potential market chop on the horizon. The recent stock market selloff of key comps to high-growth, richly valued startups is causing tremors. TechCrunch has explored the concept, but lest you think that we’re playing some sort of subversive Chicken Little routine, the idea that the venture capital perspective on startup fundraising is changing is something that CNBC, Newcomer and other publications are actively investigating.

In late December, The Exchange asked if the era of super-rich software valuations was behind us. Today we want to expand the question to include all startups and narrow our focus to Europe. What’s ahead for the red-hot startup market this year?

To help us with that question, we corralled Nalin Patel, EMEA VC Analyst at PitchBook, and Christoph Janz, co-founder at Point Nine Capital, to help us dig into what’s ahead for European venture activity.

What’s at stake? The health and continued growth of hundreds of billions of dollars of private-market wealth.

Why Europe could accelerate in 2022

The fact that Europe had a great 2021 could mean two things: That it can’t continue at that pace, or that the ingredients are in place for an even greater 2022. It’s the latter that PitchBook’s Nalin Patel is betting on, with observations concerning both sides of the table.

On the investor side, Patel pointed out that there is a ton of dry powder available from a variety of sources. “International and nontraditional investors including corporate VCs, PE firms and sovereign wealth funds, along with larger traditional VC funds, compete fiercely to invest in fast-growing European startups looking to scale globally.”

Janz concurred on this point, noting that “lots and lots of funds have been raised in the last one or two years” and that “that capital has to go somewhere.”

On the startup side of the coin, there’s plenty of deal flow worthy of investors’ interest, Patel said. “Europe now possesses a wide variety of unicorns in different sectors and geographies, and these companies will drive up deal value figures to new heights with substantial late-stage rounds.” And in earlier stages, he predicts that capital from previous exits will be reinvested “in new batches of startups.”

With this in mind, Patel and PitchBook are bullish about VC activity in 2022: “We expect dealmaking in Europe to increase,” the analyst told TechCrunch.

Looking at it more broadly, Europe may not need a correction. According to the Point Nine investor, recent European startup fundraising success has been a correction in the other direction. “VC activity in Europe had been lagging behind until a few years ago, so to some extent, the growth in the last few years was about catching up with other parts of the world,” Janz said.

This is perhaps more subjective, but the quality of best-in-class startups also seems to have increased, making them less susceptible to public market volatility. Amid market selloffs, “the stock prices of the fastest-growing public SaaS companies haven’t declined that much,” Janz said.

That there’s a gap between top companies and others is a takeaway that caught our attention a few weeks ago, when we reported on OpenView’s annual Financial & Operating Benchmarks report. “I think the very best companies will continue to get huge premiums,” Janz said.

What about not-so-great companies, though? Will their public-market fate trickle down – especially in light of a host of failed and failing SPAC deals – and affect early-stage deals? That’s what we expect to see, but Nalin has a different opinion.

“Recent public equity volatility is unlikely to impact … early-stage startups seeking an exit in the coming years,” he argued. Why? Because in his view, “businesses are more developed before an exit nowadays.” He therefore believes that “if exit appetite declines … startups will seek out subsequent financing to extend their investment runways in the VC ecosystem.”

That startups will seek out more funding is one thing, but we aren’t as convinced as Patel that they will find it.

Why Europe could decelerate in 2022

Our general perspective that rapidly deteriorating public markets will impact startup investment found succor with Janz. The venture capitalist said that while “2021 was a spectacular year for venture capital in Europe,” he believes that a “slowdown is likely.”

Just don’t expect a collapse: He’s thinking more along the lines of a 20% to 50%. That’s sharp, but the investor cautioned that he does not anticipate a “huge crash” on the order of “90% reduction in VC activity.” It’s worth recalling that even a 50% reduction in European venture capital activity would result in a tally roughly in line with 2020’s historical results for the continent; any slowdown would hardly prove to be a death sentence, then, even at the upper end of Janz’s expectations.

What’s driving the potential slowdown? We asked Janz if he expects changing exit expectations linked to public market declines to trickle down to early-stage venture investment in Europe. “Yes,” he wrote in an email, if “public SaaS stocks keep going down or sideways, I would expect it to trickle down within the next few weeks.”

That line from the investor stood out given the pace at which he anticipates a decline. A slowdown could be felt in Q1 2022, then, which means we should be able to vet market reaction among European venture capitalists inside the next few months. If the line goes up or down, we’ll have an early signal of the year ahead in not too many days.

Even the somewhat bullish Patel had some caution for the year ahead, saying that “near-term market conditions may cause VC-backed companies to postpone or rethink their exit plans in Q1.” More simply, the IPO and exit market more largely is going to be ice-cold this quarter in Europe. We mostly expected that, but it’s nice to know that we’re not alone in thinking along those lines.

Lest we make Janz appear to be some sort of contrarian bear, we should add that he told TechCrunch that regardless of “short-term ups and downs,” his firm is “incredibly excited about how entrepreneurship is flourishing across Europe, and we’ll continue to be a very active seed investor.”

There’s institutional momentum in the market via funds that VCs have already raised, and FOMO won’t die out overnight. On the other hand, public markets are jitter-inducing and exits are on hold. How precisely that nets out in Q1 and 2022 will set the future climate for European startups. More when the data comes in.

More TechCrunch

Here are quick hits of the biggest news from the keynote as they are announced.

Google I/O 2024: Everything announced so far

Google Play has a new discovery feature for apps, new ways to acquire users, updates to Play Points, and other enhancements to developer-facing tools.

Google Play preps a new full-screen app discovery feature and adds more developer tools

Soon, Android users will be able to drag and drop AI-generated images directly into their Gmail, Google Messages and other apps.

Gemini on Android becomes more capable and works with Gmail, Messages, YouTube and more

Veo can capture different visual and cinematic styles, including shots of landscapes and timelapses, and make edits and adjustments to already-generated footage.

Google gets serious about AI-generated video at Google I/O 2024

In addition to the body of the emails themselves, the feature will also be able to analyze attachments, like PDFs.

Gemini comes to Gmail to summarize, draft emails, and more

The summaries are created based on Gemini’s analysis of insights from Google Maps’ community of more than 300 million contributors.

Google is bringing Gemini capabilities to Google Maps Platform

Google says that over 100,000 developers already tried the service.

Project IDX, Google’s next-gen IDE, is now in open beta

The system effectively listens for “conversation patterns commonly associated with scams” in-real time. 

Google will use Gemini to detect scams during calls

The standard Gemma models were only available in 2 billion and 7 billion parameter versions, making this quite a step up.

Google announces Gemma 2, a 27B-parameter version of its open model, launching in June

This is a great example of a company using generative AI to open its software to more users.

Google TalkBack will use Gemini to describe images for blind people

Firebase Genkit is an open source framework that enables developers to quickly build AI into new and existing applications.

Google launches Firebase Genkit, a new open source framework for building AI-powered apps

This will enable developers to use the on-device model to power their own AI features.

Google is building its Gemini Nano AI model into Chrome on the desktop

Google’s Circle to Search feature will now be able to solve more complex problems across psychics and math word problems. 

Circle to Search is now a better homework helper

People can now search using a video they upload combined with a text query to get an AI overview of the answers they need.

Google experiments with using video to search, thanks to Gemini AI

A search results page based on generative AI as its ranking mechanism will have wide-reaching consequences for online publishers.

Google will soon start using GenAI to organize some search results pages

Google has built a custom Gemini model for search to combine real-time information, Google’s ranking, long context and multimodal features.

Google is adding more AI to its search results

At its Google I/O developer conference, Google on Tuesday announced the next generation of its Tensor Processing Units (TPU) AI chips.

Google’s next-gen TPUs promise a 4.7x performance boost

Google is upgrading Gemini, its AI-powered chatbot, with features aimed at making the experience more ambient and contextually useful.

Google reveals plans for upgrading AI in the real world through Gemini Live at Google I/O 2024

Veo can generate few-seconds-long 1080p video clips given a text prompt.

Google’s image-generating AI gets an upgrade

At Google I/O, Google announced upgrades to Gemini 1.5 Pro, including a bigger context window. .

Google’s generative AI can now analyze hours of video

The AI upgrade will make finding the right content more intuitive and less of a manual search process.

Google Photos introduces an AI search feature, ‘Ask Photos’

Apple released new data about anti-fraud measures related to its operation of the iOS App Store on Tuesday morning, trumpeting a claim that it stopped over $7 billion in “potentially…

Apple touts stopping $1.8B in App Store fraud last year in latest pitch to developers

Online travel agency Expedia is testing an AI assistant that bolsters features like search, itinerary building, trip planning, and real-time travel updates.

Expedia starts testing AI-powered features for search and travel planning

Welcome to TechCrunch Fintech! This week, we look at the drama around TabaPay deciding to not buy Synapse’s assets, as well as stocks dropping for a couple of fintechs, Monzo raising…

Inside TabaPay’s drama-filled decision to abandon its plans to buy Synapse’s assets

The person who claimed to have stolen the physical addresses of 49 million Dell customers appears to have taken more data from a different Dell portal, TechCrunch has learned. The…

Threat actor scraped Dell support tickets, including customer phone numbers

If you write the words “cis” or “cisgender” on X, you might be served this full-screen message: “This post contains language that may be considered a slur by X and…

On Elon’s whim, X now treats ‘cisgender’ as a slur

The keynote kicks off at 10 a.m. PT on Tuesday and will offer glimpses into the latest versions of Android, Wear OS and Android TV.

Google I/O 2024: Watch the AI reveals live

Facebook once had big ambitions to be a major player in enterprise communication and productivity, but today the social network’s parent company Meta will be closing a very significant chapter…

Meta is shutting down Workplace, its enterprise communications business

The Oversight Board has overturned Meta’s decision to take down a documentary revealing the identities of child abuse victims in Pakistan.

Meta’s Oversight Board overturns takedown decision for Pakistan child abuse documentary

Adam Selipsky is stepping down from his role as CEO of Amazon Web Services, Amazon has confirmed to TechCrunch.  In a memo shared internally by Amazon CEO Andy Jassy and…

AWS CEO Adam Selipsky steps down