Investors

Limited Partners ('LPs') are a critical foundation of the European tech ecosystem as the ultimate source of capital that flows into the region's startups and scaleups. It is thanks to increased allocation from a growing and increasingly diverse set of LPs that European VCs have succeeded in raising record amounts of funding.

2021 represented another record year for European VC fundraising, hitting over $19B for the year. This robust momentum continued during the first half of 2022, hitting over $10B in the first six months of the year and putting 2022 on track to match or potentially exceed 2021's record-breaking year.

These increased sums have been driven by the ability of many VCs to raise increasingly larger vehicles, including a (very) small number of billion-dollar funds, such as Northzone X and EQT Growth I. While European VCs have raised record sums, the totals remain tiny in comparison to the US. On the other side of the Atlantic, VCs have typically raised 2.9x more capital per year over the past five years than their European counterparts, based on analysis from PitchBook.

Despite overall macroeconomic trends, there has been a flurry of sizeable funds raised over the last 12 months to invest in European tech across different stages. In many cases, VC managers have raised their largest vehicles to date. For example, at $400M in total capital commitments, 468 Capital has raised its largest fund to date and Europe's largest dedicated Seed fund closed this year.

In 2021, Europe saw a record number of VCs raise new funds, with the $19B raised split across 350 unique funds. This represents a near 2x increase in the number of funds raised just five years ago. This widening and deepening of the investor base is observed across funds of all sizes.

The vast majority of funds, however, are small in size. In fact, funds that close at €50M or less account for two-thirds of all successful fundraises by European VCs. Therefore, there are still only a small number of larger vehicles closed each year in Europe. In 2021, for example, just five funds were raised at greater than €500M and only a further five at between €250-500M, a number that represents the lowest number since 2018.

Preliminary numbers from the first half of 2022 show a shift in this trend, where the size bracket of €250-500M in fund size accounts for 42% of all VC funds raised. However, similarly to last year, the absolute count of funds is driven by the smallest funds. Europe's homegrown growth stage investor base continues to be shallow in depth.

The median VC fund closed in 2021 hit $64M, continuing a multi-year trend that has seen average fund sizes steadily increase. Interestingly, the median first-time fund raised in 2021 jumped to $66M and, in doing so, actually exceeded the median follow-on fund raised during the same period for the first time on record.

It's hard to say if this is a trend that may persist, but it'ss certainly illustrative of the potential to achieve positive outcomes for first-time fund managers that have the determination and persistence to withstand an often long and winding path to a final close.

Furthermore, there are definite differences across geographies, whereby Germany, Austria and Switzerland (DACH), and the UK & Ireland have a median VC fund size nearly double the size of the other European regions. This is perhaps less surprising given the relative maturity of these ecosystems, which has allowed them to raise larger successive funds.

Regardless, the increase in fund sizes speaks to the larger opportunity set available in Europe. As strong European companies become more numerous, it is crucial that European VCs and thereby European LPs have the necessary funding to capitalise on these opportunities.

The European VC asset class remains primarily funded by European LPs - this holds true in both absolute and percentage terms. European LPs are overwhelmingly the largest source of European VC funds raised, having stepped up their contribution annually, with the exception of 2020.

At the same time, backing from US LPs has been consistent, though remains a small share of overall European VC fundraising. Asia & Australia remains a largely untapped market for European VCs with only a fraction of overall VC funds raised from LPs in the region.

LP appetite to invest in the European venture asset class remains. Though a small number of LP respondents to our survey (8%) report a decreased appetite compared to 12 months ago, we see more than 30% noting they have an increased appetite.

The largest share of respondents (almost 60%) say that their appetite remains unchanged during the last year, which itself has been an important year in further building LP appetite to commit to European VC.

Breaking apart LP sentiment by type, government agencies come across as most bullish in terms of their appetite for the European venture asset class, while the sentiment of pension funds is the most conservative. The share of respondents stating that their appetite has decreased is low or non-existent across different types of LP.

The strength of LP commitment to the European venture asset class is underlined by the fact that 93% of LP respondents expect to maintain or increase their allocation over the next 12 months. While 40% of LP respondents state an intention to increase their European allocation, only 7% of respondents are expecting to see their allocation decrease over the coming year.

The commitment by LP respondents to continue to maintain or grow their allocations to European venture is also backed by an intention to continue to add new manager relationships to their portfolios. In fact, more than four out of five (81%) of LP respondents to our survey state an intention to invest in new European GP relationships over the next 12 months.

When asked about the one change LPs would like to see in order to improve the health of the European tech sector, roughly a third of respondents voted for getting a broader variety of LPs involved in investment. This is significantly ahead of the other response options, including increased VC activity.

The challenge of a congested fundraising market has been a key theme of 2022, reflected in 59% of responses from LPs when asked to highlight challenges they have experienced in relation to their VC investment programme and strategy in the past 12 months.

Product proliferation within LPs' existing GP portfolio has compounded the challenge of managing allocations - an issue highlighted by 31% of respondents. This has also been exacerbated by internal resourcing constraints, where LPs lack the bandwidth to manage their pipelines, as well as liquidity challenges created by a lack of distributions from existing commitments.

Interestingly, only 14% of LP respondents cited challenges related to performance and even fewer (8%) highlighted challenges arising from the so-called denominator effect, where markdowns in the valuations of certain asset classes cause other allocations in their portfolios to be overweight vs. target allocations.

The sources of capital being allocated to European venture are relatively diversified, though government agencies remain the largest source of funds.

In recent years, corporate investors have emerged as an increasingly significant source of LP capital for European VCs, followed by private individuals and fund-of-funds.

The contribution from large institutional investors, such as pension funds, insurance companies, endowments and foundations, still only represents a small share of total VC funds raised in Europe, and constitutes just a tiny fraction of the assets under management of these sources of capital.

The share of European VC funding raised via government agencies reached a record low in 2021 at 18%, falling sharply from 30% in 2020, a year that was marked by larger-than-average commitments from government agencies during the pandemic.

As the European VC ecosystem matures, the share of capital sourced via government agencies will be diluted by the diversification and increased participation of institutional investors active in the region. For now, however, the role of government agencies continues to be an important foundation to help foster the development of the European VC landscape.

In terms of ecosystem-expanding policies, a common government strategy across many different entrepreneurial ecosystems is to amplify private venture capital investments via funding for VCs. This is a benefit for governments that don't want to get involved in direct investments (requiring expertise and infrastructure to wade through and assess manifold ventures), but still want to help spur on outcomes requiring higher funding levels in their local ecosystem. There are many different flavours - a sample is included below.

Curious? Check out more details here.

This is an incomplete list, compiled to give a flavour of policy initiatives across Europe supporting startups and venture capital. Want to make it more complete? Please share your contribution here.

European pension funds have assets under management of more than $3T. This means that the close to $500M invested by European pension funds in 2021 is equivalent to just 0.012% of their total assets under management. This is the only chart in the whole report that would require us to use three decimal places in order to observe shifts in the data.

As already outlined in the State of European Tech 2021 Report, increasing their allocation of total assets to venture by only a small fraction would represent a seismic shift in the total amount raised by European VC funds.

Increasing pension funds' available allocation to alternative assets like venture capital could not only increase returns for these traditional investors but also greatly expand the amount of venture funding available in the ecosystem, more on par with pension funds' contribution to VC in the US. There are understandable concerns and considerations in these changes - pension funds are public monies, after all, and, to traditional investors, 'alternative assets' often sound inherently risky. But when invested in tested fund-of-funds or in VCs that have proven their ability to bring returns, as a proportionally small part of a diversified portfolio, greater pension fund involvement in VC is not only good for the pension funds and good for VCs, but transformative for the future of European tech. Unlocking larger pots of funding enables effective scaling.

There have been a few initiatives around Europe to this end, though these are mostly still in discussion. Initiatives we could find in our research are listed below.

Curious? Check out more details here.

This is an incomplete list, compiled to give a flavour of policy initiatives across Europe supporting startups and venture capital. Want to make it more complete? Please share your contribution here.

Pension fund contributions to European VC continue to fluctuate. Although there is a clear longer-term trend that is driving higher absolute levels of capital commitments from pension funds, the total amounts fluctuate from year to year.

In 2021, for example, total commitments reached less than $1B across pension funds from all regions, representing a decline of almost a third from the high point of 2019.

The Nordics continue to be the most developed source of pension fund commitments to European VC, followed by the German-speaking countries of Germany, Austria, and Switzerland.

The absolute amounts across regions, however, still reflect the fact that pension funds are an underdeveloped source of LP capital for European VCs. While there are signs of progress in certain regions, particularly the Nordics, it is still the case that in most regions, pension fund commitments are most notable by their tiny scale or almost complete absence.

Not only would increased European pension funds' investment be good for European tech, European pensioners stand to benefit greatly from the outsized returns that VC can deliver by accessing this generational opportunity.

To put the scale of pension fund commitments into more context, it's interesting to compare the relative scale of allocations to venture capital vs. buyout private equity funds. Over the past five years, for every dollar allocated to a European VC fund, there have been more than $23 dollars invested into buyout funds.

But it's not just pension funds where this large delta in allocation exists. It's the same across other key institutional investor sources too. Sovereign wealth funds, for example, have allocated 58x more capital to European buyout funds over this period than to European VC funds.

Though LP contributions to VCs will always be dwarfed by their relative contributions to buyout funds, 2021 saw some shifts to close the gap. In 2020, the ratio of pension fund allocations to buyout versus VC funds was 31x, but in 2021 we saw that multiple drop to only 23x.

In fact, the multiple reduced across the board for all LP types, driven by the overall increase in VC funding between 2020 and 2021 and a decline over the same period in buyout funding.

The largest shift can be observed in allocations by asset management firms (excluding fund of funds) and insurance companies. While other asset managers increased funding to both buyout and VC funds, insurance companies actually invested fewer in buyout funds and increased their funding allocation to VC. Overall, the buyout / VC multiple for these LP types dropped from 16x to 13x in 2021.

The relative sums of capital raised by European VCs in comparison to European buyout funds have narrowed in recent years, as European VC fundraising has increased and European buyout fundraising has slowed.

In 2021, European buyout funds raised around 4x the total amount raised by European VCs, down from a multiple that has tended to average 5-6x in prior years. Importantly, for an ecosystem that is maturing and has growing numbers of scale-up companies that require larger sums of growth capital, the total funds raised by Growth stage funds has increased materially.

While government agencies form the bedrock of most regional entrepreneurial ecosystems, the makeup tends to vary greatly across different regions. The proportion drops off in more mature ecosystems such as the UK & Ireland, France & Benelux, and Germany, Austria and Switzerland, which are all between about 12 to 25% vs. the 39% to 56% seen in Southern Europe and Central and Eastern Europe.

Family offices are a presence across most ecosystems, usually around 9-12% of regional funding. However, the UK & Ireland and Central and Eastern European regions are outliers, with only 5% of UK & Ireland's ecosystem funding coming from this source followed by only 3% of CEE's.

Corporate investors have invested heavily in Germany, Austria and Switzerland, France & Benelux, and Central and Eastern Europe - between about 15-23% of each of these ecosystems' total funds raised.

Each sub-region within Europe has a different underlying mix of LP sources and it is interesting to see that, in some cases, this set is evolving over time, while in other regions it remains pretty much unchanged.

In general, the more mature the underlying ecosystem in each region, the more diversified the LP base. Conversely, the more nascent the ecosystem, the greater the dependence on the market-building role of government agency funding.

Germany, Austria and Switzerland have seen an uptick in the share of pension funds and fund of funds. Central and Eastern Europe is diversifying away from government agencies and has seen an increased share of funds raised from fund of funds, endowments and foundations as well as private individuals.

All LP types, understandably, cited the quality and experience of the investment team as the most important expectation they hold for the funds in which they invest. However, priorities thereafter diverged significantly depending on LP type.

Pension funds value access to deal flow; fund-of-funds look for networks and relationships; and family offices appreciate strategic insights and expertise. The strongest pull for second place, however, came from government agencies, with a pronounced push for GPs that can strengthen the European VC ecosystem, which was the lowest priority for fund-of-funds.

At the bottom of the list for just about all types of LPs were ESG-related certifications and a focus on diversity and inclusion, with fund-of-funds placing the highest priority on ESG, and government agencies the highest on diversity and inclusion.

At the end of 2021, the European venture asset class capital under management reached a new high, with over $110B of capital despite the change in the foreign exchange rate that has moved against the Euro.

Dry powder, which refers to the amount of available capital available for future deployment, is now $44B. This is a metric that has a material impact on the capital supply available in the market, with implications on the propensity for founders to get funding as it is reserved to be deployed against a certain timeframe.

Zooming out over the past 10 years, it is evident that European tech has seen a transformational level of interest more recently. In the past five years, the level of dry powder has been growing 2x faster than the previous five years.

Beyond the available capital supply for Venture funds, which is defined by Invest Europe as firms focusing on early-stage, later-stage and both, there is also an increasing level of private equity funding available for Growth companies.

While most of the dry powder raised by investors has a European mandate and therefore local dry powder is not restricted to domestic investments only, a fair share gets invested locally.

Since 2017, dry powder has significantly grown across all regions, though this growth is not uniformly distributed. Perhaps encouragingly, given overall funding amounts are still the lowest thus far, Southern Europe and Central and Eastern Europe saw the largest multiple increases since 2017 - 3x and 2.7x respectively.   

This year, the Nordics and the UK & Ireland saw dry powder decreases - 11% and nearly 10% respectively - while Germany was flat. 

While the supply of capital (or dry powder) was at record-high by the end of 2021, the activity tapered off in the second half of the year with investors deploying less capital.

This is echoed by investor survey respondents, with almost half of all Series A+ investors doing fewer investments vs. their target deployment pace (i.e. the number of new investments they were expecting to make over the course of 2022). This goes up to 60% for Series C+ investors.

Similarly, across larger funds, a vast majority of investors (71%) are mentioning doing fewer investments compared to their expected deployment target.

We have calibrated investor responses to the survey with an analysis of actual new investment activity disclosed by cohorts of dozens of leading funds active across stages in European tech.

The data shows that new investment activity from Seed funds has remained remarkably consistent across the last five years, though notably has started to slow in Q3 2022, while for the cohort of multi-stage Venture and Growth firms, new investment activity started to decline in Q1 2022 and has tapered more aggressively in Q2 and Q3 2022. 

Perhaps unsurprisingly, given the pace and intensity of the market during 2021, almost 50% of VCs this year felt competition at their stage of entry had decreased. This is a huge difference from last year, where 93% felt it was more competitive.

However, nearly a third of VC respondents perceived that opportunities at their stage of entry were more competitive than last year, despite the cooling of the broader market environment. This shows that whilst the market may have shifted, competition remains very much present. 

If we slice how sentiment varies across stages, based on the preferred stage of entry cited by VC respondents to the survey, we see a clear alignment with the prevailing commentary that the cooling of competitive dynamics has been greatest at later stages, while earlier stages, especially at Pre-Seed and Seed, have remained relatively more competitive.

These differences in perceived competitive intensity reflect various factors, such as a continued healthy pipeline of competitive opportunities at these stages, greater valuation concerns at later stages, as well as more investors shifting their focus to invest earlier. 

It is also interesting to draw out the difference in perceived competition intensity felt by those investor respondents that stated they have been more active in the market compared to respondents that shared that they have been less active than expected. 

Interestingly, this highlights that those investors that have been more active in the market than their planned pace are far more likely to perceive competition as remaining elevated. By contrast, those respondents that have deployed at less than their target deployment pace are more likely to believe competition has waned. 

For the best opportunities, competition arguably remains high, if not higher, given these companies most stand to benefit from a “flight to quality” by investors, looking to back companies seen to meet a new higher bar in terms of what is considered a great investment in this market. However, if you’re not active, perhaps it is harder to assess true competitive intensity.

While the stage of investments shows interesting nuances with more competition at the earlier vs. later stages, country-level responses also show meaningful differences.

Amongst the top countries by funding, such as the UK, France, Germany and Sweden, there is a more pronounced change in the market dynamics, with the majority of VCs perceiving less competition in 2022 vs. 2021.

By contrast, investor respondents from smaller ecosystems like Italy, Finland and Spain, are more likely to perceive a continued  higher level of competition.

Investment activity in Italy and Spain, in particular, tends to skew towards earlier-stage rounds, with twice the level of capital invested (as a share of total capital invested per country) across rounds of less than $20M, compared to the United Kingdom, for example.

We asked VC respondents to share the ways that they are seeking to strengthen their competitive edge. Across all stages, the most frequently-cited efforts shared by VCs are building their networks and increasing the specialism of their investment focus. 

Larger funds, unsurprisingly, are more likely to have the luxury of being able to improve their competitiveness by scaling their investment and non-investment teams, as well as investing in areas such as data and technology.

Also noteworthy is the fact that better reporting on the ESG impact of portfolio is gaining momentum across funds of different sizes and those focused on Series A and B investments.

Investor respondents were asked to share the investment-team specific initiatives that they have rolled out or are rolling out to improve their competitiveness. The two most frequently-cited responses focused on the importance of building close relationships with other funds, as well as spending time to build sector knowledge.

This may be a function of VCs allocating time differently given a slowdown of new investment opportunities compared to the relentless pace of last year. Respondents from larger funds stood out for their increased focus in 2022 on data-driven investment initiatives. 

Despite a major shift in the macro environment, VCs are overwhelmingly staying consistent with their core investment process, with only small numbers of respondents citing changes to preferred entry stage, investment criteria, decision-making process or how they approach due diligence. One change that did gather a meaningful number of responses is a return to travel to spend time in other locations and markets.

The increased focus on relationship-building is not surprising given that VC respondents to our survey also perceive that building relationships early with founders is the most decisive factor by far in winning competitive deals.

In a period of uncertainty, this is bound to strengthen as trust, empathy and reliability take on greater importance when relationships are tested by difficult situations. 

There are some notable differences in survey responses from this year compared to last year. Speed of conviction and decisiveness has dropped from second place in 2021 to fourth place this year. This has been replaced in second place by the brand and reputation of the winning fund, according to VCs. This perception is perhaps shaped by an expectation amongst VC respondents of a ‘flight to quality'.

While most funds haven't necessarily rolled out new strategies with regards to the investment process, they are placing more emphasis on certain aspects of a company's due diligence. The change in the macro environment, especially valuation compression in the public markets, has led to increased scrutiny on entry terms, financial and operational metrics, as well as exit assumptions.

This is especially true for larger funds given their increased sensitivity to these considerations at their preferred stages of entry, which are typically later. Notably, many pre-Seed and Seed stage investors also highlighted that they are placing greater emphasis in their diligence on metrics (financial and operational), as well as their entry terms and exit assumptions.

We asked VC respondents to share their reflections on how the market environment is impacting their portfolio. Looking at responses by different types of managers (i.e. solo GPs vs. emerging managers vs. established managers), a greatest number of respondents from all groups highlighted longer fundraising processes, slower investor decision-making, and more frequent bridge and extension rounds as the most biggest changes in market dynamics.

Interestingly, VC respondents from established fund managers were significantly more likely than other respondents to highlight delayed exit timelines as an observed change. An increase in repricing and pulling off term sheets was only highlighted by a small number of respondents across all categories. 

We analysed how VC respondents based in specific countries may differ in their observations on the way the market has evolved.

While it’s clear that large numbers of respondents from all markets have observed changes to the market dynamics, the scope of change observed across all response options by those based in Europe’s largest markets by capital invested (UK, France, Germany) really stood out to us. This indicates that the biggest markets have seen the biggest changes in fundraising dynamics.

To understand the views from the other side of the table, we asked founders and C-levels what they consider to be the most important considerations when selecting between investors. Across all stages of their journey, founders and C-levels look first and foremost for partners that are aligned with their vision of the company. It is by far the most important consideration with on average a 24 percentage point gap with the next highest consideration.

The ranking of the table is based on the average across the different stages and ordered from high to low. It paints the picture of how the needs of founders and C-levels evolve as they scale and face different set of challenges.

For pre-Seed through Series A, the second place factor in choosing a round leader is access to a relevant network, demonstrating the importance of building connectivity at these early stages. It is noteworthy that valuation, round structures and track are much less frequently cited as important considerations by founders and C-levels across all stages.

In chapter two, we explore the characteristics of the talent base within the European tech ecosystem in respect of the experience profile of founders and leaders. Experience, of course, brings different perspectives and it’s interesting to see how founder responses vary by age segment.

There is one clear difference when comparing the different age groups - the importance of alignment of vision. Whilst this is the most important consideration for founders of all ages, it ranked notably higher for founders in the oldest age segment.

In fact, the only other consideration that saw a notable difference across founder age cohorts was the importance placed on the ability of an investor to support follow-on rounds. All other considerations had much lower spreads in terms of differences.

Pretty overwhelmingly, large investors aren't blowing founders out of the water. When asked in what areas the largest external investor delivered above expectations, over 1 in 4 founders selected 'none of the areas listed', even with the option to specify other ways that weren't listed in the answer choices. This represents an opportunity gap for investors to fill.

For the remaining founders, corporate development, community, and business development ranked high on the list of areas they were happy with. While executive recruiting and talent are important areas of support, as highlighted by founders, they rank low on the list when it comes to investors delivering above and beyond.

Business development and Sales are areas that could be a key differentiator for VCs executing well against them, given they are high in demand and some of the areas with the greatest level of dissatisfaction from founders. Both of these are also likely to grow in importance as companies look to grow and/or defend their revenue base during a period of economic pressure.

Angels are vital to the European ecosystem. Almost half of founders - 44% - reported raising capital from angels in 2022, compared to only 37% raising from VCs.

Standing as often the first point of entry to founder funding, angels act as early ambassadors, finding founders and providing the bridge they need to the overall funding ecosystem.

Although self-identified full-time angel investors represent the largest share of angel investments, an impressive number of survey respondents reported that they are actively angel investing alongside their primary day-to-day role.

While we don't pretend this is necessarily fully representative of the broader angel investing market, it speaks to the growing breadth and depth of the angel landscape in Europe today.

In particular, 34% of founders and C-level survey respondents stated they have made at least one angel investment in the past 12 months.

Drilling into the profile of founder respondents further, we found that 60% of them are repeat founders and the remainder are first-time founders. The fact that more than one in three founders is actively angel investing speaks to growing role of recycling of capital and knowledge within the ecosystem as more founders are reinvesting their time and resources to support and mentor a new generation of founders.

The growing prevalence of angel investing within the European tech ecosystem is also evident in the share of employees at tech companies undertaking this activity.

Survey responses clearly highlight how operators at all levels (C-Level, heads of departments and employees) are being drawn into backing new founders and companies, many of whom only started in the past one or two years.

This is a trend that is observable across all types of survey respondents, including amongst institutional investors from VCs and LPs too.

While a number of initiatives and funds exist at the earliest stage to support a more diverse set of founders, there is still work to be done amongst angel investors too.

They are performing better on team diversity than the share of overall funding. However, they have actually taken longer to catch up if we look at the share of capital going to mixed and all-women teams raising rounds of less than $5M - a closer comparable to the types of rounds they are involved in.

There are a wide range of survey respondents across the European tech ecosystem with varying firepower to invest. 46% of tech employees are investing less than $5K on average for initial investment. The majority of respondents invest anywhere between $5-25K per investment.

There are other angel networks where participants are able to write bigger size checks. Business Angels Europe ("BAE") network is made up of 19 BAE clubs across Europe, with around 200 members per club. The average investment size across their networks stands at $250K.

Tech companies like Odin have also emerged to make it easier for individuals to pool their smaller sized cheques to invest together, making it easier to open up access to more potential investors.

Another way to help bring in more angel investors, and amplify existing angels' impact, is via tax breaks. Tax incentives for young tech company investment both raise awareness of this asset class and help new investors with limited funds see it as a viable investment opportunity. A sample of policies that we could find in this category are below.

Curious? Check out more details here.

This is an incomplete list, compiled to give a flavour of policy initiatives across Europe supporting startups and venture capital. Want to make it more complete? Please share your contribution here.

Each type of angel investor brings something to the table. Full-time investors (VCs, angels and LPs) can naturally best support founders with raising their next round of funding. Senior employees (C-level and department heads) are particularly well suited to support on talent topics. Founders and C-level are also best placed to provide advice on sales playbook and go-to-market strategies. Seemingly, VCs feel they are the best placed to help across all categories.

We asked angel investors to share details on how they have adapted their investment pace to the shift in the market environment since the start of 2022.

The majority of respondents (51%) shared that they are staying consistent and have not changed their pace. 36% of angels shared that they are making fewer investments compared to last year - around 3x the number of angels (13%) that shared they have been making more investments this year.

Similar to the overall amount of equity investments, debt has seen a large increase in 2021 and 2022, growing 4x within the past five years.

In relative terms, it has seen an uptick in proportion to equity investment, representing the equivalent of around 5.6% of the total equity investment into private European tech companies.

After a dip in 2019 and 2020, the number of disclosed debt rounds have seen a jump in interest over the past two years, as founders started turning more towards debt.

Needless to say, these rounds represent only a subset of the activity taking place, but they provide insights into the direction of travel and increased demand for debt instruments.

Given the enduring challenges in the equity capital markets, it is expected to become a more frequent source of funding for companies over the next 12 months.

This increased demand for debt is also a function, in part, of conversations with investors about how to shore up balance sheets and manage cash flow.

According to VC respondents to our survey, just under 30% shared they have advised companies to use debt financing as a way to increase cash balances and runway. The probability is higher for those investors that are focused on later-stage companies.

Across Europe, a number of VC-backed companies raised debt financing in 2022.

Looking at the top transactions disclosed provides a sense for the type of companies turning to debt financing. The largest debt transaction this year in Europe was by Celonis, over 3x the size of the second largest round raised by Casavo.