Lack of Late-Stage Capital Drags Down European Venture Funding in Q1

Severe investor belt-tightening caused global funding to nosedive 53% year over year.

That’s according to a Crunchbase report, which also found that 2023 is off to a rough start for Europe’s startup ecosystem, with firms only raising $10.6 billion in funding in the first quarter of the year, a 66% drop from the previous year and down 18% from the previous quarter.

When venture capital funding hit an all-time high in 2021, competition from major U.S. VC firms piling into European rounds intensified, creating a challenge for Europe-focused VC firms.

It’s a challenge that Rob Moffat, partner at U.K.-based VC firm Balderton Capital, discussed in a conversation with PYMNTS in February.

“Our competition has increased over the last couple of years, [and now] it’s really justifying to founders why they should take money from us, rather than from a big-brand U.S. firm with a London office,” he explained.

But the Crunchbase report shows that American venture firms are starting to pull back, with François Veron, managing partner at Paris-based venture firm Newfund, estimating a drop in French startup funding from U.S. VC agencies, from around 40% in 2022 down to 5% in Q1 2023.

Early-Stage Funding Takes the Lead

Overall, early-stage startups experienced the lowest funding pullback among the three stages — the others are venture-funded (growth) stage and late stage — the report noted, even though their funding was still down 7%.

Late-stage firms took the hardest hit, however, further complicating matters for capital-starved companies as funding had already been on a downward slope these last few quarters. Investments secured dropped 77% year over year to reach $4.3 billion in Q1, a decrease Crunchbase attributed partly to the effect pandemic-era inflation has had on company valuations like Klarna.

“That, coupled with fears of conducting a down round, has put funding in this space at a standstill,” the report stated.

Europe’s early-stage funding scene, on the other hand, is on an upward trend — and for the first time since Q4 2020 surpassed late-stage firms in funding by $600 million.

In a PYMNTS interview earlier this month, Zeynep Yavuz, FinTech partner at early-stage venture capital firm General Catalyst, spoke about the potential these firms have to capture the VC dry powder in Europe as growth-stage firms continue to struggle with stock market challenges.

“I believe it’s an amazing time to build a company,” Yavuz said, “and because the funding market has slowed down in the growth and late-stage space, a lot of the capital is shifting to early-stage.”

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