Confidence in Europe’s start-up sector drops to historic low.
The European Venture Sentiment Index (EVSI) has been surveyed quarterly by Venionaire Capital together with network partners such as EY, the European Super Angels Club (ESAC) and several international angel organizations since Q1 2020. More than 4,000 venture investors (business angels, venture capital specialists and family offices) throughout Europe are surveyed on their market assessment. As recently as Q4 2022, the experts expected the economy to stabilize in Q1 2023 and improve in the second half of 2023. However, the reality reveals a different picture.
Never before has the experts’ prediction regarding the Sentiment Index been so far from reality. Low valuations, difficult financing and a clear demand overhang to existing venture capital are putting companies and the innovation of the last 5 to 10 years at risk. Three macroeconomic events are largely to blame for the ongoing shock to the European economy and the resulting negative surprise in the market. These are the war in Ukraine, rising inflation and the energy crisis.
Market sentiment reaches record low
The majority of experts surveyed believe that the current level this quarter will represent the low point for 2023. The negative trend has continued in the first quarter of 2023. That results in a fifth consecutive decline in the index from 4.3 in the fourth quarter of 2022 to 4.1 in the first quarter of 2023. The actual index value of 4.1 differs significantly from the forecast for Q1 2023 (measured in Q4 2022), which called for a neutral value of 5.0.
Investors have scaled back their expectations for Q2 2023 compared to the Q1 2023 expectation. Rising key interest rates and the banking crisis have frustrated European efforts to revive capital markets. In the current quarter, there were declines in all factors of the index. That results in a decline in total investment volume, total deal count, and average deal size in the European VC market. Investor expectations for Q2 are currently much closer to the neutral terrain of the Sentiment Index. This prediction seems positive at first glance, but it is essential to take it with a grain of salt. Investors tend to overvalue negative markets and undervalue positive markets. In short, when the market is going really badly, people expect and hope for an improvement soon. Whereas in positive phases they usually assume that these can and will never last long.
Topics covered in the latest report:
- Banking crisis and high inflation impacted the European economy and VC market in Q1 2023.
- Loss of faith in the VC market leads to a “cherry-picking” attitude in Europe.
- European Venture Capital Sentiment Index hits record low in Q1 2023.
- Fundraising for early-stage startups in Europe becomes more challenging.