Europe VC Dealmaking Slows in Q3, Startups Turn to Buyouts as Markets Cool

Despite a continent-wide economic slowdown and comparatively deflated financial markets, Europe is on track to match last year’s record-breaking venture capital (VC) activity, which saw over 12,000 deals raise over 100 billion euros, according to PitchBook’s latest European Venture Report.

The report cautions, however, that although VC investment managed to sustain the pace of 2021 in the first half of the year, total European deal value dropped 36.1% in the third quarter (Q3) as compared to the same period last year.

Read more: European VC Deal Value to Surpass €100B for Second Consecutive Year Despite Decline in Q2 2022

There is also the matter of declining valuations among late-stage startups.

From 2016 onward, late-stage deals accounted for a greater share of all VC investment in the European ecosystem but on the current trajectory, that trend is set to either level out or reverse in 2022.

For now, at least, this change appears to mark the end of an era defined by mega-deals that enabled companies to burn through cash at an unprecedented rate in pursuit of growth at all costs.

And although late-stage investors are still signing multi-million-euro cheques, valuation haircuts, down rounds and cost-cutting have been constant so far this year. In turn, VC-backed startups have shifted their focus to efficiency, sound unit economics, cost cutting and a growing emphasis on profitability.

See more: Uncertain Times Shift CFO Focus From Growth to Profitability

The same is true for companies that have exited the VC ecosystem via initial public offerings (IPOs). For example, British online auto retailer Cazoo recently announced in its Q3 report that the firm intends to completely withdraw from the EU in order to focus on its domestic market in the U.K.

Related: UK Car Retailer Cazoo Ditches EU Market to Ease Path to Profitability

According to company founder and CEO Alex Chesterman OBE, the decision is in line with Cazoo’s target of reaching profitability by the end of 2023.

A Dry Year for European IPOs

Across industries, publicly listed companies have seen a significant decline in its stock market valuation so far this year, making it a slow period for European IPOs.

Besides Cazoo, other high-profile stock market flops include Wise and Deliveroo, which have seen their valuations shaved by about 30% and 67%, respectively, since going public last year.

Still on the downside, the total value of all European exits in Q3 2022 was the lowest PitchBook has recorded since 2017, with only seven public listings recorded in the quarter.

In that exit space, buyouts and acquisitions have taken the lion’s share so far in 2022, as compared to public listings accounting for the largest chunk of all exit value last year.

Absent a last-minute string of 10-figure IPOs, this year is set to be the first in a long time in which the average post-deal valuation for companies that get bought out is higher than that for companies that list publicly.

For the year to date, PitchBook has reported that the median deal value for buyouts and acquisitions sits at 52.2 million euros versus just 32.5 million euros for public listings.

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