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Is investment in start-ups experiencing a "harsh winter"?

There has been a lot of talk about the situation of large technology companies, and not particularly in a positive tone: layoffs, loss of status, the search for new models/products/services that can be "star markers", failure to meet investor expectations, and more.

Freeze startup investment

But the question is, is the sector really "frozen"? Well, there are several aspects to consider in order to make a statement in one way or another:


-The impact of the pandemic: The pandemic accelerated the digital needs of society, and established players took full advantage of this, focusing on seizing the opportunity to grow their customer/user base without much emphasis on profit margins. This led to an overgrowth of structures


-Additionally, the digital acceleration brought forth a multitude of new players (start-ups) aiming to take a slice of the big pie, along with expectations that were clearly inflated (with a strong focus on short-term opportunities). These expectations often led to excessive investments for the value that was going to be generated.


-After the pandemic, it became evident that many of the initiatives launched didn't make sense or didn't justify the cost at the time. In other words, there was a clear "overvalue" situation.


-On the other hand, are the big tech companies doing poorly? Well, the reality is that they are still highly profitable companies, but less so than what they promised to their investors, who are now demanding not only revenue but profitability. This explains many of the severe adjustment measures that these companies have taken.


Furthermore, the world has been facing an economically turbulent environment, with conflicts, tensions between global powers, increasing interest rates, and more. This has cooled down the ease of convincing investors to "contribute" capital.


By mid-2022, venture capital firm Sequoia Capital made a presentation to its investees with a direct and clear message: "Adapting to endure" and an even more assertive sub-claim, "the end of the cheap money era" ... in essence, it strongly urged its investees to step up, demonstrate their viability, and forget about continuous injections of capital without too many questions

Sequoia end of free capital

Indeed, Sequoia Capital is known for its impactful messages. Back in 2008, during the financial crisis, they delivered a similar presentation with the message "R.I.P Good times."

Sequoia change fast or die

Indeed, these observations align with the analyses conducted by other sources such as CB Insights, Pitchbook o Dealroom, They all highlight several key trends and shifts in the investment landscape, including:


  • Slowdown of reckless investments.

  • Increased focus on profitability.

  • Heightened skepticism in primary funding rounds.

  • Higher viability requirements for accessing funding.

  • Reduction in round sizes.

  • Decreased company valuations.

  • Slow recovery.

Sequoia investment recovery will be slow

And setting the pace is the American market, traditionally the "engine" of the industry, but Europe, with a delay of 12-18 months, follows the same trend. A good proof of this is seeing how the investment from American funds has already been affected in European tech companies.


Recently, Bullhound has published an interesting report son the investment situation in European tech companies and its evolution.

Bullhound Titan of tech 2023

Additionally, I would highlight that the size of the sector remains significant, exceeding $1.15 trillion, and the Q1'23 evolution, after a valley of death throughout Q2-Q3 of 2022, is starting to resemble the pre-pandemic period (although far from the hype experienced during the pandemic). However, there is a clear devaluation of tech company valuations.

Bullhound european tech investment

Does that mean they are worth less? Yes, but the question would be whether they were actually worth what was being asked for in the decks? And, on the other hand, investors didn't even question it. There was a clear bubble that was accepted by everyone.

Bullhound EV multiples variation

This "bipolar" situation of liquidity in the market and valuation adjustments is generating two major effects:


-The first one is that many startups and entrepreneurs, fearing "down rounds" and the consequences of explaining to previous investors, value loss, and greater dilution, are turning to the financial instrument of "Private debt". However, just as interest rates are rising in the regulated banking environment, they will also rise in these vehicles, which already have higher rates due to associated risks, and it remains to be seen how sustainable these instruments will be over time.

-The movement among those with liquidity, namely companies/corporations that have capital and are in a good position to seize opportunities to acquire competitors and/or other companies that strengthen their portfolio/value proposition. As a result, a clear trend towards M&A deals is being observed.

Bullhound acquisitions M&A

In the European case, traditionally there have been two driving forces in terms of investment focus in technology companies - the UK, Germany, and Israel. However, in the last 18 months, France is experiencing significant growth, with a strong increase in technology companies receiving investments and multiple candidates emerging as unicorns or reaching higher stages (Decaorns or Titans).

In summary, we have an environment that is alive (there is liquidity), but, as in the American case, not at any price. Valuations have plummeted by 60% since the peak experienced during the pandemic, and their evolution is expected to be positive, but at pre-pandemic levels. Therefore, for unfortunate investors, it will depend greatly on their entry point, and for companies that need cash and had their last funding round during the pandemic, they will likely face complex conversions, as they will most likely be "down rounds."

Europe has not escaped the focus on reckless growth, disregarding profitability, and it must be said that those who have successfully established their model and gained traction are doing great! However, for those who haven't, they are in a tough spot because profitability is now what is being demanded, and the burden they have acquired can sink them, as financial lifelines are more expensive and scarce.

Bullhound startup focus on revenues versus profitability

Investors are now demanding a reversal of this situation in order to maintain their confidence in their investments.

Other aspects of the European market include:


- Increased caution from non-traditional investors such as corporates and family offices, who have become more conservative in the face of market uncertainty. They seek a clearer value proposition rather than just a financial exercise.


- There has been a reduction in large funding rounds, similar to the USA, as well as a decrease in seed-stage activity. On one hand, valuations for larger rounds are often inflated and associated risks are high. On the other hand, investors are more cautious and place greater value on business plans and the real viability of projects.

In this turbulent environment, there are four positive aspects that stand out. On one hand, two sectors and a technology are experiencing growth and receiving special attention from investors, and on the other hand, the big technology companies have become a "cradle" for new ideas/projects, especially through M&A or exits.


- The standout technology at the moment is none other than Generative AI. It has become a plus for your project to use/incorporate or be based on this technology in order to attract investor attention. There is still a great deal of confusion and uncertainty regarding its evolution/applicability and legislative restrictions, but it already attracts 27% of investment with expectations to grow to 40% in the next two years.

evolution investment in AI project Bullhound

-One of the standout sectors, which could be considered an "old-timer," is enterprise software. However, due to the accelerated technology adoption that all companies have had to undergo, it is a sector with multiple interesting projects and investor attention, accounting for 37% of investment.

Most attractive sectors investment Bullhound

-The other standout sector is talent management. Talent in the digital world and product-turned-service has become the primary asset of organizations, and there is a whole ecosystem of solutions to provide comprehensive coverage (we have published the HR Tech Trends 2023 report at The Brain Mixers, if you're interested in a copy, please contact us).

HR TECH solutions wave

Furthermore, we need to take into account the market size and its expected growth over the next 6 years.

Talent management market size

- Lastly, the so-called "entrepreneurship waterfall" is a phenomenon that is increasingly observed in the sector and is associated with the profile of individuals working in it. These individuals, who have either been part of a successful startup or have founded one, do not wish to become mere employees, and their entrepreneurial spirit drives them to continue starting new ventures, supported by the economic rewards obtained from their previous ventures.

Entrepreneurship waterfall

In closing, if we take a look at the TOP50 most promising technology companies in Europe, we see that:

TOP50 most promise startups in Europe 2023

The categories that stand out the most - with a greater number of potential future "stars" - are:


- Software development, with a strong focus on AI.

- Financial services/payment.

- Sales/marketing acceleration solutions.

- Data management solutions with a significant AI component.

- E-commerce platforms.

- EdTech platforms/solutions.

- HR-Talent Management platforms.

Categories TOP50 promises startups

How do you see the investment scenario? Do you agree with the reflections/ conclusions? Do you have a different approach?

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