It’s no secret that 2023 was difficult for the startup scene. But what does the coming year look like? Using various evaluations, we take a look at what founders have to prepare for.
The capital market has seen many difficulties in 2023. This is likely to have an impact on startups in the future. Getty Images
There is no denying that the startup scene has seen better years than 2023. In the previous two years, there was plenty of reason for founders to celebrate: a lot of capital, new startups, lots of exits. Now things look different. Geopolitical crises, inflation and rising interest rates shaped the economy this year.
Investors also acted much more conservatively compared to previous years. Like data from Pitchbook show, this particularly affects late-stage startups that are aiming for exits or IPOs. You can find out how the market developed in 2023 and what effects this could have for 2024 here:
The diversity of investors is decreasing
Anyone who wants a cash injection from so-called non-traditional or strategic investors – such as angels, crowdfunding platforms, CVCs or even wealthy private individuals – should lower their expectations. According to Pitchbook data, the participation of non-traditional or strategic investors in Europe was only 10% by the third quarter of 2023 73.4 percent of the value from the previous year.
The situation is similar with the level of company valuations and deal activity: while these were still comparatively high in 2021 and 2022, both values fell significantly in 2023. This pullback indicates caution among many investors in the current market environment.
Developments in valuations and deal activity between 2013 and 2023. Pitchbook
The consequences for startups: “The decrease in investments from non-traditional players could lead to downrounds – financing rounds with low valuations,” says Kai Hesselmann, co-founder and managing partner at Deal Circle. “This can affect the startups’ attractiveness and future fundraising potential.”
Read too
When is it worth selling your startup? A professional will clarify
The number of unicorns in Europe is stagnating
The total value and number of VC-financed companies valued at more than one billion euros will stagnate in 2023.
According to the report, the total value of all European unicorns was around 447 billion euros by the third quarter of 2023. This is just below the total value (453.9 billion euros) at the end of 2022. Currently, as of the third quarter of 2023, there are 135 active unicorns headquartered in Europe, which corresponds to the 2022 number. However, there were only seven new unicorns by the end of September this year. In 2022 there were significantly more at 46 by the end of the year.
Development of the number of active (dark blue) and new unicorn startups (turquoise) as well as the value (light blue) of all European unicorn startups. Pitch book
According to the report, slower deal activity and fewer exit options are reasons why the bottom line is that values are stagnating. Yaron Valler, founder and partner at Target Global, also says: “It’s not the rate at which unicorns are created that has fallen, it’s the level of bluffing that has fallen.” The flattening is therefore a signal of a return to normality on the capital market. “The companies that were overvalued in the past are now fairly valued,” he says.
The sales valuation on exits decreases
The Pitchbook report also shows that the exit environment in Europe currently remains calm. Accordingly, the average exit valuation was in the first three quarters of 2023 at 25 million euros. This is the average of the estimated market value of a company at the time of its sale. This average is based on all exit data recorded by Pitchbook.
For comparison: In 2021 the average exit valuation was 35.7 million euros and in 2022 it was 33.2 million euros. These years saw record-breaking exit activity. By 2023 the average valuation will be over 24.7 percent sunk.
The development of the sums for which startups were sold between 2013 and 2023. Pitch book
The falling valuations can be explained by market conditions. According to Hasselmann, the cooling of the valuation was mainly influenced by the increased interest rate level. “As interest rates rise, the costs of loans and financing become higher,” he says. For investors who want to arrange acquisition financing to purchase a company, this means higher costs and therefore lower margins. “This may result in potential buyers becoming more cautious and setting lower valuations to minimize risk.”
Experts see “likely” decline in exits and IPOs
But are the current market conditions causing difficulties for startups that want to conduct an exit or IPO soon? Hasselmann says: “It is likely that we will see a decline in IPOs and other exit opportunities for German startups in the near future.” He describes five factors related to this:
Tougher market conditions: “Elevated interest rates, economic uncertainty and cooling exit valuations are creating a more difficult environment for IPOs,” he says. “Higher interest rates and risk-averse investor sentiment may dampen demand for new equity issues.”
Cautious investors and companies: “In an uncertain market environment, both investors and companies tend to be more cautious.” There is a possibility that startups tend to postpone their IPO plans in the hope of better market conditions in the future.
Alternative financing and exit strategies: “Given the challenges of traditional exits, startups and their investors could look for alternative paths,” says Hasselmann. “This could include, for example, strategic acquisitions, private sales or longer investment periods rather than relying on the public market.”
Adjusting valuation expectations: “Companies looking to go public may need to adjust their valuation expectations,” he predicts. This can attract investors – making a successful IPO more likely for companies.
Focus on sustainable growth: “In a challenging environment, startups may place more emphasis on sustainable growth and strengthening their financial foundations before pursuing an exit.”
Read too
Startup sold, and then what? How founders avoid the “black hole”.