2023 was a tough year for the venture and tech scene – in many ways even tougher than the previous one. However, for us, this year was also full of exciting tech assessment projects: We saw our Deep Tech and especially AI project volume grow continuously – sometimes with sophisticated hardware components. We supported complex industry M&A transactions and Private Equity investments. And we continued to work with Venture Capitalists (VC) and founders, building up exciting tech companies. We want to reflect on trends we saw in our work in 2023 and what conclusions and expectations we can draw from them for 2024.
2023 – The Year of Regression to the Mean
The tech and VC ecosystem has faced significant challenges this year: Rising interest rates, a bad economic outlook, and other external factors have led to a decline in funding of nearly 45% vs 2022 in Europe alone. The European VC market is back to the pre-pandemic growth rates, with roughly 20% more funding than in 2020.
The decline in VC funding has had a notable impact on the availability of capital for many startups. Most investors turned to their internal portfolio first, to provide them with bridge rounds to continue operations. The amount of bridge rounds was up 10-15% vs 2022 in absolute numbers across all stages of the company lifecycle.
However, despite the difficulties faced, the European tech ecosystem has shown resilience and adaptability: Europe was the only region that grew its investment amount compared to 2020. We believe that this this year was kind of a regression to the mean and we will see sustained growth over the next years based on certain factors:
The Rise of Deep Tech
One of the big trends that resisted the overall market sentiment is Deep Tech investing. The total funding in European Deep Tech companies has even increased by 2B $ according to the State of the European Tech Report.
Given the current geopolitical, climate, and other challenges on a macro level, VCs are increasingly recognizing the immense value that companies can create. Despite the higher technical risk and capital requirements associated with these companies, the market opportunity is strong enough to justify taking on such risks. VCs are becoming more willing to invest in these ventures, understanding the potential rewards they can yield. After all, because of their strong technological edge, Deep Tech startups have a higher defensibility against competitors. Additionally, strategic investors are increasingly realizing that they can pursue investments with innovative companies and Deep Tech startups to pursue their innovation demands.
In projects like the 100M$ Investment in CMBlu by Strabag or the investments by Ananda in NatureMetrics in 2022, we have worked with truly innovative companies. With Deep Tech on the rise, the importance of Tech Due Diligence grows, as these companies usually have more complex tech stacks. A good Tech Due Diligence supports Deep Tech founders in building the best products.
For 2024, we expect Deep Tech funding to continue to stay on its growth path. However, implications of regulation need to be anticipated, especially in Artificial Intelligence, as new frameworks are emerging such as the AI Act in the EU and the AI Code of Conduct between EU and US. Safety issues surrounding bias, accuracy, reliability, and model performance will continue to need attention, as well as security concerns surrounding model and data stealing, data poisoning, and evade detection.
At the same time, we believe we will continue to see more specific Deep Tech use cases come through in 2024. Something we have already seen happening this year, in healthcare diagnosis and treatment optimization, in manufacturing, and in addressing environmental challenges, from energy to biodiversity.
AI- and Data-Driven Manufacturing and Construction
We are seeing Construction transforming. Sophisticated, low-maintenance solutions are coming to the fore, to give manufacturers a real-time view of their operations. We saw this reflected in some of our projects this year.
For example, Berlin-based ecoworks recently raised a €40 million funding round. They have developed an ultra-efficient building skin for real estate, supported by an AI-powered digital planning solution, that reduces the climate impact of the built environment. Other examples would be the French Prop Tech Company Vizcab, which developed a platform specializing in data-driven solutions for Life Cycle Assessment (LCA) in construction projects. Or Berlin-based Spread AI, which builds a data-layer on top of the hardware engineering lifecycle.
We believe we will see more of these kinds of deals happening shortly, as Manufacturing and Construction are under pressure to cut costs, improve sustainability, and speed up supply chains.
Digital Health Powered By Data
While Healthcare is taking longer to digitize than many other sectors, due to its complexity, structural, and regulatory challenges, we have seen several startups innovating in this area, oftentimes with AI and sophisticated hardware approaches.
Take Swedish Healthtech company Neko Health, for instance, which raised a €60m Series A round led by Lakestar earlier this year. Neko works on creating a healthcare system that can help people stay healthy through preventive measures and early detection, incorporating the latest advances in sensors and AI. In our Tech Due Diligence, we assessed the company’s AI approach in combination with hardware components in sensors and medical scanning technology, which is being used for broad and non-invasive health data collection.
Another example is Floy, a Healthtech startup from Munich we assessed on behalf of HV Capital. They are developing AI to support radiologists in seeing diseases difficult to detect. Or Qualifyze, a Frankfurt-based Startup offering data-driven supply chain compliance solutions for the pharmaceutical industry.
Challenges in Healthtech remain around tech implementation and cost savings, integration, and data, given data privacy regulations such as GDPR. As these challenges continue, we expect to see a whole host of technology companies like the above-mentioned emerge and revolutionize Healthcare, including therapeutics software, AI, and predictive analytics to support early intervention and provide diagnostic and treatment solutions.
More M&A in Tech
While the M&A market was slower this year than many expected, we have worked on a couple of M&A deals this year, including EdTech Company Sdui’s acquisition of Additio App, the merger of Habyt and Common, and most recently, HomeToGo acquiring majority stakes in kurz-mal-weg.de and Kurzurlaub.de.
Looking at the broader market, while many companies successfully managed to sustain themselves through debt and bridge rounds funded by their internal investors over the past year, it is important to note that these rounds alone may not be sufficient in the long run. Eventually, these companies will need to seek new external capital to support their growth. Therefore, in 2024, many of these companies will find themselves in a position where they have to venture into the market once again and engage in fundraising activities.
Given the prevailing market pressures and the potential closure of the IPO window, we can anticipate a significant surge in mergers and acquisitions (M&A) from two different perspectives:
1.) Strategic investors, as mentioned earlier, may opt to pursue majority takeovers when they believe that a particular technology has been validated and is robust enough to offer a promising product outlook.
2.) Strong companies will proactively embark on a path of industry consolidation, seeking to acquire competitors to expand their market share and/or diversify their product range. This approach will enable them to strengthen their position in the market and capitalize on new growth opportunities.
The Trend Towards Data-Driven Investing
Data-driven Venture Capital investing is becoming increasingly important as in more competitive fundraising markets, investors are seeking ways to mitigate risks and make more informed investment decisions. By leveraging data and analytics, VC firms can gain valuable insights into market trends, customer behavior, and the performance of potential investment targets. This data-driven approach helps investors identify high-potential startups, assess their growth prospects, and make strategic investment decisions.
Advancements in Artificial Intelligence have revolutionized the investment landscape. AI-powered algorithms can analyze vast amounts of data and identify patterns and correlations that humans may overlook. This enables VC firms to uncover investment opportunities with higher precision and efficiency. Data-driven investing also allows for more accurate monitoring and evaluation of portfolio companies, helping investors identify areas of improvement and make data-backed decisions to drive their success.
While we continue to grow our data-driven assessment, we have been in an increasing amount of conversations with many investors on how to build and leverage their data in the best way possible. As the European tech ecosystem continues to evolve, data-driven approaches will play a crucial role in shaping investment strategies and driving the success of startups in the coming years.
In 2023, we continued to see a strong shift towards leaner teams aiming for profitability. Although this is a challenging pathway, the reality adjustment within engineering comes with a healthy pragmatism and a stronger focus on markets, customers, and products. A development that we welcome, because it shapes a stronger and more resilient startup ecosystem. This is something we expect to continue in 2024.
Slow growth and global instability will probably remain for some time as well. This will continue to impact valuations and investor confidence. A lot of companies that haven’t raised this year will have to raise in 2024. That will bring a lot of repricing, along with some write-offs in VC.
But the European tech ecosystem is poised for further growth and evolution. Several trends are likely to shape the landscape in the coming years. We are looking forward to many great discussions about more technical projects and investing.