The state of early-stage European SaaS in Q2 2023
.European early-stage SaaS companies are returning to fundraising .
Early stage investors are expecting to see a big step up in investment in Q3 and Q4 across Series A and Seed rounds, according to our new index monitoring activity in Seed and Series A SaaS investing.
The index, which will report quarterly (Q2 2023 report), shows that early stage investing is poised for recovery with the surveyed funds expecting to deploy £2.4bn in early stage European SaaS by the end of the year. The increase in activity follows a slow start to early stage fundraising in the first two quarters of the year.
With the early stage tech sector experiencing high levels of uncertainty around funding, AlbionVC, has created the aVC index to inform founders whether fundraising market conditions are improving or deteriorating. The report is created through an anonymous survey of 40 investors, actively deploying capital into the European ecosystem at Seed, Series A and Series B stages. 30% of the investor base have AUM of at least £1 billion. Google Cloud also contributed to the survey development.
The expected recovery follows a sluggish Q2, in which a quarter of VCs refrained from issuing any term sheets for new investments, with a median of only 2 term sheets per fund. During the period, only 4% of all portfolio companies received externally led term sheets despite reported ample investor capital and softer valuations. In respect of valuations, 67.5% of surveyed investors report a less competitive market or no change in pricing dynamics, while 20% saw a more competitive deal making environment driven by sector specific variations, as companies with exceptional performance and in certain segments remained highly competitive in both price and time to receiving a term sheet.
A new health indicator into European VC.
Inspired by the PMI index in the public markets, the aVC index is a forward looking, early indicator of fundraising activity. In contrast, other surveys and reports tend to look backwards at deals done and tend to be published months after the transaction has taken place, if at all.
For Q2 2023, the aVC index comes in at 54 – showing an expansion in the number of companies in investors’ active pipeline. A reading below 50 represents a contraction in the market, whilst 50 represents no change. For Series A specifically, the Q2 index is 57.1, with more companies looking for funding from Series A investors, whilst early-stage investors report a slight contraction in the number of companies raising with the index at 46.8.
Given the early stage market remains buoyant and, as the data shows, both Series A and later stage investors have seen an expansion in pipeline activity, there appears to be a trend for later stage investors to invest in early stage deals.
The aVC index also showed:
- Dry powder is not driving additional risk taking, with 25% of funds choosing not to issue new term sheets in Q2 despite ample available investment capital
- Investors are reporting that processes have become less competitive or have seen no change in pricing – yet 20% of funds report a more competitive dynamic
- Two out of five investors believe valuations will fall further in 2023, with 25% believing they could drop 20% or more
- Respondents are anticipating more investor-friendly terms
Comparing activity across Europe, UK funds have issued more term sheets than their European counterparts in the first two quarters – issuing a median of three term sheets compared to two from their European counterparts. However, UK funds report a smaller number of companies in their pipeline than European funds. Investors in both regions have substantial capital reserves, with two-thirds of this capital allocated towards new investments and one third towards follow-on investment into the existing portfolio.
Robert Whitby-Smith, Partner at AlbionVC, said: “The background of our first aVC index is the slowest start of the year in my 20-year career as an early-stage tech investor and the data reflects this with a quarter of funds reporting no new term sheets in Q2. However, the funding market now appears to have bifurcated. Some companies are attracting 2021 levels of interest – whether because they are in super hot sectors (including Gen AI and climate tech) or because there is strong investor demand and a limited supply of exceptional companies. While such deals are still an exception there is a feeling among VCs that the tide is turning and an expansion in the aVC index at Series A confirms this.”
Oksana Stowe, UK&I Head of VC and Startup Ecosystem at Google Cloud, said: “The aVC index provides a vital tool for the SaaS ecosystem, empowering founders with valuable insights to navigate their fundraising journey in the forthcoming quarters.”