Introduction to European Startup Investment

The European startup scene saw venture capital investment surpass $52 billion in the previous year, demonstrating a steady long-term growth path and a gradual return to stability following the unprecedented peaks of 2021-2022, which were largely fueled by the COVID-19 pandemic, and the comparative downturn in 2023, as indicated by a recent report.

Market Trends and Insights

Despite the political and regulatory challenges witnessed in 2024, the pool of talented startups in Europe continues to expand, albeit with funding constraints that became apparent last year, according to the “Dealflow” report by global law firm Orrick, which provides insights into 2024 trends.

Analysis of Venture Capital and Growth Equity Investments

An in-depth analysis of over 375 venture capital and growth equity investments in Europe last year highlights several key observations. The European startup market exhibited signs of stabilization compared to previous years, with a moderate adjustment in investment terms, moving away from the extreme highs and lows seen during the pandemic and its aftermath.

Adoption of Standardized Model Form Documents

There was a significant increase in the adoption of the British Venture Capital Association’s new model form documents in European deals, which align more closely with practices in the U.S. As this de facto standard gains traction, it is expected to accelerate future deal-making by simplifying deal structures that are familiar to all parties involved.

Expansion of Option Pools and Focus on Scaling

European companies showed a tendency to expand option pools, with more than 70% of equity financings including a top-up, indicating a stronger talent pool in Europe and a greater focus on scaling companies rather than seeking early exits.

Deal Volume and Size Trends

Improvements were also observed in deal volume and size, with the average size of deals facilitated by Orrick for investor clients increasing by 66%, while deals initiated by startups experienced a slight decrease, although company-side deals still constituted the majority.

Challenges in Growth-Stage Funding

However, the report underscored the ongoing challenge in Europe regarding the limited number and amount of growth-stage funding deals. While early-stage funding is readily available, later-stage and growth-stage funding remains scarce.

Preference for Equity-Based Deals

Equity-based deals were more prevalent than debt-based deals, with companies opting for extension rounds over debt rounds. The most common types of equity-based deals were Advanced Subscription Agreements (ASAs) and Simple Agreements for Future Equity (SAFEs).

Secondary Financing Trends

Around 30% of rounds involved either standalone secondary financing or included a secondary component. Founders increasingly accessed secondary transactions at an earlier funding stage, with some occurring as early as the Series A round.

Sectoral Distribution of Financings

Startups with SaaS or platform-based business models accounted for 21% of financings, while DeepTech increased to 23%, deals involving AI and ML maintained a 33% share, and FinTech deals rose to 16% of European financings.