Early-stage European SaaS startups set for funding rebound, report finds

In the second half of the year, early-stage European SaaS companies will see a significant funding increase across Series A and seed rounds. That’s according to the aVC index, a new monitoring tool developed by London-based AlbionVC and Google Cloud.

The aVC index is based on an anonymous survey of 40 investors, who are actively deploying capital into the European ecosystem at seed, Series A, and Series B stages. The respondents expect to invest £2.4bn (€2.8bn) early-stage SaaS startups by the end of the year.

The projected recovery follows stagnant investment activity in Q2 2023. Specifically, 25% of VCs chose not to issue new term sheets despite having sufficient capital available. UK funds issued an average of three terms sheets, while their European counterparts came at an average of two. Overall, only 4% of all portfolio companies received externally-led term sheets.

In addition, two in five VCs believe valuations will fall further in 2023, with a quarter predicting a 20% or higher drop. But, in total, respondents reported that they expect more investor-friendly terms.

Nevertheless, there is cause for optimism in the second half of the year. The aVC index found that Q2 already showed an increase in the number of companies within investors’ active pipelines.

The index’s Q2 score reached 54 — with a rating below 50 indicating a contraction in the market and a rating at 50 indicating no market change. For Series A, in particular, the index was 57.1, pointing to higher funding activity in this stage.

Meanwhile, the VCs surveyed reported they have significant capital reserves, with two-thirds of the funds dedicated to new investments and the remaining one-third intended for follow-on investments.

“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,” said Robert Whitby-Smith, Partner at AlbionVC.

“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.”