“2023 was a challenging year for both VCs and startups,” summarizes Marcin Hejka, General Partner at OTB Ventures, describing the state of the global investment landscape and the general mood prevailing among the European ecosystem’s players. Last year, the region’s venture capital deal value dropped by 45.6%, while VCs themselves saw fundraising down over a 39% decline, according to PitchBook fresh data.
To find out if this trend will continue to be observed in the new year, Vestbee asked the partners of leading regional VC funds: OXO Ventures, Roosh Ventures, Warsaw Equity Group, Day One Capital, and OTB Ventures for their perspectives. They shared thoughts on what challenges the European venture capital and startup ecosystem will face, what tech verticals will be at their peak, and why everyone is increasingly talking about the AI bubble.
Marcin Hejka, OTB Ventures
In 2024, we anticipate the continuation of several prominent trends that emerged in 2023. One area that we are particularly optimistic about is the further expansion of deeptech, with specific focus on enterprise automation and AI. These technologies will play a crucial role in enhancing efficiency at the enterprise level, making them indispensable for businesses seeking to improve their operations. We also foresee growing acceptance of dual-use technologies, including spacetech, cybersecurity and semi, as a highly visible category for CEE venture capitalists. This sector presents significant potential for growth and investment opportunities.
Generally, I expect 2024 to be a very difficult year. So far, many companies were able to extend the runway and keep functioning based on funding raised in good days of 2021 and 2022. But this money has been running out. It is also going to be a hard year for VC fundraising. As a result, 2024 is going to be the year of down rounds and increased mortality of both startups and VCs.
But all crises have one thing in common. They end. It may be a bit later than most expect. But 2025 or even late 2024 should bring us improvement in the macroeconomic situation. The best founders and the best investors will successfully muddle through and will benefit from the new era of prosperity that will follow.
Richard Illes, OXO Ventures
In 2024, the VC industry is expected to experience a more favorable year compared to 2023. The industry as a whole eagerly awaits a decrease in interest rates by central banks, which will enhance its overall attractiveness. In my opinion, this anticipated decrease is likely to commence no later than the end of 2024.
Despite the presence of a higher inflation rate, increased interest rates and unusually dry investment activity in 2023, VCs still possess dry powder, although they exercise more cautious and strategic allocation compared to the past. Consequently, there has been a notable decline in startup valuations. I expect to see the valuations to persist at a more realistic level, which will ultimately benefit the entire ecosystem in the long run. Startups understood the importance of not chasing ever higher valuations, but recognizing VCs who can offer significant assistance and become true partners in their businesses. This trend is projected to continue throughout 2024.
However, amidst this prevailing period, one trend stands out from the crowd: AI investments. It is currently characterized by overvaluation and a sense of being overheated, and we will be able to observe some impacts of this trend this year. The valuations are expected to continue rising in 2024 in this particular sector, raising my speculation as to when this bubble may burst.
Lastly, the VC industry is likely to experience more secondary transactions that provide liquidity. Also, a significant development in 2024 will be the initiation of consolidation, not only among startup companies, but among VCs themselves. This consolidation is anticipated to foster a more efficient system, which is vital in navigating the challenging market environment.
Paweł Maj, Partner at Warsaw Equtiy Group
Global startup funding in 2023 declined by 38% year over year and 59% from the all-time high in 2021. Although we don’t have 2023 data for the CEE region yet, we should expect to see a similar decline. Looking forward, I expect global startup funding in 2024 to be on a similar level as in 2023 and further declined in the CEE region. For startups, it means that fundraising will be as difficult as in 2023, and investors will still be very selective, focusing on startups with great metrics/unit economics and on a clear path to be profitable in the foreseeable future.
Talking about the technological verticals, I expect trends seen in 2023 to continue in 2024, especially the high interest of investors in startups from the AI sector, which was the largest sector to show an increase in the last year, but also startups from the semiconductor and cleantech sector.
Andrew Tymovskyi, Roosh Ventures
In 2024, the CEE venture capital and startup ecosystem is expected to remain rather conservative. One of the key trends and verticals of interest is, of course, AI, which is set to mature with significant corporate investment and the development of sophisticated models. This progression is set to drive the way for industry-specific AI solutions, fundamentally altering traditional business workflows.
Simultaneously, energy tech is gaining substantial momentum, especially in Europe, catalyzed by the Russia-Ukraine war, highlighting the need for a new energy model. Additionally, the fintech sector is expected to make a notable recovery after a challenging period.
The overall outlook for 2024 suggests a modest increase in growth, supported by positive macroeconomic trends. Early-stage startups are expected to maintain stability in terms of round size and valuations. However, the late-stage market may experience more pressure, with an increase in mergers, acquisitions, and down rounds. This reflects a more cautious investment approach and a shift in market dynamics.
György Simó, Managing Partner at Day One Capital
We will witness the real adoption of AI applications at the enterprise level, further propelling the success of winners in each product category. Apart from the obvious sectors, one we find most suited for AI adoption is media and entertainment. While last year was dominated by LLMs, large language models, 2024 could be the year of SLMs, as their use case specificity can significantly enhance performance and result in an order of magnitude cost reduction.
We only dare to whisper it, but we very much hope we’ll avoid creating a real AI bubble, which in some cases already started with the advent of VC backed GPT wrappers, and arriving at an equilibrium where the level of the valuations will match that of the innovation.
Apart from the AI trend, although in the past years defense was — and at most places still — a taboo topic, we see a growing number of CEE startups popping up or transferring into the defense sector with dual use technologies catering more and more to defense use cases.
Overall, we don’t anticipate the first half of this year to be significantly different from the past two years. Nevertheless, we foresee a substantial divide between the best-performing companies, which can secure funding on their own terms, and those forced to struggle for survival. This pattern, observed in 2023 for Series A and beyond, is expected to extend to Seed rounds as well, particularly for companies whose 18-24 months of secured runways from 2022 are nearing their ends.
Later-stage funds launched in 2021-2022 deployed very little capital in the past years, and they need to change this soon. This will strengthen the effects of winners raising big and faster than usual, while the inevitable down rounds — where breaking even is unachievable — will be even more present. Many founders will have a hard time managing dilution and learn about cap table reorganization.
Related Posts:
VC Trends Shaping CEE Startup Ecosystem In 2023 (by Olga Chechłacz, Editor, Vestbee)
VC And Startup Trends 2023: Cleantech, Energy, Greentech, Impact Investing (by Olga Chechłacz, Editor, Vestbee)
Outlook Of The CEE Startup and VC Ecosystem In 2023 (by Katarzyna Groszkowska, Editor, Vestbee)
