Down-rounds continued to run in-line with the historical average of ~20% in 2023

Two additional trends we have identified for 2023 include: i) an aversion to down-rounds, and ii) the ongoing shift between growth and profitability. Data from Atomico’s recent ‘State of Technology Report,’ suggests down-rounds as a share of deal volume stayed broadly flat in 2023, contributing ~20% of all funding rounds[9]. This was consistent with the 5yr average. The use of liquidation preferences and alternative funding likely offset the potential for more deal activity at lower valuations.

2024 could be when many venture-backed companies grow into their 2021 valuations

The continued aversion to down-rounds could provide a pillar for some potential optimism for 2024. Below, we show why. To illustrate, we have taken a company who raised equity in 2021. We have then sensitized an annual revenue growth rate between 0% and 100% and calculated the company enterprise value assuming 50% multiple compression (in line with Refinitiv’s venture capital index which is down ~50% from its 2021 peak). In 2024, only companies with a revenue CAGR below 25% would raise equity at a lower valuation compared to 2021. In 2025, the breakeven point falls below 20%.

Consumer competitive moats may have been re-defined over the past 18 months

Consumer venture & growth funding has been subdued since early 2022, but funding trends in 2023 suggests there may been a re-definition of competitive moats across the sector. We believe that investors are now less prepared to reward companies who recycle venture-capital dollars into direct marketing to drive top-line growth, especially without the underpin of more robust marginal economics. Many direct-to-consumer operating models have received lower levels of funding.

Conversely, it seems that companies who can build brand value within secular themes (such as sustainability or experiences), provide differentiated approaches to multi-channel distribution, and leverage high-margin operating models are potentially able to attract investment.

An example of two consumer companies who raised in 2023 are Huel and Castore. Huel, a food nutrition brand, raised US$100m from Morgan Stanley’s 1GT Climate Fund in a secondary transaction in Oct-23. Huel distributes its health product range through both retail stores and via a subscription service. This omni-channel mix aims to maximize customer spend and builds strong unit economics. Huel’s gross margin approached 60% in FY23-Jul, and the company delivered EBITDA profitability.[16] The alignment of brand, sustainability and strong customer economics is likely favoured by consumer-focused investors.

The second example is Castore who raised US$179m in Nov-23 led by the Raine Group. Since being founded in 2015, the company has built partnerships with established sports teams and franchises. This approach aims to de-risk demand, with Castore then overlaying its digital infrastructure to broaden distribution to a global audience. The firm generated around US$150m in revenues in FY23-Jan, with a 70% gross margin generated via manufacturing efficiencies.[17] Castore’s exposure to global sports fans, the multi-channel mix and high margin structure likely helped construct an attractive model.

The AI platform shift in Europe is starting to gain traction

In Europe, there were 21 European DeepTech deals (>US$50m) in 2023, raising over US$3bn. Eight of these deals were AI-related, raising almost 60% of the total, with 80% of AI funding invested into open-source foundational models. While the foundational layer took off in Europe through 2023, most of the funding continues to be attracted to US companies. For example, only US$1 in every US$10 invested in AI was raised by a European-HQ company in 2023, according to data from Pitchbook.

Within the foundational layer, three European companies raised large growth rounds – with two companies raising twice, which may highlight the high capital requirements of training large models. Germany-based Aleph Alpha raised over US$500m in a series B round in November, who are building their Luminous series - a family of LLMs - targeting specific industries and government use cases.

Mistral AI also raised two rounds in quick succession to develop its community-focused open-source models, which can be deployed through APIs. A key aspect for Mistral was the management team’s previous experience from Meta and DeepMind which likely helped provide conviction for investment during the seed and series A rounds. The recent US$450m series A commanded a US$2bn post-money valuation and was led by A16Z. Finally, Poolside – also based in France - raised a US$126m seed round led by Redpoint Ventures in August 2023, with the aim to build a model focused on software creation, and rapidly integrate AI into vertical workflows.

2023 saw many notable deals across verticals including PragmatIC and Isar Aerospace

More broadly within DeepTech, Cambridge-based, semiconductor company PragmatIC raised in excess of US$200m in a series D round led by M&G Catalyst and the UK Infrastructure Bank. The company manufactures low-cost flexible, integrated circuits, and aims to reduce the global semiconductor reliance on silicon and geographical foundry concentration. The RFID market is the first market targeted, with many use cases beyond RFID also within the company growth plans.

Activity across the SpaceTech value chain also continued through the year. For example, Isar Aerospace – the verticalized developer of launch vehicles - raised US$166m in Mar-23 led by UVC Partners and the European Investment Fund. Within space logistics D-Orbit also raised US$106m in a round led by the Japanese conglomerate Marubeni in Nov-23. In 2024, we might potentially see further capital deployment across the European SpaceTech ecosystem as launch heritage becomes increasingly established, and commercial traction continues to improve revenue visibility.

Shifting Allocations into Cash Benefitted Many Investments and Cash Management Platforms

Notable 2023 deals included Scalable Capital - the Munich-based digital investment platform - who raised US$65m in Dec-23 at a US$1.4bn valuation; the round was led by Balderton Capital. The company has now scaled to US$19bn of AUM, coupling a breadth of savings plans with a full stack product offering, across equity, bonds, crypto and derivatives. Investment platforms who can leverage the through-the-cycle re-allocation of assets are potentially well-placed to build sustainable growth models, in our view.

More broadly, the shift from risk assets into money-market funds has been well documented. Taking SEC money market data, assets rose by over US$1 trillion in 2023 to reach US$6.4 trillion by end of November 2023.

The sensitivity of growth to deposit betas – the degree to which changes in base rates are passed through to savers – has been a focus for some public and private investors. The positive impact of higher rates on cash investment volumes saw some related fundraises, including deposit marketplace Raisin (raised US$64m series E in Mar-23) and cash treasury platform, TreasurySpring (raised US$30m series B in Jun-23). Other Neobanks have similarly benefitted from higher net interest margins, with Zopa raising US$93mn in Feb-23 at a >US$1bn valuation, and the company reporting an annualised revenue run rate of >US$300m in August.

Account-to-Account and Vertical Payments Supported Activity Within the Payments Sub-Sector

Despite being particularly active over the last few years, funding into payments companies slowed through 2023. This was likely due to several factors including the shorter duration of the Venture & Growth funding market and some evidence of slowing payment volumes. That said, there were two pockets of notable activity which we believe represent two key structural growth trends.

First, Account-to-Account payments which has continued to benefit from new open banking legislation, and the increased focus on both cost efficiency and user experience for merchants. These dynamics seem reflected in Volt’s US$60m series B round in June 2023 led by IVP, as well as Stockholm-based Brite Payments who raised a $60m series A round. The ongoing shift to instant bank payments (and payouts) at checkout, has led to several funding rounds in recent years, with some selected European players included in the figure below.

The second dynamic is the inter-section of payment processing with independent software vendors (ISVs) - and notably, the disintermediation risk of direct merchant relationships. This is a theme we have written on throughout 2023 (see link to SUV here). In summary, we could potentially see a continued convergence. On one side, incumbent merchant acquirers and vertical payment platforms acquiring end market, SMB-focused workflow tools. On the other, ISVs are progressively integrating payment capabilities and even becoming payment facilitators. Notably, Sumup – provider of retail POS and software solutions - raised US$307m of debt & equity in Dec-23, in a round led by Sixth Street and Bain Capital.

Crypto saw some evidence of recovery with tokenization of financial markets an ongoing theme

Finally, crypto exited 2023 with a resurgence as bitcoin reached ~US$44k, up over 160% from the start of the year. We have identified three notable deals within crypto: wallet hardware provider Ledger (raised US$108m in Mar-23), crypto exchange Blockchain.com (raised US$110m in Nov-23), and blockchain-based payments system Fnality (raised US$93m series A in Nov-23). These fundraises represent three interesting themes to us. First, the need for digital asset custody solutions; second, the prevalence of down-rounds - Blockchain.com raised at a US$5bn post-money valuation (around two-thirds lower than the March 2022 round); and third, the de-centralization of wholesale funding and settlement, and the shift towards tokenization. We capture the expected growth of tokenization in the figure below.

Lazard VGB’s 2024 outlook - FinTech

FinTech is often viewed as an area of European leadership, and the fundraising environment may start to recover in 2024. While the trajectory of interest rates will impact the growth and earnings performance of many companies, there are a few funding trends which could playout. Beneficiaries could include: neobanks/neobrokers and investment platforms who can deliver through-the-cycle revenue growth; payments firms who can reduce friction and improve economics for merchants (i.e. account-to-account and cross-border payment providers); and finally, firms who enable the re-platforming of capital markets, such as scale-ups who benefit the shift towards tokenization.

Both Asset-Heavy and Capital-Light Technologies Will Likely be Key to Enabling the Energy Transition

Our Energy Transition vertical largely consists of two main buckets: i) large-scale capital projects and ii) asset-light technologies. Companies within the Energy Transition vertical will be important in keeping global temperatures below 1.5°C of pre-industrial levels, with the capital requirement needed to achieve this goal expected to reach US$200 trillion by 2050. As such, European Venture & Growth capital is expected to play a crucial role. The figure below reflects the annual investment required on a global basis.

Large-Scale Capital-Intensive Projects Dominated Funding Activity in 2023

There were three examples of large Energy Transition fundraises in Europe during 2023. Octopus Energy raised US$800m in Dec-23 from its existing shareholders – the round valued the company at nearly US$8bn. The funds will be used to grow the energy supply business internationally, and scale its home services offering, including heat pumps. The company may be able to leverage its deep customer relationships and continue to scale Kraken, its CRM and flexibility management software.

The need to fund large-scale asset-heavy projects is clear but attracting capital can be challenging where the capital requirement is significant but technological risk still exists. H2 Green Steel (H2GS) raised US$1.7bn in Sep-23 from a blend of financial, strategic and sovereign wealth investors. The proceeds are to be used to finance the development of a green steel plant in Sweden, with the deal underpinning the quantum of capital needed to decarbonize industrial processes. H2GS pre-sold 1.5m tonnes of annual output to provide commercial visibility and encourage participation from sovereign wealth funds. In our view, SWFs will be important in financing the Energy Transition.

Verkor also raised €2bn of funding in Sep-23 to finance its low-carbon battery gigafactory in Dunkirk. The round mapped a similar profile to H2GS, with French subsidies and debt funding from the EIB contributing to raising the quantum needed.

The Climate Software Opportunity to be Increasingly Unlocked Over the Coming Years

The majority of Energy Transition funding to-date has been focused on i) renewable energy generation, and ii) other large-scale capex-heavy projects such as H2GS and Verkor. We might expect the scaling of generation and infrastructure projects to continue to unlock an attractive opportunity in climate software (read our Nov-23 SUV here), with a requirement to drive efficiency and resilience across the Energy complex. In the figure below, we have identified and broken down the potential investable universe within ClimateTech.

In Europe, there were a number of ClimateTech deals in 2023. Infogrid raised US$90m of equity funding in Apr-23 in a round led by Softbank. Buildings produce almost 40% of carbon emissions, and the need to measure, monitor and reduce output has become a strategic priority for some asset owners. IntegrityNext – the ESG supply chain compliance platform - raised US$106m from EQT in Mar-23. Scope 3 represents over 70% of emissions for many companies, with the ability to audit suppliers an important part of monitoring and achieving corporate ESG goals. PVCase – a global leader in solar project design software – also raised US$100m led by Highland Europe in Jun-23. PVCase’s software aims to help drive efficiency through the design and operation of utility-scale solar projects, with the funds helping finance the acquisition of US-based Anderson Optimization.

Home Services Saw High Levels of Activity as Rising Energy Costs Reduced Payback Periods

A further area of activity has been within behind-the-meter electricity generation - with Home Services an area of interest for some European growth investors. The recent energy crisis saw higher spot energy prices reduce the payback period for hardware solutions like solar panels and heat pumps. Companies like German-based Enpal benefitted, offering flexible financing solutions to help residential reduce annual energy costs and their carbon emissions. In 2023, 1Komma5 in Germany and Aira in Sweden raised US$232m and US$91m respectively, showing continued momentum.

The longer-term business model of many such companies is predicated on generating product gross profit on the sale of carbon efficient energy devices, and then upselling recurring energy management services. Other Home Services market participants include energy suppliers like Octopus Energy - who utilize low customer acquisition costs to upsell green energy products – and more traditional firms like Homeserve or Hometree who are diversifying their product offering into renewable energy services.

Lazard VGB's 2024 Outlook - InfraTech

We believe the shift to the Energy Transition will continue to dominate the InfraTech sector in 2024, with the depth of capital required to reach challenging climate goals may potentially generate positive returns for many European growth investors. Both large-scale giga-projects and enabling capital-light technologies we expect to be areas of notable funding activity. That said, many segments of ClimateTech remain in their infancy, and in our view investors will need to be selective to identify opportunities which have the appropriate business model to capture share within the rapid market formation we expect across the Energy Transition universe.

Each quarter in 2022 included a European funding round exceeding US$500m (other than 4Q22), such as Relex, Personio, and ContentSquare. In 2023, fundraising from later stage software companies slowed, with companies focused on operational performance and profitability. That said, there were a number of notable growth rounds which did close in 2023 including Pigment, Quantexa and Builder AI.

Activity Across the Procurement Stack May have Benefitted from Enterprise Focus on Cost Efficiencies

Business planning software provider Pigment raised US$88m from Iconiq Growth in May-23, followed by supply-chain procurement platform Tacto who raised US$54m in a series B round in Dec-23 led by Index Ventures and Seqouia Capital. Pigment aims to deliver improved collaboration and process efficiencies across core enterprise functions, while Tacto helps digitize supplier workflows and deliver gross margin expansion for SMEs. These two deals show investor focus across the procurement stack, and we believe there may be two main tailwinds. One, the increased focus on profitability for enterprise customers. And second, the high volume of SaaS products used - the chart from Ben Evans recent presentation demonstrates the second point.

Best-of-Breed in Attractive Verticals Able to Command Through-the-Cycle Multiples

The valuation environment across private markets – but notably within Software – became increasingly bifurcated in 2023. High quality companies within attractive verticals continued to raise through the cycle – these included firms such as Quantexa who raised a US$129m series E round from GIC at a US$1.8bn valuation in Mar-23, likely benefitting from its strong positioning within the GRC landscape. Quantexa’s decision intelligence platform has now been deployed in over 70 countries, offering solutions across data management, KYC, and AML. In our view, enterprise customers increasingly view the GRC function as key to driving innovation and guiding digital transformation.

Builder AI – the AI powered composable software platform – closed the largest 2023 round within the sector, raising US$250m in series D funding in May led by QIA. Builder uses AI aiming to leverage reusable code and design to develop cheaper, faster customized software applications. On the investor side, the participation of QIA seems to show the benefit of the lower cost of sovereign wealth capital in a volatile interest rate environment (like GIC who led the Quantexa round).

Limited Deal Flow in Vertical Software but End Markets Remain Fragmented and Under-Digitized

Other selected 2023 European software fundraises included Threecolts and Sport Alliance within vertical software. More broadly, we remain potentially positive about European vertical software opportunities, with many end markets yet to replicate the winner-takes-most venture-backed success stories we have seen in the US over the last decade. Our recent SUV on vertical software in Europe (linked here) identifies some interesting growth-stage companies we have selected across ten vertical markets.

Potential 2024 Outlook – Enterprise Software

We might expect high-quality software companies in areas of enterprise focus to continue to raise growth capital through the cycle, with tools which can re-base operating costs - including SaaS management – potentially seeing deal activity. Moreover, in our view software tools which can leverage the data repository of foundational AI models and integrate AI within core enterprise workflows could generate positive levels of investor interest.

Areas which saw more limited deal flow in 2023 may improve in 2024. For example, we believe the vertical software growth story in Europe could potentially accelerate given the under-digitized nature of many end markets, coupled with the prospect of attractive terminal year economics. Areas which have seen high levels of capital investment prior to 2023 with some cyclical exposure (such as HCM) could potentially rebound through a balanced mix of capital raising, consolidation or strategic exits.

Healthcare

Healthcare was a story of resilience in 2023 with over US$5bn of capital raised in Europe. This represented a -19% YoY decline which outperformed the broader market decline of nearer 50%. Life Sciences was the key driver contributing over three-quarters of total funding, with Digital Health and MedTech deals more selectively funded. Digital Health was particularly weak compared to 2022, falling by almost 80% YoY.

Life Sciences Contributed Three-quarters of Healthcare Funding in 2023

Within Life Sciences, we saw large raises for oncology-focused companies including ITM Isotopen Technologien Munchen, who raised US$277m in a round led by Temasek to develop its pipeline and improve commercial readiness for the lead candidate (currently in Phase 3 trials). In the UK, Ellipses Pharma raised US$139m from West Coast Capital. Ellipses currently has one oncology candidate in Phase 2 trials and three candidates in Phase 1 trials, treating diseases including leukaemia and breast cancer.

Apollo Therapeutics raised US$227m from Patient Square Capital and M&G to further build out its portfolio of over 20 programs. The business has partnerships with 5 leading research universities from which it sources its candidates for development. Within the adjacent services space, Ascend Gene and Cell Therapies raised US$133m led by Abingworth and Petrichor. Ascend provides manufacturing capacity for gene and cell therapy developers, and has acquired an array of chemistry, manufacturing and control (CMC) units that it offers as a service. The company was originally founded by Monograph Capital in response to the increased outsourcing of manufacturing.

Potential 2024 Outlook – Healthcare

In our opinion, the Life Sciences funding environment could remain robust if there is appetite from strategic players and specialist Life Sciences investors that have dominated rounds in 2023. Of the 27 Life Sciences rounds to disclose lead investors, 23 were led by specialist investors. Exit optionality has also remained highly liquid market for successful drug development, which has likely helped support continued funding of early-stage Life Sciences projects.

Interest in Digital Health may remain tied to investors’ appetite for the broader software sector.