In the first quarter of 2022, VC investment in European startups reached the second-highest quarter on record: $29.8bn, according to the business information platform, Crunchbase.

This is despite the fact that globally and in North America, Q1 2022 investment fell compared to Q4 2021. That fall was partly due to the dip in the value of public technology stocks.

Europe was able to buck that trend because, as a growing venture market with a less developed late-stage funding market, it offers global growth investors exciting new opportunities to reap rewards.

The UK led Q1 early-stage funding in Europe, closely followed by France and Germany, and then the Netherlands, Switzerland, and Spain.

What’s exciting is that early-stage funding in Europe for Q1 2022 was $9.4bn, a massive 50% year-over-year increase from Q1 2021 – demonstrating a move in investor sentiment towards earlier stage funding and a loss in appetite in ‘mega-rounds’ as VCs adjust their plans to the changing economic conditions.

This is backed up by Dan Boyer of SuperSeed VC who said:

“75% of last year’s investment cash was what we call tourist cash, so non-traditional VC, i.e. Hedge funds, PE, CVCs and others. Does this retraction in cash matter to you? No. As VCs we must fill the hopper at seed & pre-seed – so this is great for you. If we don’t, there’s nothing [for us] to invest in tomorrow.”

Meanwhile, seed-stage startups in Europe raised $2.1bn in Q1 2022 across more than 1,000 companies. In total, the size of seed and angel venture deals reached a combined value of $10.3bn globally, which is a significant increase over previous results.

So, the early signs are that investor sentiment is shifting away from mega rounds and towards earlier stage funding. In 2022, we would expect total investment value to be less than 2022 (we are going to see fewer $100m+ mega rounds than 2021) but are currently on course for a resurgence in early-stage deals.

Angels see safety in numbers

Economic uncertainty in Europe, plus the war in Ukraine, seems to have sparked uncertainty in the angel investor community. More and more active angels are opting to invest their resources into angel syndicates and platforms because it lowers their risk, rewards their profile, and helps to diversify their wealth portfolios.

This is potentially excellent news for early-stage startups looking to raise angel investment. By leveraging angel groups, investors can de-risk the investment opportunity, and founders can access a broad range of expertise and advice to support their growth.

SEIS and EIS funds are, as ever, going to play an important role in the UK investment ecosystem and will become an increasingly powerful tool for accessing capital at an early stage.

Valuations are being reset

Investors are taking the current economic situation as an opportunity to reset start-up valuations. 2021 saw a massive increase in valuations – pricing many investors out of the market and making it difficult for many to envisage a potential return.

With a reduction in mega-rounds at mind-boggling valuations, VCs are now able to re-set the price back to pre-2021 levels. This, while benefiting investors, does also bring many investors priced out of the market in recent years back into the fold.

The headlines will undoubtedly be “a fall in Unicorn creation across Europe”, but the reality is that many of the unicorns created in the past 18 months will struggle to sustain that lofty valuation and were overvalued to begin with.

As a result of this valuation shift, we’re starting to see experienced investors – who we may have previously deemed “inactive” due to an 18 month break in investing – start to close some deals.

It looks like a wave of more experienced angel investors, who were not willing to get caught up in the valuation inflation of 2021, are coming back onto the scene. This is only good news for early-stage founders as it creates more supply of early-stage capital into the market.

Investors expect “real” business models

Gone are the days of “build it and they will come” philosophies. The days of business strategies where the focus is on grabbing market share with no concern for profitability are over.

Investors want to see a clear path to profitability in as few investment rounds as possible. To a large extent, this has always been the case with Angel Investors, so very little changes to the advice we’ve always given Pre-seed and Seed stage founders.

However, this sentiment has been echoed by VC firms, large and small. So, when raising your Series A round and beyond, you very much need the financial narrative to be focused on profitability – not the tale of “smash and grab” of years gone by.