12/07/2024

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European Startup Funding Weakens as Investors Favor Bonds

European Startup Funding Weakens as Investors Favor Bonds

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Banks and lenders around the world have been throwing trillions of dollars at bonds, betting that a cooling economy won’t fully collapse and hit currently high yields.

But the aggressive bid for safety has hurt funding for riskier ventures, including the European market for financing startups.

Quality Bond-ing Time

European startups were riding pretty high on the hog even as late as last year. VC deal activity was responsible for more than $100 billion in investments in both 2021 and 2022. But market researcher PitchBook found that the European VC deal count and value has dropped significantly in the first half of 2023, with roughly 4,000 VC deals accounting for a combined value of about $24 billion. US investors also are pulling back in the European VC sector.

Instead, many investors kicked off a bond-buying frenzy. So far this year, banks have sold more than $2 trillion in bonds, a record pace, according to a Bloomberg analysis. Not only are they relatively low-risk, but with interest rates up and bond prices down, they’re seeing some of their best yields in more than a decade:

  • A dearth of European VC funding has “shifted company strategies from growth at all costs to prioritizing cost management, which has translated into layoffs and hire freezes across the entire startup ecosystem,” a PitchBook report says. For example, Austrian digital-education company GoStudent cut more than 10% of its workforce and pulled out of the US, The Wall Street Journal reported.
  • Bloomberg found that “sales of euro-denominated securities are up 52% from the same period last year and make up the largest share globally for the first time since 2014.” So far, Europe has sold roughly $700 billion in bonds.

AI is Still a Winner: While a business like Dutch company Peeryby, which lets neighbors borrow each other’s power drill and lawnmowers isn’t doing so hot, generative AI startups are still seeing the money roll in. In June, after just four weeks, Mistral AI — France’s rival to America’s OpenAI — received $113 million in its first-round seed funding. Earlier this summer, French President Manuel Macron announced a €500 million spending bill to create AI “champions.” At least the companies working on replacing us all one day are in good shape.