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What a year. With the early-stage tech sector experiencing high levels of uncertainty around funding, AlbionVC, with support from Google Cloud, has just released the aVC index to inform founders whether fundraising market conditions are improving or deteriorating. The report is created through an anonymous survey of 40 investors, actively deploying capital into the European ecosystem at seed, Series A and Series B stages. 30% of the investor base has an AUM of at least €1.2 billion.

An explanation of the formula used to measure the direction of change within the aVC index. 

Source: Albion VC in aVC Index Report Q2 (2023)

So what were their findings so far? Early-stage investors are expecting to see a big step up in investment in Q3 and Q4 across Series A and Seed Saas investment rounds. Also that early-stage investing is poised for recovery with the surveyed funds expecting to deploy €2.8 billion in early-stage European SaaS by the end of the year.

Early-stage investors are expected to deploy capital in new investments in Q3 and Q4, while Series A investors have balanced follow-on allocations over the next two quarters.

Source: Albion VC in aVC Index Report Q2 (2023)

The expected recovery follows a sluggish Q2, in which a quarter of VCs refrained from issuing any term sheets for new investments, with a median of only 2 term sheets per fund. 

Main Take-aways: 

  • European early-stage SaaS companies are returning to fundraising
  • The aVC index comes in at 54 – showing an expansion in the number of companies in investors’ active pipeline. A reading below 50 represents a contraction in the market, whilst 50 represents no change (see report for stage and geography variations).
  • Dry powder is not driving additional risk taking, with 25% of funds choosing not to issue new term sheets in Q2 despite ample available investment capital
  • Investors are reporting that processes have become less competitive or have seen no change in pricing – yet 20% of funds report a more competitive dynamic
  • Two out of five investors believe valuations will fall further in 2023, with 25% believing they could drop 20% or more
  • £2.4bn to be deployed by respondents into European SaaS by the end of the year, with a ramp up in activity on new deals in Q4
  • VCs are anticipating more investor-friendly terms
  • UK funds report a deal activity contraction yet continue to actively issue term sheets

What to expect if you are looking to raise Series A over the next 3 months

Series A investors still actively do deals and issue term sheets for both new and follow-on investment. Data suggests investors will be busy making follow-on investments in Q3, with more focus and capital being deployed into new deals in Q4. The market can expect valuations to stabilise, although some segment may feel further pressure (Europe), however this hasn’t been a blocker to Series A funds issuing term sheets. Deals to be done on more investor friendly terms outside of valuation alone, so terms sheets need to be considered holistically throughout the round.

“The background of our first aVC index is the slowest start of the year in my 20-year career as an early-stage tech investor and the data reflects this with a quarter of funds reporting no new term sheets in Q2. However, the funding market now appears to have bifurcated. Some companies are attracting 2021 levels of interest – either because they are in super hot sectors or because there is strong investor demand and a limited supply of exceptional companies. 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.”

Robert Whitby-Smith, Partner at AlbionVC

Want to learn more? 

Read their full report here. 

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