VCs and PEs have not lost faith in long-term commitment, but tech companies should differentiate

This year is off to a challenging start for the startup ecosystem in Europe, according to Crunchbase. Startups raised $10.6 billion in funding, down 18% quarter on quarter and as much as 66% year on year as U.S. investors pulled out.

The financial downturn in Europe is similar to that in most of the world. According to Crunchbase data, global funding fell 53% year on year, a sign that the tech sector is still recovering from the 2022 high-interest rates and broader economic uncertainty. 

We recognise Crunchbase's figures. It has become more difficult for European early-stage start-ups to find funding. The process is also taking much longer than a year ago. Investors are looking more critically and have more time to do a solid substantive evaluation.

We also see this in our own portfolio. At the same time, investors and founders now have the opportunity to get to know each other better and build relationships - and that is positive for both since an investment relationship simply lasts for many years. Understanding who you are getting into business with and agreeing on what the common goals are is extremely important and takes time. 

The developments outlined by Crunchbase are not unexpected. We know from our own experience that Europe follows the USA with a certain lag - and that seems to be the case now.

We disagree however that there is no longer confidence in making long-term commitments. Examples such as Insided and Teamleader in our venture capital portfolio have taught us that patience is sometimes necessary to continue investing and, where necessary, create value for all stakeholders.

And for our PE branch, it’s not different. Until 2022, investors saw in many scale-ups the potential to become frontrunners in their specific sector. They generally invested quickly and heavily to achieve growth, which only raised expectations. Good ideas within technology need to be tested and scaled quickly in order not to fall behind the competition, and capital helps to do this quickly and in a big way. This can work as long as capital is relatively cheap. 

Entrepreneurs today face challenging market conditions: inflation, talent search and retention, economic uncertainty, and rising interest rates. As a result, we are moving through a transition from cost-driven growth to efficient, sustainable, and profitable growth. Investors are looking more at profitability of the business model and looking for forward-looking indicators that give comfort on that.

Software is and will remain a dynamic market, and the long-term growth trend continues unabated. A company that solidifies its fundamentals and can thus demonstrate profitable growth will continue to be attractive and find capital in the eyes of investors today.

We expect the upcoming period to be one of consolidation for B2B technology companies. We believe this will be driven by several factors, including many similar solutions for the same customer, the same marketing channels to reach the end customer and the end user's desire to acquire an end-to-end solution rather than multiple fragmented point solutions.

That said, there will always be room for growth, with the right strategy, focus and execution. Where there are challenges, opportunities are also created. For example, for companies considering an inorganic growth strategy and actively seeking acquisition targets.

In addition, companies will need to invest smarter (instead of investing ever more) and look for where more can be done with less. For example, tapping into the existing customer base as a source of growth, by building more versatile customer relationships, tapping into other sales & marketing channels (partnerships) or trying to accelerate the development of adjacent functionality.

It becomes more important to test such initiatives with smaller amounts of money and only scale them up further upon the first indication of success. An entrepreneur will then have to be able (and dare) to act quickly and possibly set course, that is, be agile. It is also important to have a clear, appealing vision and mission that helps to maneuver through uncertain times. We are currently working with our portfolio companies to sharpen strategy, vision, and positioning, and even more flawlessly execute them.

An experienced software investor with a network (talent, advice, etc.), knowledge - including benchmarks - and specific tech expertise can help with the above and create value in the companies they invest in, in good times but also in not-so-good times. When we invest in entrepreneurs, it is ultimately also about a long-term commitment. Regarding new investments, we take more time than before to get to know management, understand the essence of a business model, and outline a joint growth strategy.

Thus, we are critical in both directions: we want to convince ourselves that we are the right partner for the entrepreneur at this stage of the business. But the interest in entering into partnerships remains undiminished.