European seed investors explain how they are investing during the current economic downturn

Since the beginning of the year, we have all witnessed the economic downturn. Especially the tech stock market, and crypto has lost a lot of its value. Now investors are getting back to business after a slow summer filled with vacations instead of term sheets. We are all wondering what the 2022 downfall of venture capital will look like, with this current uncertain venture capital climate.

What is certain now is that the VC party that started in 2020 and reached its crescendo in 2021 is over. The startup founders I meet through the Fast Track Malmö accelerator all ask the same thing of us. What does the current market mean for seed investments? Will we be able to raise capital from venture capital funds as planned?

Startups in the early stages of development are particularly dependent on access to external capital from investors. Indeed, it might be impossible to move into profitability, many of them have a lot of potential but no income yet. For most early-stage startup founders, not raising capital means the end of your startup.

Somehow it looks like it will be impossible to raise a round just yet as valuations of tech companies on the stock markets plummet. But from another perspective, venture capital funds need to deploy the record funds they have raised. With the fall in the IPO markets, it is clear that late-stage investments have been affected. But what about early-stage markets?

Compared to stock markets, trend changes occur slowly in venture capital. Worse still, the data to identify trends evolves even more slowly. This is especially true at the seed stage, as many wait several months before making funding rounds public.

The data has arrived for the second quarter of 2022, and it shows a drastic 38% slowdown in dollars invested in European venture capital compared to the same quarter last year according to Crunchbase. Compared to Q1 2022, there was a sharp drop of 24% in dollars invested. However, the slowdown was clearly driven by the decline in late-stage transactions. For the European seed stage, we don't see the same trend break. The amount invested in this market in Q2 2022 was down only 5% quarter over quarter.

But what will happen now, as we enter a new season of investing? Will we see the same numbers at the seed stage, when the data backlog has been caught? Or can we expect seed funding to stay strong? Since I'm not a fortune teller, I decided to ask seed venture capital funds how they plan to invest for the rest of 2022.

We asked 22 European venture capital funds how their plans had changed in 2022, mainly with the economic downturn in mind. Of the funds that responded, 96% invest in seed, 82% in pre-seed and 46% in Series A. 78% of respondents invest across Europe or globally, while the rest invest at the regional level.

Of all respondents, 43% were partners, 33% directors, and 23% associates. On average, the funds that participated in the study make 10.7 investments per year. Responses were collected between June and August 2022. You can access the full report here.

Asked whether they have changed their plan for the number of new investments for this year, two-thirds say they will stick to their original plan. Clearly, venture capitalists have funds to deploy and they continue to see opportunities in this market.

"Have you changed your plan for 2022 on the number of new investments?"

Melinda Elmborg

However, we can expect a drop in momentum from a third of the funds. As 18% expect a sharp drop of 30-50% in their number of new investments. The remaining 14% of respondents expect a smaller decline of 10-20%.

We also asked about the reasons for the slowdown, and the most common reasons were that the fund:

Don't feel comfortable placing bets in uncertain times Reserve capital or time for portfolio companies instead