Europe’s Struggling Start-Ups Need Backing of Forward-Thinking VCs to Unleash Potential

At a time when European innovation is urgently needed to accelerate the continent’s twin digital-green transitions and remain globally competitive, the tech start-ups at the heart of this effort face troubling headwinds. In the first half of 2023, venture capital (VC) funding in Europe plummeted by 61% relative to the same period last year, with investors growing increasingly wary amid slowing growth rates, ongoing inflation and high interest rates.

This waning investment is hitting thousands of European start-ups as they continue grappling with sharp, inflation-fuelled hikes in labour and operational costs – a toxic combination that has forced them to temper growth plans and slash jobs to keep their heads above water. What’s more, this economic turbulence is expected to drive down the continent’s start-up graduation rate, which captures the number of start-ups projected to grow and thus attract further investment.

Europe’s VC funding dip is significantly worse than in the US, “reflecting the fickleness of the continent’s investor base,” as economics reporter Eric Sylvers recently wrote. According to Dan Shellard, a start-up founder and UK-based partner of European VC fund Breega, all too many investors fail to recognise that building start-ups is a “people business” that “takes time, patience and a lot of grit.”

Yet forward-thinking funds like Breega are encouragingly championing a holistic, human-centred and sustainable model that empowers Europe’s most innovative start-ups to maximise their economic and societal impact.

Time’s up for short-sighted VCs

Europe’s current VC investment volatility is symptomatic of recent market trends. According to VC investor and advisor Kjartan Rist, burgeoning tech markets during the pandemic lockdowns attracted large streams of start-up funding, but from essentially reckless, out-of-touch investors. During these “fast and loose” years, as Rist describes them, too many VC fund managers failed to “focus on fundamentals,” amassed “bloated portfolios” and brought “little added value to their portfolio,” guided by the misguided belief that the party would continue in the post-Covid world.

This blind, “growth-at-all-costs” mindset is a major flaw of Europe’s VC industry, reflected by the preponderance of wealthy “family offices” among European investors in the past three years looking for quick, reliable returns. Consequently, many of these VC funds miscalculated the risk of investments made during the tech funding boom, leading to widespread start-up failures and family VCs switching to “safer” types of investments.

Moreover, research from VC platform Vauban last year revealed that former bankers and private equity investors continue to comprise the majority of European VC partners, as opposed to experienced start-up founders – who represent a mere 24.7%, yet are ready to roll up their sleeves and help fledgling tech firms chart a path to sustainable growth and profitability.

Founder-focused model on the rise

This industry imbalance should be corrected by founder-focused VC funds that recognise the societal importance of start-ups and provide the know-how to unlock their potential. Encouragingly, Kjartan Rist has signalled that the much-needed transition from “transactional” VC to “venture craftsmanship,” is already underway.

European VC fund Breega is among the leading proponents of this founder-focused, mission-driven model. Founded in 2015 with the ambition to help narrow the industry’s operational expertise gap, Breega’s partners are all former start-up founders and operators, ideally positioning it to offer its founders “full stack funding,” – a broad package of guidance, hands-on support and network access in addition to capital.

Dan Shellard, a UK-based Breega partner and experienced founder of tech start-ups – including leading fitness tech firm Fiit – believes that “because we have all been on the other side of the table, we are one of the best at guiding founders…not just as investors in the boardroom but as founders in the weeds on a day-to-day basis.” Shellard points to Breega’s internal Scaling Team – which offers governance, talent, brand-building, certified coaching and growth support – as emblematic of an emerging trend of deeper VC-founder collaboration in Europe’s innovation ecosystem.

This holistic, human-focused approach is increasingly recognised as a key part of sustainably scaling up start-ups, notably by helping founders avoid burnout. “Having first-hand experience of what that founder is going through allows you to deliver the right motivation, encouragement or feedback” according to Shellard, who would have appreciated similar mentoring support when he was starting out. Describing his early start-up days as highly neglectful of his personal wellbeing, (sleeping at the office, zero exercise, poor diet) Shellard says that a radical healthy lifestyle adjustment triggered one of his most productive years.

Moreover, Shellard strongly emphasises guiding new founders’ thinking on their growth model and wider assumptions. During his early startup days, Shellard quickly learned the importance of realistic expectations and a long-term outlook, which, along with “ruthless prioritisation,” are two key pieces of wisdom that he imparts to the founders being helped by Breega.

Unlocking start-ups’ societal impact

Beyond the multi-faceted nature of Breega’s founder support, helping their start-ups fulfil their societal role is a core component of its VC approach. Shellard and his co-partners feel “extremely fortunate…that we get to see some of the most innovative companies solving some of the world’s biggest problems,” and employ ambitious ESG criteria “that ensures our investment have an impact on the world.” By combining its extensive start-up experience and purpose-driven outlook, Breega is particularly well-placed to choose start-ups whose solutions are both economically-viable and socially beneficial.

This long-term VC model is precisely what Europe’s innovation ecosystem needs during this tight funding period. Indeed, many of the start-ups with the potential to develop innovative tech solutions to the continent’s socioeconomic, health and environmental challenges will need investors with the patience and vision to stick with them. With the short-sighted profit-seekers jumping ship, now is the perfect time for more European VCs to follow Breega’s lead.

Looking beyond Europe’s dwindling start-up funding, the continent still has a strong innovation base to build on, with over 150 unicorns spanning 28 countries and ten of the world’s highest-ranked universities for computer science. With Europe’s undeniable innovation assets supported by founder-focused VCs, the current investment drop can soon be relegated to a footnote in history.