UK VC Fundraising, Corporate Climate Pullback, EU Fragmentation, and Pan-European Startup Entity

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UK VC Fundraising, Corporate Climate Pullback, EU Fragmentation, and Pan-European Startup Entity – hosted by Dan Bowyer

Oct 18, 2024

Welcome to a new episode of the EUVC podcast, where our good friends Dan Bowyer and Mads Jensen from SuperSeed cover recent news and movements in the European tech landscape 💬

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Here are the core take-aways:

Are UK VCs leading the way?

What it is: UK-based VCs are projected to raise over $12B in new funds by year-end, surpassing the previous 2021 record of $11.5B, according to Dealroom. However, according to Venture Capital Journal, global VC fundraising still hasn't surpassed 2019 levels.

Why it matters: The UK and Europe appear resilient, even as global VC fundraising shows signs of slowdown. Europe’s unique trajectory is underscored by a 3% growth in fund size this year, the only region to see an expansion. The shift to larger, fewer funds, with LPs seemingly favoring established names, has resulted in the average fund size almost doubling in six years to reach $170M. This resilience may signal growing confidence in the region’s innovation potential and attract larger-scale investments in Europe’s startup ecosystem.

Dan notes that while global VC activity may be slowing, the UK’s ability to surpass its 2021 fundraising record is “extremely surprising and warming.” He emphasizes that Europe, and especially the UK, is growing faster than the US, showcasing confidence in the region’s innovation potential and the growing attractiveness of its startup ecosystem.

Mads points out that top fundraisers, like Norwest, ARCH, and Flagship Pioneering, are not traditional VC names, focusing more on growth and infrastructure investments than backing early-stage startups.

Are corporates pulling back on climate just when we need more power?

What it is: As COP29 nears, more CEOs from major corporations, including financial giants like Blackrock, Bank of America, and Deutsche Bank, are opting not to attend. Simultaneously, many global companies are scaling back their climate initiatives, pointing to a lack of clear government policies and support.

Why it matters: The cooling enthusiasm for climate initiatives is reflected in broader market data. MSCI’s ESG and climate business growth has slowed significantly, dropping to 12%—below 2017 levels—after peaking at 50% in 2022. Investment in climate tech, which reached $55 billion in 2021, has seen a 20% dip in 2024, according to Pitchbook, Climate Insider, and Jeffries. This pullback is concerning, particularly as we enter what the IEA calls the "age of electricity," driven by electric vehicle (EV) adoption, AI growth, and expanding data centers.

Interestingly, new data centers announced in the first half of 2024 totaled nearly 24GW, triple the amount from the same period last year, and already exceeding the entirety of 2023, per Wood Mackenzie. Google’s recent investment in nuclear energy underscores the increasing demand for reliable, large-scale power sources to fuel these technologies.

For startups and investors in climate and clean tech, this changing landscape presents both challenges and opportunities. With climate tech investment slowing, startups will need to navigate a more cautious funding environment.

UK Investment Summit faces challenges despite £63bn target

What it is: The UK International Investment Summit aimed to attract £63B in private sector investment, but it faced a major setback when DP World, the operator of P&O Ferries, pulled its £1B investment pledge.

Why it matters: The timing of the summit, which occurred just before the UK budget announcement, may have limited its impact. Despite Labour leader Keir Starmer’s call for less regulation to attract investment, his party also proposed new employment regulations, sending mixed signals. Shadow chancellor Rachel Reeves hinted at changing how government debt is measured, potentially unlocking billions more for infrastructure investment and attracting foreign co-investment.

Rachel Reeves’ suggestion to change how government debt is measured could potentially unlock billions more for infrastructure investment and bring in foreign co-investment, but Mads emphasized the need for Labour to strike a balance between bold investment plans and market confidence. He pointed out that Labour’s ambition to raise significant private capital for sectors like defense, digital technologies, and life sciences makes sense, but the government's mixed messaging may undercut investor enthusiasm.

Can public investment deliver long-term gains for the UK?

What it is: Andy Haldane, former CEO of RSA and ex-chief economist at the Bank of England, suggests that public investment can be self-sustaining.

Why it matters: Public investment in the UK is set to fall from 2.7% to 1.7% of GDP over the next five years unless Labour changes its fiscal rules on debt. This reduction risks triggering a vicious cycle of lower activity, reduced tax receipts, and diminished economic output. However, the Office for Budget Responsibility (OBR) estimates that increasing public investment by 1% of GDP could boost output by 0.5% in five years and 2% over 10-15 years. A 4% GDP investment could potentially raise national income by 10%, translating to a 9% return on investment—outpacing borrowing costs.

As Mads and Dan discuss, Rachel Reeves faces the challenge of balancing bold investment ambitions without unsettling the City. Mads emphasizes that, if well thought through, this approach could attract international investors and spur growth in critical sectors like energy transition and transport.

Dan highlights that a key to success will be the co-investment piece—government partnering with private capital to amplify impact. While current public investment plans fall short of the necessary scale, as Mads points out, the right combination of increased investment and regulatory changes could significantly benefit the UK economy

Rachel Reeves cuts National Wealth Fund budget by 1.5B

What it is: The UK Infrastructure Bank is being rebranded as the National Wealth Fund, with the goal of attracting “tens of billions of pounds” in private investment to help decarbonize the British economy.

Why it matters: The reduction in funding raises questions about the UK’s ability to meet its ambitious decarbonization goals. Against a GDP of £2.3tn in 2023, even the original £7.3bn budget seemed modest, and the further cut to £5.8bn makes the fund’s impact appear even smaller. The move contrasts with the government’s aim of leveraging private capital to drive green infrastructure, leading to concerns about whether the current funding is sufficient to attract the scale of private investment needed for significant economic transformation.

Dan further emphasized the need for bold investments, not just in capital, but also in regulatory reforms to ensure planning and execution efficiencies. Mads echoed this sentiment, explaining that without sufficient funding and streamlined processes, the UK risks missing opportunities to decarbonize effectively, especially in sectors like energy transition and infrastructure development.

Is the European Project under threat?

What it is: The European Union is facing internal fractures as global divisions grow, with America politically polarized and China distancing itself from the West.

Why it matters: French President Emmanuel Macron’s recent warning underscores the gravity of the situation: “In the two to three years to come, if we follow our classic agenda, we will be out of the market.” Protectionist tendencies within the EU could derail the bloc’s ability to compete globally, potentially weakening its position in key sectors. Productivity stagnation, coupled with fragmented trade policies, puts the EU at a crossroads—either it reinforces unity or risks economic decline.

Dan and Mads underscored the significance of these comments, noting that the EU's fragmentation, coupled with productivity stagnation, could severely weaken its global competitiveness. Mads pointed out that Germany, a key driver of the EU economy, is facing challenges in its once-dominant automotive sector, particularly with the slow transition to electric vehicles. This decline in one of the EU's major industries could have a ripple effect across the bloc.

Will the EU finally get a Pan-European startup entity?

What it is: Andreas Klinger from Prototype Capital, along with other prominent figures, is leading a push for the EU to create a pan-European startup entity. The goal is not to introduce more regulations, but to standardize key elements like investment processes, employment laws, and stock options across Europe. The initiative aims to unify and strengthen Europe's fragmented startup ecosystems.

Why it matters: A pan-European startup entity could solve some of the biggest challenges facing European startups—disparate regulations, complex cross-border hiring, and inconsistent stock option frameworks. Standardization could make it easier for startups to grow and scale across the continent, potentially unlocking greater investment opportunities and fostering a more competitive global position for European innovation. You can bring your contribution!

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