European VC predictions: What's in store for 2022?

Investors are preparing for another record year of European venture capital activity, but frothy valuations, overseas competition and accessing talent are among the potential headwinds.

European startups ended 2021 with a healthy €92 billion of capital raised, according to PitchBook data, representing an increase of 116% over 2020. PitchBook analysts are predicting that this year capital invested will reach a stunning €175 billion as round sizes and valuations continue their upward trajectory.

With that optimistic outlook in mind, we reached out to investors active in Europe's VC scene to see what they expect for the year ahead. Here are five key takeaways.

1. Don't expect the same levels of growth.

OMERS Ventures managing partner Harry Briggs suspects that while investments may go up, startups and investors should expect the rate of growth in capital invested to be slower this year than in 2021.

"The rapid acceleration of tech coming out of the pandemic and the incredibly low-interest rate environment made [2021] an incredible year, but those things will slow down," he said. "There are still huge opportunities and money to be made, but we're starting to see a re-rating of the stock market and some of the tech companies. And if interest rates rise as expected, people will not be searching for yield quite as desperately as before."

2. Foreign VCs will continue to dominate later-stage rounds.

The presence of foreign investors in late-stage deals is expected to continue to be a key driver of growth in 2022, according to AlbionVC partner Christoph Ruedig.

"A lot of European countries don't have the same kind of cash-rich investors that they do in the US," Ruedig said. "It takes time for an ecosystem to develop and we're starting to see local investors exploring [later-stage] opportunities, but in the short term, I don't think they will be as involved."

3. Frothy valuations may lead to corrections for many startups.

High funding levels and more foreign capital led to skyrocketing valuations last year, which are expected to continue on this trajectory in 2022, but it may not look quite like last year.

"The frothiness of the valuation of the later-stage companies means that earlier-stage startups feel like they can justify the high levels of valuation relative to their own metrics," Paula Groves, general partner at Impact X Capital, said. "The problem is that when they're set too high, in order to make good returns that company has to become a unicorn, which is a big risk for investors."

Groves believes that while a market-wide correction may not be in the cards for 2022, many startups will face downgrades in their valuations—and there could be more high-profile failures.

4. European VC deal activity will spread out as location matters less.

Nontraditional tech centers are expected to benefit from increased funding this year as investors search for better value.

According to LocalGlobe general partner Julia Hawkins, more success stories are coming out of underfunded areas, which is boosting investor confidence, as the move to remote working also helps make fundraising more accessible.

"We're already starting to see funding shift to ecosystems that capital hasn't historically reached before," she said. "Investment in Europe is really just getting started, and we're seeing great ideas coming out of founders and universities across the region."

5. Talent will remain the biggest challenge for startups.

With more competition in Europe's VC industry, the challenge of getting access to talent will continue to intensify this year, according to Highland Europe co-founder and partner Fergal Mullen.

"It's a persistent challenge for all startups because the market is becoming increasingly competitive," he said. "More and more startups are being launched, but there isn't an equivalent increasing number of university places for computer scientists, as well as product and market development people. It's a battle, and the startups with compelling and visionary founders and appropriate compensation structures in place will do better."

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