The volume of global venture investment experienced a sharp reduction, dropping by around 50% from its zenith in 2021. This trend was mirrored in Europe, which saw a decline in the magnitude of investments, albeit the quantity of deals remained relatively stable. Growth-stage startups felt the brunt of this downturn, while early-stage ventures continued to garner investor interest.

"Some of the larger foreign funds with a focus on multiple investment phases have focused a bit more on the early stage, where they have seen more opportunities, due to the problems of falling valuations in the late stage and also due to the virtual freeze of IPOs (initial public offerings on the stock market). Among other things, the currently favourable valuations in the early stages and the fact that the founders put more emphasis on financial sustainability rather than rapid growth and scaling while burning much money have contributed to this," explains CIO of ZAKA VC Andrej Petrus.

The preceding year also brought shifts in investment dynamics, with diminished competition among VC funds, partly because some were unable to secure new funds for investment. "Over the last period, we have seen much more focus on funds to assist and invest in existing portfolio companies that have not been able to raise additional funding from other funds at later stages. We've also seen many bridge rounds. There is less capital in the market compared to 2019-2021. However, less competition between funds creates room for more detailed analysis of potential investments and longer discussions on investment strategies overall," Petrus added.

The surge in VC investment activity between 2020 and 2021 led to inflated startup valuations, a situation that has since aligned more closely with pre-Covid norms due to reduced capital and continued innovation. This scenario is deemed opportune for early-stage startup investments, with the venture capital domain being cyclical and driven by technological advancements, market trends, and valuation dynamics.

The evolving technological landscape has also steered investment focus shifts, with the creation of software products becoming more accessible and cost-effective due to advancements such as cloud computing and open-source tools. This ease of entry has heightened competition and led investors to seek out sectors with higher barriers to innovation, like biotech and clean tech, which promise better defensibility.

Artificial intelligence has notably influenced investment considerations, offering both new startups and established companies significant opportunities for innovation. "We are already testing some tools to help us find suitable companies for our portfolio and analysis. However, VC is still true about personal relationships, intuition, and experience. The evaluation of an investment cannot be shifted to artificial intelligence; it can be helpful, but the final decision will always be up to people," says Petrus.

The Central and Eastern Europe (CEE) region is emerging as a compelling destination for investors, attributed to its burgeoning startup community and capital efficiency. "CEE is one of the fastest growing VC regions. Between 2017 and 2022, it grew 7.6 times in invested capital, which is twice the EU average, but we also saw a sharper decline in invested capital here in 2023. According to Vestbee, it was around 75%. According to Crunchbase figures, the year-on-year decline in the Czech Republic was 75.5%. So, capital is still limited here compared to Western markets. However, it is a good opportunity for investors to invest in the early stage because teams in Central and Eastern Europe are more capital-efficient. Sometimes they can create the same product as a comparable team in the United States or Western Europe for half the capital, and the quality of technology talent is very comparable," explains Petrus.

In Europe, the ecosystem for startups and unicorn companies is flourishing, with an increasing number of successful technology ventures acting as catalysts for new entrepreneurial endeavours. This vibrant dynamic is contributing significantly to the region's economic and technological landscape.