Europe’s Edge in Returns Has Been Clear—Until Now
European venture capital funds have stood apart since the global venture downturn began in 2022¹. Rolling one-year IRRs placed Europe at 44.3% in early 2022, while US funds posted an IRR of 29.1%¹. When markets tightened, US IRRs fell to -17.1% in the fourth quarter of 2022. Europe’s bottom came later and shallower, at -10% in Q1 2023¹. By mid-2023, European funds had returned to positive territory, while the US lagged, making Europe the refuge of choice for limited partners seeking steadier returns during a volatile period.
Performance resilience came alongside notable shifts in capital behaviour. Median deal values and valuations across all stages of the European market rose through Q1 2025, signalling that investors were not only holding steady but also actively committing more capital. Pre-seed deal sizes increased to €0.7 million, up from €0.6 million at the end of 2024. Seed grew to €2.2 million, a 34.6% increase, with valuations rising to €5.6 million, 15.4% above the prior year’s level. Early-stage deals reached €1.6 million, a 23.1% increase, with pre-money valuations at €6.2 million, 8.5% higher than in 2023. Late-stage recorded the steepest climb, with a median deal size up 36.7% to €4.8 million and valuations 14.2% higher at €13.5 million. Venture growth stood out, with valuations up 30.2% to €44.5 million and deal sizes up 24% to €10.1 million, driven by unicorn financings such as CMR Surgical and Quantexa.
Structural Advantages Built Europe’s Cushion
Europe’s resilience reflects its structural tilt. Funds tend to skew toward early-stage companies, where valuations fluctuate less in public equity markets¹. This positioning insulated portfolios when late-stage US assets—often tied to IPO prospects—absorbed sharp markdowns. With public listing windows closed for much of 2022 and 2023, US IRRs declined more rapidly and significantly.
Valuation discipline added another layer of stability. European startups avoided the lofty multiples that fueled Silicon Valley’s frothiest years. When global rates rose and growth assumptions were reset, corrections in Europe felt measured rather than severe, as limited partners, wary of steep losses, were concerned. These favoured managers emphasised predictable trajectories over aggressive scaling.
Capital Retreat Complicates the Picture
Yet 2025 presents new headwinds. Tariffs and a more insular US trade posture have curbed American participation in European deal flow. Andreessen Horowitz’s decision to close its UK office underscored a shift in cross‑border engagement. Reduced competition from US investors could slow the pace of valuation growth despite recent momentum, especially if domestic capital remains selective.
Sector Trends Reshape Where Value Accumulates
The headline numbers conceal diverging stories beneath. SaaS and cleantech lead growth in valuations, while AI and fintech show softness despite dominating deal headlines.
At the early stage, median AI and machine learning valuations slipped slightly to €6 million, down from €6.3 million in 2024, despite AI companies representing seven of the top 10 valuations in that segment. SaaS posted the most substantial gains, up nearly a third from 2024 to €8.5 million. Fintech valuations also declined, although median fintech deal sizes more than doubled to €5.6 million, as investors concentrated capital in fewer, larger bets. The life sciences sector saw median deal sizes decline by 25% to €2.1 million, a sharp pullback after experiencing outsized pandemic-era inflows.
Late-stage dynamics followed a similar pattern. AI valuations trailed those of cleantech (€14.2 million), SaaS (€14.4 million), and fintech (€21.5 million). Cleantech stood out with deal sizes doubling to €10 million, marking the highest median across sectors, led by large rounds, such as Altilium Metals’ battery recycling play in the UK.
These sector currents add complexity to Europe’s outlook. While overall valuations rose, capital was clustered around a narrower band of growth themes, suggesting that investors are cautious despite headline step-ups.
Liquidity Stagnation Tests Europe’s Staying Power
Returns hinge as much on liquidity as on valuations. Despite rising deal sizes, the European exit environment remains constrained. Nearly 75% of Q1 2025 venture exits were acquisitions, with only two VC-backed initial public offerings (IPOs )¹. Forecasts indicate that the IPO window will remain closed until at least the first half of 2026, as tariffs and geopolitical volatility continue to keep public markets unstable.
This backdrop drives a heavier reliance on alternative liquidity tools. Venture debt, which saw a record year in 2024, remains active as growth-stage companies seek non-dilutive capital. Direct secondaries have also gained traction, aided by initiatives like the UK’s Private Intermittent Securities and Capital Exchange System (PISCES). PISCES enables private company shareholders to sell stakes through regulated trading windows, providing liquidity without the need for complete public listings.
These mechanisms address capital flow, but not at the speed or scale of public exits. Unless acquisition volumes surge or IPO conditions stabilise sooner, Europe’s ability to maintain its performance advantage will hinge on how effectively managers use these channels to return capital.
Investor Psychology Shapes the Cycle’s Next Phase
Behavioural dynamics remain critical. European LPs gravitated toward safety, prioritising capital preservation through managers focused on earlier stages and modest valuations. US LPs endured heavier losses but positioned their portfolios to capture rebound-driven upside, leaning into discounted late-stage rounds and public market recoveries.
Now that US liquidity channels are reopening, those who embraced volatility may see returns accelerate. Europe’s steadier approach could deliver lower variance, but may cede the performance lead if its liquidity recovery lags behind.
What Investors Should Watch
For limited partners, balance remains the most straightforward strategy. Allocations that combine Europe’s stabilising characteristics with the US’s higher potential velocity help reduce timing risk. Diversified exposure ensures participation in whichever market generates liquidity faster.
Fund selection criteria should emphasise not only stage and sector focus but also each manager’s capability to leverage venture debt, secondaries, and structured exits. In this cycle, liquidity strategy—not just entry valuation—will separate outperformers from peers.
Europe’s Advantage Hinges on How It Adapts
European venture capital has provided a rare source of relative strength for LPs: early-stage weightings, disciplined valuations, and reliance on acquisitions cushioned returns through the global reset. Rising deal values and record dry powder reinforce its current momentum.
Yet those strengths face counterweights: US capital retreat, reducing competitive pressure; concentrated sector growth; a closed IPO window; and a liquidity framework that relies on slower, less scalable mechanisms.
The coming quarters will test whether Europe can translate its reserves and valuation gains into actualised returns. If managers can accelerate liquidity through secondaries, venture debt, and strategic M&A, the region’s performance edge may remain intact. If US IPOs and late-stage deal flow outpace Europe, the historical hierarchy may reassert itself by late 2025.
For LPs, success will hinge on embracing this complexity—allocating across both regions, sectors, and stages, while backing managers adept at navigating today’s constrained exit environment. Europe’s outperformance remains real, but its future depends less on headline valuations than on the speed at which capital comes home.
Reference
- PitchBook, Q1–Q2 2025 European Venture Reports (IRR, dry powder, valuation, deal size, sector, and liquidity data).
