PERSPECTIVE
10 Key Learnings from the VC Winter in Europe: How to Navigate a Prolonged Downturn
Published date: 22 January 2025 | 5-Min Read
The venture capital world is no stranger to cycles of boom and bust, but the recent „VC winter“ has revealed new challenges and trends reshaping the industry, especially in Europe.
In 2023, European startups experienced a significant decline in funding, marking a pivotal moment for entrepreneurs and investors. As the downturn persists, it’s vital to glean lessons from this evolving landscape.
Here, we share 10 key takeaways with a focus on Europe, offering insights into the shifts we’ve observed and the implications for the future of venture capital.
This article was inspired by Ali Afridi’s insightful piece on venture downturns, which offers a compelling analysis of the challenges facing the American venture ecosystem. Afridi’s perspective on prolonged downturns and structural shifts in VC funding provided a valuable foundation for our reflections on how investors and founders can adapt to evolving European market conditions.
1. Consolidation Will Define the New Normal
VC winters create winners and losers. Smaller, underperforming funds may shutter or fade into „zombie“ status, unable to raise new capital or make meaningful investments. Meanwhile, dominant firms will consolidate power, as LPs flock to established players with proven track records.

In Europe, VC funding dropped by over 50% in 2023 compared to its 2021 peak, falling from €116 billion to approximately €58 billion. Smaller funds, particularly those without strong track records, are struggling to raise new rounds, while power has consolidated among top-tier players like Index Ventures and Accel.
2. Slimmer Funds and Leaner Operations
In this climate, „right-sizing“ is the norm. Many VC firms are downsizing their fund sizes, focusing on quality over quantity. Some are even returning uninvested capital to LPs, while others reconsider premium fees that no longer align with their performance.

Europe has seen a significant drop in average fund sizes, with many VCs raising 20–30% less capital in 2023 compared to previous years. Some firms, like Seedcamp, have refocused on smaller, higher-quality deals. This trend reflects LPs’ preference for leaner, more disciplined fund strategies.
3. Generational Change at Firms
Downturns often trigger a changing of the guard at VC firms. Senior partners may retire, while underperforming investors could be transitioned out. This creates opportunities for younger investors to step up and make a name for themselves. Watch for an uptick in new firm formations as the market shows signs of recovery.

Newer firms such as Cherry Ventures and Northzone have started gaining prominence, positioning themselves as leaders for the next cycle.
4. Diversification Beyond Traditional VC
As venture capital becomes more challenging, some firms may explore other asset classes to deploy capital and generate fees. This could include growth-stage investments, public markets, buyouts, or even acquisitions. The lines between VC and other investment strategies may blur.

5. A Shift Toward Proven Business Models
VCs may become less risk-tolerant and more inclined to back startups in proven markets with established business models. This could lead to increased funding for tech-enabled versions of traditional businesses like retail, restaurants, and services.
70% of VC funding goes to revenue-generating startups, compared to 55% in 2020. 3x Increase in B2B SaaS investments, compared to 2020-2021. -65% Funding for consumer-facing startups, compared to 2021.
Founders must stress capital efficiency and a clear revenue path during fundraising. GPs favor startups with clear customers and revenues over high-burn sectors. Subscription models have become a key factor for GPs allocating funds in uncertain markets.
6. Increased Participation from Foreign Investors
During downturns, foreign investors often see opportunities in the U.S. tech market. Sovereign wealth funds from the Middle East and Asia, in particular, may step up their investments in U.S. startups and VC firms.

Foreign investors accounted for 30% of total VC funding in Europe in 2023, up from 20% in 2019. Sovereign wealth funds from the Middle East and Asia are particularly active, leveraging Europe’s lower valuations as an entry point into high-potential startups.
7. Sifting Through the Wreckage
With numerous overvalued companies struggling to justify their valuations, VCs and other investors will be looking for diamonds in the rough. Expect more recapitalizations and secondary market activity as investors seek to find value among the ruins.

8. Harsher Terms and Shorter Leashes
Over 15% of European startups that raised capital in 2021 are struggling with down rounds or recaps. Secondary market activity has surged as VCs seek undervalued opportunities. This presents an opportunity for strategic investors to acquire stakes at a discount.

9. Corporate Venture Capital Pullback
To protect their investments, VCs may impose stricter terms on startups, such as provisions to limit dilution or guarantee minimum returns. They may also be quicker to replace founders or management teams that aren’t meeting expectations.

Term sheets are becoming stricter across Europe, with more provisions to limit dilution and enforce governance. Reports indicate that over 40% of deals in 2023 included liquidation preferences or pay-to-play clauses, compared to just 25% in 2021.
10. Geographic Shifts
While the top startup hubs like Silicon Valley and New York are likely to remain dominant, tier 2 and 3 markets may see a reshuffling. The rise of remote work could help some smaller cities with thriving tech scenes retain their momentum better than in previous downturns.

The downturn has accelerated shifts to tier-2 markets in Europe. Cities like Lisbon, Tallinn, and Kraków are gaining prominence, supported by remote work and lower operating costs. The share of funding outside major hubs like London and Berlin rose from 15% in 2020 to 22% in 2023.
The VC winter presents a mix of challenges and opportunities. While capital may be scarcer and terms tougher, the downturn also rewards resilience, adaptability, and strategic foresight. By understanding these trends, entrepreneurs and investors can navigate the current climate more effectively and position themselves to thrive when the next wave of growth emerges.
This period may be difficult, but it’s also a chance to reset, innovate, and build stronger foundations for the future of venture capital.
Need help strategizing for the VC winter or want to know how to keep your operational costs low during this time period contact us here.
Source: Equal Ventures
Atomico
State of European Tech 2023
Institutional Limited Partners Association (ILPA)
LP Sentiment Surveys, Preqin Private Equity & VC Leadership Reports
Cambridge Associates Private Investment Benchmarks & Strategy Reports
Invest Europe
European Investment Fund (EIF)
Cooley Venture Financing Trends Report
VentureBeat
Dealroom European Startup Hubs Report 2023

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