The withdrawal of American funds and its impact on French startup investments

French startups are facing a 68% decline in funding during Q1 2023 compared to Q1 2022. In light of this historic shift in the French startup ecosystem, Newfund has published a study highlighting the link between fundraising amounts and the decrease of US funds’ activity in France.

American funds are withdrawing, and it shows

French startup investments have declined in Q1 of 2023. During the first 12 weeks of 2023, fundraising announcements in France have amounted to merely €1362.4m compared to €4295.2 over the same period in 2022. This drop can be explained through the absence of rounds above €50m. This in itself can be linked back to the almost complete withdrawal of American VC players:

  • In 2021, US funds participated in 36 out of 53 fundraisings of over €50m (68%) in France.
  • In 2022, they participated in yet another 36 out of a slightly lower total of 49 announced fundraisings of over €50m, thereby increasing their participation to 73%.
  • In the first quarter of 2023, only three announced fundraisings of over €50m involved US funds, with the total number of fundraisings of this magnitude amounting to 6.

Based on Newfund's market experience, US funds accounted for approximately 40% of the amounts invested in French startups in 2021 and 2022 (largely due to their participation in large fundraisings of over €50m). Thus far, their participation has dropped to less than 5% in 2023.

Cumulative investments in French startups per year

There is always a time lag between the completion of a fundraising round and its formal announcement. Considering the reportings of this first quarter, the observed initial decline in fundraisings is therefore likely to confirm itself over the upcoming months.

Putting it into perspective

After two years of euphoria in the VC market, the figures of the first quarter of 2023 mark a return to 2019-2020 levels.

Amounts raised by French startups by quarter, in millions of euros

It is important to point out that these figures do not reflect the total number of fundraisings. When the market slows down, investors often provide internal rounds to startups they have previously invested in. This type of investment can be understood as a funding extension or bridge, which is why it is usually not formally published.

That said, the slowdown can be seen throughout the entirety of the investment chain, especially in larger rounds. As there has been an acceleration of fundraisings in 2021 and 2022, particularly in growth rounds (Series B and beyond), the pool of startups expecting to be able to raise a follow-up round in 2023 is much larger than it was in 2019. This means, for example, that startups that have raised a Series A (typically €10m) or Series B (typically €30m) round will not be able to return to capital markets once they have consumed their funds, which happens on average within 24 months. The return to investment volumes close to the ones of 2019 will thus be accompanied by restructurings and adjustments in operations of scale-ups as they learn to operate without new external funding.

Startups need to focus on profitable growth

In this context, startups will need to focus on reducing cash consumption through profitable growth.  They are currently showing their capability to adapt very quickly to this new environment. A new era is beginning, during which entrepreneurs will need to focus on optimizing their business activities rather than on fundraising. Future European champions will emerge from this period, rewarding the most resilient teams.