Hello,

Welcome to edition #263 of Sunday CET. On a grey but warm morning, we look at what’s beyond the INSANE positive vibes Linkedin is full of when it comes to European VC. Yeah, did the old school thing and looked at the data. Let me know what you make of it.

Best,
Dragos

Judging by the media narrative covering the local startup ecosystem in Europe, you’d think that it’s all milk and honey - most stories underline how people from both sides of the market are killing it. Fire up Linkedin, and see this narrative get louder - granted, it’s by aggregators seeking attention by regurgitating the work of media people.

On one hand, positive stories aren’t necessarily a bad thing - ecosystems often grow on narratives that become self-fulfilling prophecies. But what I see in the European startup market looks quite different than from the daily media cheerleading. And just to be sure it wasn’t anecdotal, I looked at the data this week - roughly a thousand deals closed in the first eleven weeks of the year, tracked over at Nordic9. Where is the money going, by stages, who are the active investors, and what's beyond the AI frenzy - did a cheat sheet with my findings.

The reality check is a snapshot of capital under some sort of a cognitive dissonance -we’re in a bearish market, but with a specific bull flavour. The European startup market today is neither bull nor bear. A pure bear market is actually easier to read - less capital, fewer deals, lower valuations, everyone waits. That's not what the data shows - we have a market that's functioning but mis-functioning: high volume, significant capital deployment, consistent activity across sectors - but the foundation is fragile in ways that are not reflected by numbers.

You can also say we have a bull case but it’s tricky. AI is generating interesting companies with fast-growing revenue, not 2021-era vibe funding. The defense seed cluster is following paths established by Helsing and co, already category leaders. The mega rounds have real strategics and sovereigns in them, not just tourists. If you're in the right 20 deals, you're probably fine.

The obvious bear tell is the hollowing of the mid-market. This year we have a 44% drop in the $10–50M deal rounds range vs last year’s Q1 (two more weeks to go though) - but this layer keeps thinning out since 2023, indicating no reliable next steps for seeds, and brutal graduation rates from early to growth.

The AI concentration is the other tell. Almost half of the capital (41% this year) is spent on everything AI, and that’s herding more than conviction. When everyone's betting on the same generational wealth thesis, the exit math doesn’t make sense - there’s simply not enough liquidity providers to absorb that many AI companies at the multiples needed to justify entry prices.

The data of this year confirms a well known big picture - Europe probably has 3-4X more VCs than what the LP market can support in terms of returns. The correction is slow, as is subsidised by public money - but many funds are unable to further raise and their people making lateral move into operator roles or family offices.

The ecosystem is consolidating around fewer larger funds. Survivors have a clear edge - a brand, deep LP relationships, and at least one partner with the conviction to lead rather than follow. Then the pace of change is so fast that everything you build (or invest in) today looks outdated in 6-12 months. AI rewards either very early conviction (which requires being close to the technical frontier and willing to be wrong expensively) or very late scale capital (which requires a fund size most European VCs don't have). The $20-100M middle, where European funds are most active, is exactly where AI companies don't need outside help anymore. So European VCs end up as syndicate followers, which makes for diminished returns and kills pattern recognition.

Otoh, the other side of the market - startups - is going up, as costs of building stuff keeps falling. I am already seeing more European startups than ever, probably by a significant margin, most of them smaller and leaner at founding. Also a good mentality, profitable from day one and focus on fundamentals. Anecdotally, a good part of them skeptical of VC as the default path. But the ones that do VC will have a growing problem since $1–2M ARR is not interesting anymore for the Series A bar.

I am also seeing a different thinking about the US migration - with Legora and Lovable as great examples, which basically follow Spotify’s approach. You move to US to find your tribe - if you have that here, you build European base, you take US capital, and you open a US commercial office when revenue demands it. Full relocation is for founders who couldn't raise in Europe at all.

The net result will probably show a more polarized European startup landscape in the coming period. Fewer companies in the $5–50M revenue range than the ecosystem needs for health, more companies at either extreme - tiny AI-native micro-startups that stay small by design, a handful of stars that get in American portfolios early on, and a disappearing middle class i.e. 40 people, $10M ARR doing something genuinely useful, probably will seek financing options other than VC for growth.

The European startup ecosystem may continue to look busy and optimistic on the surface. But structurally, it’s slowly turning into a barbell market - and ecosystems without a strong middle class rarely compound well.

AI agents already outnumber human visitors to your docs — now you can track them.

See your AI traffic!

We have screened 135 fundraising deals closed in Europe this week.

We archive/transform deal-related data into an easy-searchable intelligent asset at N9, and email a selection of the interesting ones to our customers every week.

Below a recap of the week.

🇬🇧 ​Captur AI​ - AI photo SDK for logistics, micro-mobility and retail
🇸🇪 Endform - browser-based end-to-end tests for web applications
🇳🇴 ​Space Lab - producer of reusable rockets
🇫🇷 Standout - AI agents for careers
🇩🇪 ​Tower​ - data flow orchestrator of pipelines and data agents

🇬🇧 ​NScale - $2B
🇫🇷 AMI Labs - $1B
🇸🇪 Legora - $550M
🇮🇱 Wonderful - $150M
🇫🇷 Alan - $120M
🇬🇧 Tropic - $105M
+
Lovable crossed $400M ARR (best P&L in career VCs)
Nebius raised $2B with Nvidia
Kinnevik accused of alleged fraudulent deals + weak counter + dubbed as gaslighting dressed up as investor relations.

We add more signals on Linkedin and keep a religious track of what’s interesting in Europe on Nordic9.

We produce intel notes for the best investors in Europe every week - join them!

That’s all folks, have a wonderful week!

Great, will forward • Good • Meh

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Created every Sunday by @drnovac of Nordic 9 with weekly notes and observations from the European startup ecosystem.

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