Is VC’s ‘flight to quality’ a good thing?

Good morning there,

In the last year or two, VCs have been telling reporters like me that there’s been a “flight to quality” in dealmaking; that only the best companies with the best founders and revenue traction are convincing VCs to part with their cash.

It’s in stark contrast to the fast and loose days of 2021, when investors were writing cheques left and right into all sorts of undisciplined companies. But now capital is concentrating into a select few ‘quality’ companies, often at the growth stage — which is heaping pressure on them to deliver. Is it a good thing? I dig into that below. 

Elsewhere today:

• Infarm is back — and this time it’s kosher
• Monzo third lowest bank for refunding APP fraud cases
• Funny business: what comedy taught me about running a company.

— Anne Sraders, senior reporter

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Is VC’s ‘flight to quality’ a good thing?

In 2021, investors ploughed a record $675bn into startups globally, double the haul of the year before. Many companies didn’t need revenue, or customers, or perhaps even a clear business model, to attract eye-watering amounts of capital. In hindsight, it was clearly a bubble. 

In 2024, VCs with large funds and impatient LPs might be creating a different kind of challenge for the ecosystem. I’m talking about the ‘flight to quality’ — the big cheques being written for, and big valuations being awarded to, a select few ‘quality’, often growth-stage, startups. The concentration of capital in these companies puts extra pressure on them to succeed, and could potentially limit future exit opportunities should they not deliver.

‘Quality’ startups are those with really strong founding teams, solid business models and, often, some (or a lot of) revenue traction. These days, one VC recently told me, investors still have a lot of capital to deploy, but are wary of investing in anything but startups that tick those boxes. That means that when there is a hot deal of a quality company, they go big and pile in.

Some recent examples: defence tech startup Helsing, which raised €209m just last September, secured another €450m at a reported €4.95bn valuation last month. Mistral, the Paris-based OpenAI challenger, raised a whopping €468m equity round in June after having just raised €385m in December. UK neobank Monzo raised $610m at a now-$5.2bn valuation across two funding rounds earlier this year. 

“There's not a lot of Helsing-like companies in the world, and if VCs have capital to deploy, they're probably going to chase those few ones. You see the same thing with DeepL, right? This was also a very competitive round,” says Andreas Goeldi, partner at b2venture and an investor in AI language startup DeepL, which raised a $300m round in May. 

Of course, it helps that many of the above businesses are also in the AI sector — and likely saw their valuations get an extra bump as a result.

LP pressure

A key undercurrent to all of this is that VC firms have managed to raise large sums for their own coffers in recent years: European funds raised a record $28.9bn in 2022, according to Dealroom data — and need to deploy that capital. “There's also, frankly, probably some LP pressure, because some funds maybe raised a large fund in 2022 and [didn't do much investment] in 2023. LPs are also saying, 'Well, why are we paying management fees if you don't invest'?” says Christian Saller, general partner at German VC HV Capital. 

Valuations are increasing 

The market has recently grown more concentrated in hot areas like software, AI and robotics, suggests Saller — and valuations are quickly rising again. “What you're seeing in strong SaaS companies, AI companies, is valuations are 15x to 20x [annual recurring revenue], which is significantly higher than it was in 2023 and it's also higher than what you see in the public markets,” he says, adding that it is still below 2021’s high water mark. “I wouldn't say it's crazy valuations,” but they’ve “come up again quite a bit.”

“Funds are still relatively disciplined” about price tags, Saller says, but “there’s no real value deals anymore.”

The median size of European Series B and C deals increased nearly 15% and 2%, respectively, from 2023 through the end of May this year, according to PitchBook data provided to Sifted. The median pre-money valuations for Series B and C deals, meanwhile, increased 23% and nearly 10%, respectively, over the same period. The median valuations are also higher than pre-Covid days. 

Making big bets is, after all, the name of the VC game: when you see these supposed once-in-a-generation companies, it makes sense not to be stingy. But will this concentration of capital put these companies in a tricky spot when they go on to try and raise at a premium in their next round — or look for an exit?

“It will all depend on how exit markets are going to shape up,” notes Goeldi. “If and when the IPO market comes back, then all these high valuations will probably make sense, because these are tremendously successful companies that certainly will see a lot of traction in public markets. But right now it's hard to predict when that's going to happen.”

VCs, I’d love to get your take: do you think these quality startups are getting valued a little too highly? Or are they making enough money to justify the price tags? How competitive are these rounds, and how is that impacting the valuations? Are you feeling pressure from your LPs to invest more this year? I’m all ears. 

— Anne Sraders, senior reporter

💳 UK neobank Monzo trailed behind the majority of other UK banks in refunding customers in cases of authorised push payment (APP) fraud last year, according to new data from the country’s Payments Services Regulator (PSR). APP fraud describes cases where perpetrators pose as genuine payees to trick victims into transferring money to an account outside their control.

• The fresh figures, which included APP fraud data on the UK’s 14 largest banking groups for 2023, showed that Monzo fully reimbursed 9% of cases last year — the third lowest among the UK banks listed. Fellow digital bank Starling fully reimbursed 72% of APP claims, while incumbent Nationwide topped the list, reimbursing 96% of claims. 
• On top of Monzo’s low reimbursement rate, 131 APP scam payments were sent for every 1m customer transactions made via the bank last year — the second-highest figure among the surveyed payment providers, with Starling the fourth highest, with 124 APP cases per 1m transactions.
• Both Starling and Monzo note that these are reductions compared to 2022’s figures and are evidence that their efforts to fight fraud are working. Last month, Monzo introduced three new security controls aimed at reducing fraudulent activity.

🍀 Bill Gates’s VC fund, Breakthrough Energy Ventures (BEV), has raised $839m toward its new fund, PitchBook reported, based on regulatory filings. BEV did not immediately respond to Sifted’s request to comment.

• BEV backs climate-tech startups and is increasingly active in Europe – we tracked its European investments here.

🇬🇧 UK tech secretary Peter Kyle has told major tech companies that the government’s AI bill — which senior officials hope will be ready for its first reading by the end of the year — will be narrowly focused on the most advanced models, and won't be a far reaching “Christmas tree bill” to regulate the young industry, according to the FT. Senior government sources told the FT it'll look exclusively at ChatGPT-style foundation models. 

• The report says it'll focus on two things: making existing voluntary agreements between companies and the government legally binding, and turning the UK’s new AI Safety Institute into an arm’s length government body. 

🏦 The Bank of England cut interest rates from 5.25% to 5% yesterday — the first cut in the UK for more than four years.

Europe’s leading startup hubs in 2025

Are you a representative of an incubator or accelerator programme in Europe? We want to hear from you! Submit your details for a chance to get involved in our annual ranking with the FT and Statista — the deadline is August 16. 

🥗 Infarm’s back — and this time it’s kosher. Vertical farming company Infarm was once one of Europe’s climate tech stars. But rising energy prices and an inability to compete with transitional agriculture saw the company declare itself insolvent at the end of last year. At the time though, insiders predicted the company would be back, and it turned out they were right. 

• The new Infarm — which has a new company entity, a different mission and a (slightly) different name — is focused on growing kosher salad leaves from a facility in Canada.
• The company, which once employed 1,400 employees, now has around 40. And its past lives continue to haunt it: a court case relating to the old entity emerged in May this year.
• Freya Pratty and Miriam Partington have more here.

This story first appeared in Sifted's climate tech newsletter, which drops into your inbox Thursday morning. You can sign up here.

🤣 Funny business: what comedy taught me about running a company.

New data from the appliedAI Institute for Europe shows last year was a record year for German AI startups, with them raising $1.2bn in funding; the figure the year before was $771m. A few outliers — such as Aleph Alpha’s $500m Series B — contributed significantly to 2023’s number, according to the non-profit’s German AI Landscape report.

Elsewhere in the data:

• Berlin and Munich dominate, with 50% of Germany’s AI startups based in one of the two cities; Berlin comes out on top with 209 startups, compared to Munich’s 136.
• Other cities, like Hamburg (65 startups) are catching up. The chart above shows how distribution fares across the rest of the country.
• On a state level, Berlin also dominates, with 30.4% of Germany’s AI startups. Bavaria has 23.3%, Baden-Württemberg 11.5%, North Rhine-Westphalia 10.2% and Hamburg 9.6%.

Cambridge, UK-based Healx, an AI-driven drug discovery biotech, raised $47m in Series C funding. R42 Group and Atomico led the round and were joined by investors including Balderton, Global Brain, Ayana Capital, o2h, b2venture and VU Venture Partners.

Barcelona, Spain-based Wallbox, a smart electric vehicle charging and energy management provider, raised $45m in funding from investors including Generac Power Systems.

Berlin-based MYNE, a proptech for managing holiday home co-ownership, raised €40m in Series A and debt funding. Limestone Capital AG led the round and was joined by investors including Motive Ventures and Scope Hanson.

Berlin-based Checkly, a code-first synthetic monitoring platform for developers, raised $20m in Series B funding. Balderton Capital led the round and was joined by investors including Accel and CRV.

London-based Axle Energy, a smart energy platform that helps energy suppliers and manufacturers of assets like electric vehicles and heat pumps integrate their products and customers with local and national energy markets, raised $9m in seed funding. Accel led the round and was joined by investors including Picus Capital and Eka Ventures.

Vilnius-based BoBo, which allows instant cross-border transactions and safe instant card payments, raised €6.5m in seed funding. Graphit Holding led the round

London-based Lovetovisit, a travel tech for booking local attractions, raised £3.2m in funding. Venrex and Redrice Ventures led the round and were joined by investors including Active Partners and Velocity Partners.

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