The Nordic funding market is back to normal. The new normal.

By Lauri Kokkila, Alena Konina, and the Inventure team.

Over the last 18 months, the Nordic and Baltic VC landscape has significantly shifted as the 2021 Growth At All Costs startup boom quieted down. But while the boom days felt new and fresh, these past few months feel all too familiar. We’re back to normal, although it’s back with a few new characteristics.

Let’s dig into what this all means to fundraising entrepreneurs in the Nordics and Baltics.

Back to normal: It is more difficult to raise a round.

Raising a new investment round is hard. And today, it is even more difficult.

Take a look at the following graph from our internal tool powered by Dealroom and Crunchbase: the number of rounds between €2 and €20m in the Nordics and Baltics between Q1/2021 to Q1/2023 has dropped from 295 rounds to 132 rounds (-60%). The larger trend shows around a 25% dip in rounds in 2021 and 2022 with no country in our region being an exception. Late-stage funding, especially after Series B, has totally dried up, following the U.S. trend.

This is an interactive graph, click here to access it.

From the ground, we see two parallel trends driving this. On the demand side of capital, entrepreneurs are delaying their fundraising for better market timing. But for many, the runway is ending. In our portfolio, we’ve seen founders rely on cost-cutting, hiring freezes, and bridge financing to prolong their runway by 6–18 months. Therefore, we expect many founders will have to go out raising a new round starting from H2/2023, which should drive the capital demand higher.

On the supply side, VCs are sitting on a lot of dry powder. However, large funds hold a significant part of this capital and can afford to stay passive to cherrypick the best deals or not invest for years. In addition, many investors have changed their focus towards supporting their existing portfolio companies instead of making new investments. With a lot less new capital raised to VC funds, there is a lot less capital coming into the ecosystem if the trend from Q1/2023 continues.

With demand spiking and possibly less capital in the mid-term, fundraising may return to our memories of the early 2010s, when funding was simply a lot less accessible.

How can I maximize my chances to raise?

• Build a great business! This is super annoying advice, but the truth is that companies with solid working economics have much less trouble in this market.
• Create scenarios for different funding options: optimal, smaller, and no round. To do this, build a bottom-up budget to determine the right ask reflecting different scenarios and key hires.
• Focus on the active investors. You can check our list of active Nordic investors but do keep in mind that the data covers the last few years.

Back to normal: Fundraising will take a lot more of your time.

In today’s market, you’ll find yourself in more meetings with VCs that aren’t in the right place to invest but will still want to “see everything.” Here’s how that works out.

First, VCs also face a tougher fundraising climate, so it wouldn’t be strange for you to bump into a fund that can’t actively deploy but is still looking around. Second, funds are pulling back to their core thesis. Series A funds that dipped into Seed during the boom years are ultimately doing less Seed, because it’s more challenging for them to build conviction in today’s climate. And third, U.S. funds built up ground games in Europe during the boom years, but much of the new action in AI and other hot sectors are pulling their focus back to the US.

But there’s another important factor here. When you see that big drop-off in investments in the graph above, you’re not just looking at VCs suddenly saying “no.” You’re looking at lag as investment processes suddenly take much longer to close than they did in 2021.

What’s driving that? Inventure’s Lauri Kokkila says, “Investors now have the luxury to get to know the teams like they did before in 2018 or 2019. Less FOMO is driving the market, and investors have become more careful. They now have time to really dig into the numbers and understand how potential investments have to grow to become profitable.”

So processes will run more slowly compared to just a few years ago. And while VCs are digging in, expect a lot more questions around your core technology and how exactly you’ll build your moat.

What does that mean for you?

• We’re seeing investment processes take 5 or 6 months to close. Plan your runway accordingly.
• Great rounds have closed in Nordics & Baltics recently, hitting the news after the summer. The market is not entirely dead!

Back to normal: Valuations

We’ll tell it to you straight. Valuations are down.

Inventure’s Kevin Lösch sums up the moving parts: “A tectonic shift in macroeconomics, geopolitical tensions, sticky inflation, and tightening of monetary policy have reshaped the underlying valuation environment reflected by recent median pre-money valuations. The absence of the zero-interest policy directly impacts the entry valuations of early-stage companies, driven by reshaped return profile of funds pressured by the end of ‘free access to money’”.

There is not enough comprehensive data available on Nordic & Baltic round valuations. Therefore, below we settled here for European-level data (if you want to see live U.S. data on post-money valuations, go to see this AngelList dashboard).

European VC funding has had an amazing ten years driven by loose monetary policies, active public funding, the maturing of larger ecosystems like London and Paris, and the growth of new ecosystems like Nordics, as shown above. This drove valuations to their peak in late 2021s, with these rounds publicly announced in Q1 and Q2 of 2022. However Q4/2022 data shows that the boom era has come to an end. Sectors like B2B SaaS and Fintech have seen an even larger crunch. On the bright side, verticals such as Climate or Healthcare have shown strong resilience to overall market turmoils, underlining their anti-cyclicality.

As the balance between demand and supply stabilizes, we expect valuations to find a balance closer to the longer-term averages in 2015–2020, keeping seed stage median pre-money valuation at around 2–4M€.

You can again play with the filters in the graph below by clicking this link.

How to play valuation:

• Before raising, ask your peers and check for public comparisons. There is always massive information asymmetry between entrepreneurs and investors. Level the playing field before raising.
• Your round size with 20–25% expected dilution will set a direction for them. Therefore think hard about what you want to indicate.
• If there is more interest than you have room for, it offers an opportunity to negotiate on valuation. However, valuation is just one of many attributes when choosing an investor.
• Let investors say the first number. This is their job and they should be able to have enough information to dictate the valuation. By directly saying your expectations, one of the two things might happen: You set expectations too low, and the investors will offer lower valuation than you could have achieved. Or you set expectations too high, which turns off investors, and you might be left without any offer to discuss.

The New Normal

All that being said, a few things look different today. Let’s dig in.

The New Normal: Profitability

We’re out of the Growth At All Costs era, but raising in 2023 doesn’t mean you have to be profitable. The name of the game is optionality.

VCs are still expecting 2–3x yearly growth rates. However, the bar is now higher, and most investors would like to have the option to turn the company (nearly) profitable when needed. In discussing your financials, today you should have strong answers on how the company can extend its runway if the macro environment gets worse.

Looking downstream at growth investors, we see that burn multiple (i.e. net burn divided by net new ARR) rather than monthly growth rate has become the go-to KPI that investors are looking at. This number isn’t very relevant for seed-stage investors, but in your earliest fundraising story, you need to show how you’re building your company post-seed with this in mind.

But investors still need to see some versatility to your profitability. Inventure’s Sami Lampinen says, “For instance, if you’re a B2B company with long pilots and sales cycles, today you shouldn’t burn your resources across 50 corporations. But there’s a fine line before you become a ‘one trick pony.’ It’s ok to support 2 or 3 different businesses with different logic or patterns, but show you can do that, rather than focus on just one vertical.”

The fundraising checklist for 2023 — in addition to the usual, can you answer these questions?

• Can you turn the company profitable and still grow if you are unable to raise the next funding round?
• Why is your business particularly interesting right now (consider the macro, environmental crisis, technological breakthroughs, consumer sentiment, etc.)?
• Can you raise half of the amount you were initially thinking? If yes, start with that and increase the round size if there is enough interest.

The New Normal: Talent

With the cost of capital rising, founders must be even more aware of their talent decisions. Luckily, the talent market is in a new era.

We saw firsthand that the 2021 boom was tough for early-stage founders as they needed to compete head-to-head against massive scale-ups for the same small talent pool. Now in 2023, we’re seeing a shift back. Local talent is available again and is much higher quality than before the boom; today’s average hire has seen how to move fast at a high-growth startup. In the Nordics and Baltics, there are more people than ever that have previously worked at a scale-up.

It’s easier to poach quality talent as well. In 2021, highly skilled operators watched their options appreciate as valuations shot up, giving them little reason to jump ship. But today, as the exit market has closed up, there are many more reasons for talent to take advantage of new opportunities.

But how should you operate in this new talent market with more options? Inventure’s Therese Öberg says proactivity is still key. “It may sound boring, but having the basics in place: creating a hiring plan, thinking through what is key to scaling your team, and ensuring proactive iteration on this plan if circumstances change, is still crucial to succeed in talent acquisition.”

We also entered a new normal of remote work, showing us all the challenges and opportunities of what’s possible. Today you can potentially hire fantastic remote talent from anywhere. But from evaluating the market through our portfolio and pitches, we mostly see a shift towards hybrid work rather than fully remote teams. Regardless of how you structure your team, Therese suggests you make it an early, conscious decision.

The bullet-point advice

• With the high cost of capital, be much more aware of your team size and burn rate.
• Don’t hire fantastic CVs because you can now. Stick to your hiring plan!
• Between remote, hybrid, and on-site teams… pick one option and commit.
• Proactivity is still key. It may sound boring, but have the basics in place: creating a hiring plan, think through what’s key to scaling your team, and ensuring proactive iteration on this plan if circumstances change.

The New Normal: New growth areas

The truth is that every new market situation comes with new opportunities. Emerging technologies such as Large Language Models and quantum computing have gone from proofs-of-concept to real-world tools. Meanwhile, the energy transition, circular economy, and health crisis are presenting opportunities for investment. At Inventure, we’ve lately been digging into these topics:

The Energy Transition
Rebecka Löthman Rydå and Lauri Kokkila give a strong overview of the Nordic and Baltic market, digging into the sectors we find most appealing.

Vertical Fintech
What’s interesting in Fintech? Gwen Sandberg presents a case for B2B payments that truly own their verticals and offer true financial innovation for their customers.

Software for the manufacturing sector
As Adrian Arnsvik Bjurefalk puts it, the next industrial titans will be software companies.

Data infrastructure
If you’ve played with any generative AI tools, you know that the future is approaching us, fast. Rebecka Löthman Rydå predicts that for companies to truly unlock AI and this next generation of growth, they need to shore up their data stack and truly invest in their data management.

But these aren’t the only growth areas in this new (old) market. Have something interesting you’re working on? Get in touch with the Inventure team through our pitch form.

Inventure has backed over 90 Nordic and Baltic teams since 2005, typically as the first institutional investor. Visit Inventure.vc on the web, or follow Inventure on LinkedIn for more.