European investment landscape in 2025: the rise of AI and defence innovation
Still far from the record highs of 2021 and slightly down on 2023, investment in Europe shows positive signs and paints a new map of sectoral priorities for VC funds in the region.
Following a period of contraction in investment in technology companies since its peak in 2021, the outlook for 2025 in Europe points to a revival in the entrepreneurial ecosystem. The ‘State of European Tech 2024’ report, published by Atomico, estimates that the European ecosystem closed 2024 with approximately 45 billion euros raised in venture capital investment, 20% more than in 2020, suggesting a new point of equilibrium.
Among other positive signs in the European ecosystem is the growing number of Series A rounds and expansion of sectors such as generative artificial intelligence. Now that many companies are approaching the end of their runway after having raised funds during the investment peaks of 2021 and 2022, prioritising profitability or using debt as an alternative financing tool is now shaping the path forward for European tech companies.
Improved valuations and focus on profitability
According to the Atomico report, investment in the European entrepreneurial ecosystem in 2024 represents a slight decrease (just over 4%) from the 47 billion raised in 2023, and significantly lower than the record 101 billion in 2021. This decline is partly attributed to unfavourable conditions for IPOs (with only eleven in Europe in 2024, marking a ten-year low) and lower valuations.
“The hangover from the investment bubble with very high valuations that took place in 2021-22 will continue to have an effect this year, due to limited capital availability and because there are still many investors who remain cautious and focused on their portfolios,” reflects Nicolás Goulet, founding partner of Adara Ventures. “We’re now in the period that falls 18 to 24 months after the last major funding rounds, meaning that many companies are reaching the point where they need to raise capital again. Unfortunately, I don’t think it will be possible to match the total of that demand”.
Within that broadly stable outlook, there are also reasons for optimism, emphasises Ainhoa Campo Nieto, Chief Investment Officer of Bilbao Vizcaya Investments. “Valuations are generally improving and there is a lot of momentum in some sectors, especially in AI”. However, changes are approaching that create some uncertainty: “There is a lot of talk about how artificial intelligence is going to change business models such as SaaS and B2B, which receive more than 60% of all venture capital investment. We will have to look at these companies in a different way”.
AI, security or life science, the sectors on the rise
Globally, the artificial intelligence market accounted for 37% of funding and represented 17% of the deals in 2024, including 5 of the largest deals of the year, according to the ‘State of Venture 2024‘ report by CB Insights. In Europe too, this sector has shown remarkable dynamism: in 2024, European AI companies raised nearly €3 billion across 137 deals, a 35% increase on the previous year.
The geopolitical situation has also led to the rise of the security and defence field. Venture capital funding for companies in the sector increased by 24% in Europe in 2024, reaching 5.2 billion dollars, according to data from Dealroom and the NATO Innovation Fund. “Defence covers a multitude of areas, ranging from drone flight control software to industrial design and DevOps,” notes Goulet from Adara Ventures.
“Life science is an emerging trend driven by artificial intelligence and it saw a very high total volume (8 billion in 2024), with a significant number of exits, points out Ainhoa Campo Nieto, from BBVA Spark. On the other hand, “although they remain highly relevant sectors, it is significant that during 2024, both ‘cleantech’, which has been a very booming trend in recent years, and ‘fintech’ have decreased slightly in terms of referenced volume”.
Other factors shaping a positive outlook
In addition to the traction of leading sectors, other transformations and trends in the European landscape point to growth and resilience. One such factor is the recent interest rate cut (on 30 January 2025, the ECB decided to lower the three official interest rates by 25 basis points), which could give new impetus to the investment ecosystem. “Interest rate cuts spur investment. From the point of view of the investees, it can enhance the likelihood of corporates re-engaging in an investment cycle and thus achieving exits,” points out Goulet.
On the other hand, “there is better positioning of companies, with a trend to focus on profitability rather than focusing so much on growth (although it remains one of the key factors), to build more solid businesses,” explains Ainhoa Campo Nieto, from BBVA Spark. “The market now values strong unit economics and a good understanding of the business model. There is increasing talk of the ‘Rule of 40’ [a principle stating that the combined revenue growth rate and profit margin of a SaaS must be at or above 40% to be considered healthy]”.
Another sign of improvement by 2025, she adds, is secondary funds: “In Europe, we’re starting to see more activity in this area, with new secondary funds emerging. While this has long been a fairly established market in the US, it’s only recently begun to take shape in Europe”.
Debt is here to stay
Venture debt in Europe has grown significantly in 2024. “According to Según Pitchbook, it has reached 17 billion euros (up from around 13.5 billion in 2023),” notes Ainhoa Campo Nieto of BBVA Spark. “We believe we have arrived at the right time, and now with the expansion into Europe we are accessing a market that is much bigger, still eager for this financing and that will continue to grow in 2025″.
“Venture debt has evolved rapidly over the last decade. The fact that there is now a lot of capital invested in this segment means that conditions are also becoming more competitive, with greater standardisation and a substantial improvement for entrepreneurs,” says Nicolas Goulet of Adara Ventures. ” I think there’s now a shared understanding of where debt adds value, helping companies improve their position between rounds and offering a less dilutive solution,” he says, adding: “BBVA Spark is positioning itself well to take positions across all parts of the chain. It’s involved in funds, working directly with companies, and also on the more operational part of the companies. I think they’ve done well to develop such a holistic vision”.
