As 2025 unfolds, Europe’s venture capital market stands at a crossroads. After years of rapid expansion, the pace has slowed, and investors are facing new challenges. Rising interest rates, a weakening economy, and a tough exit environment have made fundraising and liquidity more difficult. In response, investors are becoming more strategic, focusing on high-impact sectors like deeptech, artificial intelligence, and climate technologies. Tulin Tokatli, CEO of Pitch Me First, shares her insights on the state of the VC market and its future direction.
The state of VC fundraising in 2024
Once driven by unbridled optimism, the European VC ecosystem is now entering a more selective phase. Investors are prioritizing quality over sheer volume, as seen in 2024’s fundraising trends. The year started strong, with €59 billion raised in the first six months — a 15% increase compared to the same period in 2023. However, as the year progressed, investor sentiment shifted, leading to a slowdown in the second half. Caution replaced exuberance, with capital increasingly directed toward sectors with long-term strategic value.
This shift toward fewer, more carefully vetted investments requires patience. In a challenging economic climate, investors have grown more risk-averse, making successful exits harder to achieve. Many startups that once commanded inflated valuations have had to adjust to more sustainable pricing, further complicating the exit landscape.
For VC funds, the ability to generate returns for Limited Partners (LPs) remains the ultimate benchmark of success. In 2024, half of European VC funds failed to return any capital to LPs, reflecting the difficulties in securing exits and maintaining liquidity. Lower valuations and extended exit timelines were key obstacles. Despite these challenges, optimism remains for 2025 — 95% of fund managers anticipate stronger returns, signaling renewed confidence in a market poised for recovery.
Are LPs losing confidence in VCs? What to expect in 2025 and how to deal with it?
Investor sentiment has been cautious, shaped by economic instability and the higher opportunity cost of capital allocation. LPs are scrutinizing their exposure to VC funds more closely, assessing whether to reduce commitments or reallocate capital to more predictable asset classes such as private equity, real estate, or fixed income.
However, not all LPs are stepping back. Those with long-term commitments to venture capital understand that cyclical downturns create opportunities for outsized returns. The key for VC funds in 2025 will be demonstrating resilience, adaptability, and a strong alignment with LP priorities. Sector-focused funds, particularly in deeptech, defense, and climate tech, are likely to retain LP interest due to their alignment with government-backed initiatives and institutional priorities.
Despite the challenges of 2024, raising capital in 2025 remains possible for funds that align their strategies with market realities and LP priorities. VC funds focused on deep tech, defense, and climate technology are in a strong position, benefiting from governmental and institutional backing that increases the likelihood of successful fundraising. However, securing commitments will require more than just investing in trending sectors - the structure, transparency, and positioning of the fund will play an equally crucial role.
Institutional LPs are becoming more selective, favoring funds with clear governance frameworks, well-defined investment theses, and disciplined capital deployment strategies. GP-friendly terms, which may have been more common in previous years, are now being met with greater scrutiny, as LPs demand more balanced agreements that mitigate risks. Maintaining alignment with LPs’ expectations, particularly regarding fee structures, liquidity provisions, and exit strategies, will be essential.
Moreover, fundraising success will increasingly depend on visibility and trust-building within the ecosystem. LPs are not just looking for strong returns - they seek long-term partnerships with funds that demonstrate strategic foresight, resilience, and active engagement in the investment community. This means that beyond compelling pitch decks, successful GPs will prioritize consistent, transparent communication, regular portfolio updates, and a strong presence at industry events. A well-positioned fund doesn’t just attract capital; it fosters confidence, ensuring that LPs see it as a reliable vehicle for long-term growth.
Ultimately, the ability to clearly articulate a fund’s value proposition, maintain rigorous investment discipline, and establish credibility within the LP network will define the winners of the 2025 fundraising landscape.
The road ahead: a more selective and strategic market
The European VC landscape is maturing. While 2024 posed significant challenges, it also underscored the importance of strategic capital deployment and investor trust. LPs remain cautious but engaged, seeking quality over quantity. The funds that will thrive in 2025 will be those that build long-term relationships, offer transparency, and position themselves in high-growth, institutionally supported sectors.
Fundraising is never easy, but with the right strategies, it remains entirely possible. The future belongs to those who adapt, innovate, and align with the market's evolving needs. As we look ahead, European VC is not in decline — it is simply evolving into a more refined, selective, and strategic industry where only the best-prepared will succeed.
