Venture capital firm Earlybird is spotting the first signs of a recovery in European startup valuations. „Capital markets are coming back“, co-founder and partner Hendrik Brandis told Börsen-Zeitung. In the first quarter of this year, startup M&A volume in Europe and the US reached 71 billion dollars – the highest since 2021. The Berlin-based early-stage investor recorded twelve tech IPOs and M&A deals, each exceeding 1 billion dollars, between January and March.

Brandis aims to harness this momentum. „We’re trying exits again“, he says, noting that two transactions are being prepared with top investment banks. While success is not guaranteed, he adds: „I’m relatively confident we’ll get them done.“

Fundraising is also proceeding well. Although capital-raising markets remain challenging after years of weak investor returns, Earlybird expects to raise a similar amount as in 2021 – around 350 million euros. „But we have to work harder to win investors than we did four years ago“, Brandis acknowledges.

The Earlybird co-founder predicted in early 2023 that the downturn for startups would last only three years, as in previous cycles. At the time, he told Börsen-Zeitung he expected a substantial recovery by the end of 2024. He now attributes the delayed rebound less to persistently high long-term interest rates. It was already clear back then that the era of zero rates was over.

Instead, Brandis points to a new factor, saying that "global political volatility is a very damaging force.“ In this environment, investors are reluctant to commit. The fact that stock market valuations continue to reach new highs does not contradict this view.

Public equity markets may be pricing in today’s strong profits and cash flows, but the venture capital market runs on vision and hope. That makes it especially vulnerable to uncertainty. „We’re climbing out of the basement, just not as fast as once thought“, he says. The industry remains far from its 2021 peak.

According to Brandis, Europe suffers because companies fail to scale quickly. While research spending relative to economic output is higher than in the US, commercialisation of top-tier research lags behind. „So far we have not been able to turn world-class technologies into large technology companies", he says.

A look at public equity markets underscores the point. Until 2010, valuations in the US and Europe largely moved in parallel. The gap of the past 15 years is entirely due to giants such as Amazon and others. Strip out the ten largest companies from the S&P 500 and the index has tracked European benchmarks almost in lockstep since 2010.

Brandis remains optimistic about the continent, saying that "the tide is turning in Europe’s favour.“ He notes the sheer size of Germany’s current investment programmes, but stresses that structural reforms – especially cutting red tape – are essential to unlock investment decisions. Bureaucracy, he warns, is currently the biggest threat to further progress.

Second, Europe is increasingly viewed as the last safe harbour for rules-based investing and economic activity. „Unlike in the US or China, you’re not out on the open sea alone with the good Lord,“ he quips.

This is prompting a massive reallocation of resources, Brandis says. Money flows into European capital markets are visible in their relative outperformance.

More important for the early-stage specialist: expertise is also shifting to Europe. For the first time since data collection began in 2011, America is set to lose more artificial-intelligence experts this year than it gains. „People are starting to vote with their feet“, notes Brandis. That may have little immediate effect, „but in the medium term it’s hugely significant.“ Europe also has a larger student body – 19 million compared with 15 million in the US as of 2022.

This „power of the brain“, as Brandis calls it, is a major opportunity for Europe because dominance can no longer be bought solely with vast sums of money. Disruptive concepts can upend industries overnight, as recent developments in artificial intelligence show. He recalls US President Donald Trump standing with OpenAI CEO Sam Altman at the White House to announce a 500 billion dollars AI-infrastructure program called Stargate – only for a startup like Deepseek to pop up days later saying: „We did it with 6 million dollars in training costs.“

Earlybird’s own portfolio offers a potential parallel in Munich-based Marvel Fusion. The technology company is developing a disruptive alternative to conventional nuclear fusion. Instead of generating a 100-million-degree plasma, it seeks to achieve ignition energy by using lasers to accelerate protons to near light speed, Brandis explains.

If Marvel can demonstrate its approach as planned in 2027, it will have required about 400 million euros from first theoretical ideas to construction of a reactor prototype – compared with some 60 billion euros invested in competing thermal-fusion concepts. „Going forward, success will depend not on money alone, but on a combination of capital and innovation“, he says. „We live in an age of extreme technological disruption. I have never seen such a density of disruptive technology startups as I do now. It’s truly sensational.“

From an investor’s perspective, Europe’s relatively low entry valuations for startups are also attractive, Brandis adds. The cause is persistent undercapitalization of the sector. Technological innovation is accelerating exponentially – so rapidly that capital allocation struggles to keep pace. According to a McKinsey study, the cumulative returns of European venture funds have risen steadily for 20 years. „That’s a very encouraging picture for us“, he notes.