It’s no secret that the U.S. market often serves as a bellwether for the global financial landscape, with the trends established by American businesses and investors tending to have a significant impact on industries and economies throughout the world. And as the Federal Reserve has gradually cut interest rates in response to cooling inflation, the resulting lower cost of capital has driven not only the U.S. stock market, but also the activity of companies and investors across Europe, whether in the realm of venture capital (VC), limited partnerships (LPs), or mergers and acquisitions (M&A).

The downward movement in interest rates is particularly relevant for European tech startups, who are ultimately poised to benefit the most from a notable increase in access to VC funding. Moreover, this comes at a time when many of these companies and their investors have been leaning more heavily into venture debt rather than equity, a trend that we can historically expect to reverse as we begin to see a greater emphasis on growth, spending, and M&A. 

From Debt to Growth

After a sharp drop in the wake of interest rate increases in late 2022 and 2023, for the past year, venture lending has been swelling across Europe, with the overall valuation of debt deals teetering close to an all-time high. At first glance, this trend might seem unusual considering that the cost of borrowing has risen considerably since the ZIRP hey-days of 2021/2022. However, we are also living through unusual times, and the utilisation of debt has frequently served as a necessary lifeline for startups amid declining equity rounds. VC equity funding for European startups, while clearly on the rebound, hasn’t grown anywhere near the amount of debt deals. Many VC-firms are still mending their considerable hangover after having moved too aggressively during the 2020-H12022 investing craze. 

But provided the U.S. Federal Reserve continues to cut interest rates in 2025, or at least not increase them, venture lending’s moment in the spotlight may be coming to an end. Of course, this is not to say that venture debt won’t remain a useful tool for startups, but rather that loose monetary policy in the US is likely to drive optimism in the IPO and M&A markets which might finally create a windfall of cash back to LPs of VC funds who have been starved of distributions for several years now. That windfall is then likely to drive an increase in VC fund investment from LPs which in its turn will drive equity investment into startups allowing them to grow more aggressively and making them less dependent on debt.  

Importantly, while such a shift would certainly be welcome, today’s global financial landscape remains anything but predictable, and the move would require the Fed to hold firm to its agenda of a relatively loose monetary policy. At the moment, this seems like the most likely scenario, but there are plenty of risks that could derail this move including geopolitics and some of the Trump administration’s more inherently inflationary policies. 

Banking on US Optimism

However, regardless of the unpredictability of a second Trump term, the current state and trajectory of the U.S. market still offers plenty of optimism for businesses and investors around the world. In fact, overall market resilience coupled with an initial decrease in interest rates has already led to the greater deployment of venture capital and positive valuation trends in Europe. 

Additionally, while it’s difficult to imagine returning to the wildly high valuations and frenzied investing we saw in the immediate wake of COVID-19, investors are still largely anticipating substantial growth in 2025 and beyond when compared with the past couple years. 

In terms of where we can expect this capital to flow, I think it’s safe to say that those on the forefront of technological innovation will continue to have a significant advantage. Over the last couple of years we’ve mainly seen capital flow to companies spearheading the latest breakthrough in artificial intelligence (AI) with strong momentum also in the space tech and defense tech sectors. As we move into 2025 and beyond, I think we’ll see a major influx of capital into companies building AI-native applications based on agentic workflows that replace the last generation of enterprise software applications that brought cloud computing and SaaS into the mainstream some 10-15 years ago. I also expect massive amounts of money to be invested in “Service-as-a-Software”  – a term that you’ll be seeing more of over the coming year – businesses which seek to deploy automated AI agentic workflows in order to automate traditionally manual processes, particularly within professional services.

Author

By Mikael Johnsson, General Partner of Oxx.