Dawn Capital, a leading European investor in business-to-business software companies, has raised $700 million across two new funds. This move reflects the firm’s commitment to identifying and supporting technology champions in the region, especially at a time when venture capital funding for tech startups has decreased.

Based in London, Dawn Capital has an impressive portfolio that includes successful companies like iZettle, a Swedish online payments firm acquired by PayPal for $2.2 billion in 2018, and Tink, a Swedish open banking company acquired by Visa for 1.8 billion euros ($1.9 billion) in 2022.

Hannah Gubbins, a newly promoted partner at Dawn Capital, acknowledges the challenges of raising funds during a period when private startup valuations have dropped and investor sentiment towards technology has soured. However, she emphasizes that the firm’s strong relationships with institutional investors, built over many years, played a crucial role in their success.

Gubbins explains, “Even investors who historically weren’t heavily involved in venture capital, felt the need to allocate more to venture 18 months ago. However, due to market conditions and the denominator effect, their private portfolios became overallocated. As a result, many funds could only continue with existing managers or those with high convictions.”

She adds, “Despite the current situation, there is still capital available, and investors remain excited to invest in this market. Some of the best companies and vintages have emerged from previous market downturns, such as the dotcom bubble and the global financial crisis. Investors recognize this based on historical data.”

The new funds will enable Dawn Capital to invest in 20 companies. The fifth fund, Dawn V, consists of two parts: a $620 million early-stage fund for Series A and Series B investments, and an $80 million “opportunities” fund focused on supporting successful companies within Dawn Capital’s portfolio that may go on to exit through an IPO or acquisition later in their business lifecycle.

Venture capital investment has significantly declined as investors reevaluate their allocations in response to higher interest rates and rising inflation.

Companies that are innovative, growth-oriented, and take longer to generate returns on investment have become less attractive due to the current high-interest rate environment. In contrast, profitable firms with stable revenue streams are garnering greater interest.

Investors are closely watching the initial public offerings of companies like Arm, a UK chip designer, and Instacart, a US grocery delivery firm, for indications of a tech market recovery.

The tech industry experienced a boom in 2020 and 2021 due to the Covid-19 pandemic, which led to increased reliance on online platforms for various activities, including shopping and remote work. Additionally, low interest rates implemented by central banks to stimulate the economy made it easier to raise funds. However, the situation has dramatically changed in the past year.

Gubbins admits she cannot predict when the IPO market will fully recover. Nevertheless, Dawn Capital is closely monitoring the debuts of Arm and Instacart to determine when the dust will settle on the public listings front.

She emphasizes that an IPO is not the only exit path for founders. As an example, Gubbins highlights the acquisition of LeanIX, an enterprise architecture management software company in Dawn’s portfolio, by German software giant SAP, which demonstrates successful exits for European technology firms.

While overall tech investment has declined, investment in artificial intelligence (AI) is thriving. Billions of dollars have poured into AI-focused companies, particularly those working on “foundational models” that generate content from written prompts, such as OpenAI, Anthropic, and Cohere.

Gubbins reveals that AI has been a standout topic in conversations with limited partners. However, Dawn Capital remains committed to investing in a wide range of business-to-business software companies across various sectors, including fintech, security, and infrastructure.

She states, “We are doubling down on our core strategy. AI is undoubtedly an area of interest for us. It not only involves investing in AI companies but also recognizing its disruptive potential across all sectors and industries.”