The technology sector is experiencing a persistent downturn, primarily attributed to inflation, higher interest rates, and geopolitical events. One of the sectors acutely feeling the impact is the venture capital funding for startups in Europe. According to a comprehensive report by VC firm Atomico, European companies are set to raise only $45 billion in 2023, a stark decline from the $85 billion raised in the thriving tech landscape of 2022.
The Funding Landscape
Notably, the funding decline is evident at each stage of startup growth, from Seed through to Series C and beyond. Larger and later-stage companies are bearing the brunt, with only seven “unicorns” projected to emerge this year, a significant drop from the 48 in 2022 and a staggering 108 in the tech-booming 2021.
However, amidst the gloom, Atomico suggests a silver lining. The theory posits that the exuberant funding activities of 2021 and 2022 were outliers, fueled by lower interest rates, a surge in technology usage during the peak of the Covid-19 pandemic, and a pent-up reservoir of funding among investors. By excluding these outlier years, the figures reveal a slower but potentially healthier growth curve.
Despite the funding challenges, there is resilience evident in the overall value of the European tech ecosystem. The combined equity value of all public and private tech companies in Europe has rebounded to its 2021 record of $3 trillion after experiencing a $400 billion drop in 2022. This rebound is attributed to new startups raising capital and offsetting down rounds, with the majority of fundraises occurring as flat or up rounds.
Crossover Investors and Mega-Rounds
The report also sheds light on the impact of “crossover investors” who invest in both private and public tech companies. Their influence, which led to nearly 100 mega-rounds in 2021, has waned. In 2023, spooked by poor performance in the tech sector, these investors made only four investments in the region. This scarcity of crossover investors has contributed to a significant drop in nine-figure rounds, with only 36 recorded in the first nine months of 2023, compared to hundreds in previous years.
Notably, the median valuations for European startups remain considerably lower than their U.S. counterparts, ranging between 30% and 60% less. Atomico suggests that this shift back toward longer-term averages in Europe mirrors the funding trends observed in the United States. The decline in funding is widespread, affecting nearly every stage of investing between Seed and Series C. The exception is the Seed stage in the U.S., which continues to rise, albeit at a slower rate.
Shift in Investment Focus
Contrary to the prevailing narrative around artificial intelligence dominating the investment landscape, Atomico’s numbers reveal a different story. The spotlight is on climate tech, particularly Carbon and Energy, which accounted for a remarkable 27% of all capital invested in European tech in 2023. This sector has outpaced traditional powerhouses like Finance & Insurance and Software, representing a significant increase in capital supporting the green transition.
As Europe navigates the challenging terrain of reduced startup funding, the tech ecosystem shows signs of adaptability and resilience. While the figures for 2023 indicate a significant decline, the recalibration of expectations and a shift towards sustainable tech sectors may pave the way for a more robust and enduring growth trajectory in the years to come.