VC funding for European startups is on the decline, with overall investment amounts down compared to previous years. However, the European tech ecosystem shows signs of resilience and a shift towards sustainable growth.
The technology sector is experiencing a downturn, influenced by factors such as inflation, higher interest rates, and geopolitical events. This downturn has had a significant impact on venture capital (VC) funding for startups, particularly those outside the United States. According to VC firm Atomico, European startups are projected to raise only $45 billion this year, which is roughly half of the $85 billion raised in 2022. The decline in funding is evident across all stages of funding, with later stage and larger companies being hit the hardest. However, amidst these challenges, there are signs of hope for the European tech ecosystem.
A Shift Towards Healthier Growth
While the overall investment amounts have decreased compared to the previous two years, Atomico suggests that 2021 and 2022 were outliers in terms of activity. These years saw a surge in technology usage during the peak of the Covid-19 pandemic, which led to a higher demand for funding. Additionally, lower interest rates and a pent-up amount of funding among investors contributed to the significant investment amounts. By excluding these exceptional years, the figures indicate a slower but potentially healthier growth curve for the European tech ecosystem.
Rebounding Ecosystem Value
Despite the decline in investment amounts, the overall total value of the European tech ecosystem has rebounded to its 2021 record of $3 trillion. This recovery is attributed to a steady stream of new startups raising money, offsetting down rounds. The majority of fundraises have been made as flat rounds or up rounds, indicating continued investor confidence in the tech industry. The authors of the report highlight that the influx of new companies and the deployment of follow-on capital have contributed to the ecosystem’s value rebound.
Crossover Investors Retreat
One notable trend identified in the report is the retreat of “crossover investors” in Europe. These investors, who invest in both private and public tech companies, have significantly reduced their activity in the region. In 2021, crossover investors led or participated in nearly 100 mega-rounds in Europe. However, this year, due to poor performance in both public and private tech companies, these investors made only four investments in the region. Their absence has impacted the overall number of nine-figure funding rounds, which saw a significant decline compared to previous years.
Valuation Challenges at Every Stage
Startups at various stages of funding are facing valuation challenges, with average valuations decreasing as the stages progress. Atomico’s data shows that European startups have considerably lower median valuations compared to their U.S. counterparts, ranging from 30% to 60% lower. This trend reflects a broader decline in funding across stages between Seed and Series C in both Europe and the U.S., with the exception of Seed stage in the U.S., which continues to rise at a slower rate.
Climate Tech Takes Center Stage
Contrary to popular belief, artificial intelligence (AI) is not dominating investment in Europe. Atomico’s report reveals that climate tech, including the broader areas of Carbon and Energy, accounted for 27% of all capital invested in European tech in 2023. This represents a significant increase compared to previous years and surpasses the investment volumes in traditionally prominent sectors such as Finance & Insurance and Software. The rise of climate tech signifies a shift towards sustainable investments and the green transition.
Conclusion:
European tech startups are facing funding challenges amidst the downturn in the technology sector. However, the European tech ecosystem shows signs of resilience and a shift towards sustainable growth. While investment amounts have decreased, the rebound in ecosystem value and the rise of climate tech as a dominant sector provide hope for the future. As the industry adjusts to a potentially healthier growth curve, startups and investors alike must navigate the evolving landscape to ensure long-term success.
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