According to data released by venture capital firm Atomico, investment into European tech startups is expected to decrease by another 39% this year, indicating ongoing challenges in the global tech sector.
Atomico projects that funding for Europe’s venture-backed startups will decline from $83 billion in 2022 to $51 billion in 2023. This decline can largely be attributed to a pullback from U.S. investors, who have historically been significant contributors to funding activities in Europe. Several notable U.S. venture capital funds have established a presence in London to increase their investments in the region.
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This latest decrease in funding follows a difficult year for the technology industry in 2022, where investment in private tech startups in Europe dropped by 22% from $106 billion in 2021 to $83 billion. Atomico’s report, a mid-year update from the London-based fund, highlights some signs of resilience in Europe’s tech industry, including the fact that the overall value of public and private companies has reached the $3 trillion mark achieved in 2021.
The decline in funding has affected early-stage firms less than their later-stage counterparts. Atomico notes that funding for companies raising less than $15 million slipped to $8.2 billion in the first half of 2023, down from $10.3 billion during the same period the previous year. Later-stage firms are expected to account for 93% of the overall $28 billion decrease in investment between 2022 and 2023.
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Over the past year and a half, technology firms have faced significant challenges as investors prioritize profitability over growth. Factors such as Russia’s invasion of Ukraine and tighter monetary policies globally have put pressure on the shares of once high-valued tech companies. The Federal Reserve and other central banks have raised interest rates and reduced pandemic-era stimulus measures to combat rising inflation, leading investors to reassess their positions on tech companies that generate losses but are valued based on future cash flow expectations.
The industry has also experienced significant downward revisions in share prices. Swedish buy now, pay later giant Klarna, for instance, slashed its valuation by 85% to $6.7 billion, while Checkout.com reportedly reduced the internal tax value of its shares by 15%.
Atomico highlights that the tech market in Europe has witnessed a significant compression in valuation multiples. The median enterprise value of public software-as-a-service companies currently stands at around five times revenue, down from the long-term average of 7.8 times. Additionally, 20% of venture rounds raised in the first quarter of 2023 were down rounds, marking a 3.6-fold increase compared to the same period the previous year.
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Layoffs have also plagued the industry, with Atomico reporting 11,100 job cuts in Europe during the first quarter, accounting for approximately 6% of the global tech industry’s layoffs, which totaled 185,000.
Despite these challenges, there has been an increase in new companies started by teams consisting of former employees of tech unicorns. Atomico reveals that 1,406 new founders have emerged from companies founded in the 2000s. However, it remains uncertain whether the recent layoffs have impacted the recycling of talent from unicorns into new ventures, as many founders have yet to update their LinkedIn profiles.
A recent report from VC firm Accel highlighted that tech unicorns in Europe and Israel are generating five times the number of startups, indicating the maturation of the continent’s tech ecosystem and a rejuvenation of talent.
In terms of positive developments, artificial intelligence (AI) has shown promise, with startups in the generative AI sector attracting notable investments. Generative AI companies accounted for 35% of total investment in AI and machine learning firms in 2022, a significant increase from their 5% share in 2023. Atomico believes that generative AI is driving substantial innovation and emphasizes that Europe has a role to play in this emerging AI supercycle.
Tom Wehmeier, a partner at Atomico, commented on the situation, stating that it is too early to determine if the current conditions represent a peak. He anticipates elevated levels of layoffs throughout 2023 and beyond, as market cycles are inherent to the industry. Wehmeier also emphasized the need to create an environment that enables European talent to fulfill its potential in the upcoming supercycle.
European startup funding to drop a further 39% this year as tech rout continues