Europe’s tech industry investment plunges amid high interest rates, economic uncertainty

Europe’s tech industry faced a challenging year in 2023, as venture capital investment plunged by half amid high interest rates and macroeconomic uncertainty.

However, some sectors, such as artificial intelligence and climate tech, managed to attract significant funding and talent, showing the resilience and diversity of the region’s innovation ecosystem, according to CNBC.

The funding slowdown

According to the latest “State of European Tech” report by venture capital firm Atomico, funding for European venture-backed companies is projected to decline 45% in 2023 from a year ago, reaching $45 billion.

This is a sharp drop from the record levels of $82 billion in 2022 and $100 billion in 2021, which were fueled by a surge of capital flows into the tech industry during the pandemic.

Atomico’s head of data insights, Tom Wehmeier, told CNBC that 2023 was a year of correction and a return to the pre-pandemic reality, which saw more sustainable and balanced growth rates. He also said that Europe stood out from its U.S., Chinese, and other international counterparts, which saw bigger declines in venture funding since 2020.

One of the main reasons for the funding slowdown was the retreat of “tourist” funds, such as Tiger Global and Coatue, which flooded the European market in 2020 and 2021, but got cold feet in the last year or so as the global economic outlook worsened.

These funds, which are mostly based in the U.S. and Asia, reduced their institutional investment into European tech significantly, leaving more room for local and regional investors.

The bright spots

Despite the overall funding crunch, some sectors in the European tech industry managed to buck the trend and attract more capital and attention. Artificial intelligence was the standout category, with 11 AI companies raising funding rounds of $100 million or more, also known as “megarounds”.

These include companies like Aleph Alpha, Mistral, and DeepL, which are developing cutting-edge AI technologies and products, inspired by the success of OpenAI, the creator of the popular ChatGPT chatbot.

AI was also the most popular sector for seed-stage investors, accounting for 11% of all funding rounds worth $5 million or less. This shows the strong interest and potential of AI startups in Europe, which is also the top hub for global AI talent, according to Atomico.

The number of highly-skilled AI roles in Europe has increased 10-fold over the past decade, surpassing the U.S…

Another sector that shone in 2023 was climate tech, which covers companies in the carbon and energy space. Funding into climate tech companies accounted for 27% of all capital invested in European tech in 2023, three times more than in 2021.

This reflects the growing awareness and urgency of tackling the climate crisis, as well as the innovation and ambition of European entrepreneurs and investors in this field.

The outlook

Despite the funding slowdown, the European tech industry remains valuable and vibrant. According to Atomico, the combined value of all private and publicly listed tech companies in Europe topped $3 trillion in 2023, recovering from the slump in 2022, which saw $400 billion wiped off its overall market capitalization.

However, the IPO window remained largely closed in 2023, with few notable listings of European tech companies. Arm, the British chip designer, went public in the U.S., but its performance has been lackluster. Other tech giants, such as Klarna, Revolut, and Monzo, are still waiting for the right moment to tap the public markets.

Meanwhile, mergers and acquisitions activity was also muted, with most exits being smaller, sub-$100 million value deals. This suggests that the European tech industry is still maturing and consolidating, and that more time and support are needed for the creation of more global tech champions.

The “State of European Tech” report by Atomico is a comprehensive and insightful analysis of the trends and developments in the European tech industry in 2023. It shows that, despite the challenges and uncertainties, Europe’s tech industry survived and thrived in some areas, demonstrating its resilience and diversity. It also highlights the opportunities and potential for further growth and innovation in the region, as well as the need for more collaboration and investment from all stakeholders.