The ongoing decline in the technology sector, influenced by factors such as inflation, elevated interest rates, and geopolitical events, persists. Among the most severely affected aspects is the venture capital (VC) funding landscape for startups, particularly those situated outside the United States. According to VC firm Atomico’s annual report on the state of European tech, companies in Europe are poised to secure only $42 billion this year, a stark contrast to the $85 billion raised in 2022.
The report reveals a decline in fundraising at each stage, from Seed to Series C and beyond, with later-stage and larger companies facing notable challenges. In Europe, only seven “unicorns” (startups with a valuation exceeding $1 billion) are expected to emerge in 2023, compared to 48 in 2022 and 108 in 2021.
Despite these challenges, there is a positive aspect to the narrative. While overall investment amounts have decreased in comparison to the last two years, Atomico suggests that 2021 and 2022 were outliers driven by lower interest rates, increased technology usage during the peak of the Covid-19 pandemic, and a surge in funding among investors. Excluding these two years, the figures seem to follow a slower, potentially healthier growth curve.
Another encouraging sign is the resurgence of the overall total value of the European tech ecosystem, reaching its 2021 record of $3 trillion after a $400 billion drop in 2022. This rebound is attributed to a steady flow of new startups raising capital, offsetting down rounds, with the majority of fundraises occurring as flat rounds or up rounds.
The report notes that “crossover investors,” who invest in both private and public tech companies, have largely withdrawn from Europe. Their absence has impacted the number of nine-figure rounds, with only 36 such rounds in the first nine months of 2023, compared to hundreds in the preceding two years.
Startups at various stages are experiencing down rounds on average, with later stages seeing more significant valuation drops. Median valuations for European startups remain notably lower than their U.S. counterparts, ranging between 30% and 60% lower.
Contrary to the current focus on artificial intelligence in the tech landscape, Atomico’s data indicates that climate tech, encompassing Carbon and Energy, accounted for 27% of all capital invested in European tech in 2023. This marks a substantial increase from 2022 and surpasses traditional sectors like Finance & Insurance and Software.
In summary, while challenges persist in the European tech funding landscape, there are positive indicators of a more sustainable growth trajectory, with a notable emphasis on climate tech as a driving force in investment trends.
