The European tech industry is heading into the second half of a challenging year with greater resilience than ever before. Contrary to past crises in 2000 and 2008, the ecosystem is now robust and more established. There are important signs of growth, including Europe closing the early-stage funding gap with the US, increased investment in AI companies, and increased focus on climate and other purpose-driven companies.
However, it’s important to note that the market has adjusted to a new reality. Investment volumes in Europe are set to reach around $50B+ for 2023, which is about a 50% drop compared to the record highs of 2021, and around 38% down on 2022. Nevertheless, this is still roughly 35-40% ahead of what we saw in 2020 and 2019, positioning Europe to have its third largest year in terms of funding raised. This decrease in investment volumes is not exclusive to Europe, but is a global phenomenon mirrored in the US, China, and the rest of the world.
Over the past five years, European tech has delivered over $500 billion in exit value, but this year, like last year, remains stagnant. This creates liquidity challenges for founders, tech employees, and LPs, all of whom rely on the flywheel of recycled capital and talent for ecosystem progression. However, potential IPOs from companies like ARM, Vinted, and Visma could unlock tens of billions in unrealised value.
The global retraction in investment volumes has resulted in a decrease in capital flow from US investors into Europe, with US contributions falling from 66 cents to around 40% for every dollar invested by European investors in 2023. This will primarily affect later-stage founders raising larger rounds.
The slowdown is evident across Europe, with steep declines in investment levels in most countries. For instance, the UK has seen a 57% fall, with 55% in France and 44% in Germany. Despite this, the ecosystem remains diversified, with over a dozen countries on track for annualised investment levels in excess of a billion.
Founders are adjusting to this new market reality. The funding landscape remains subdued and valuation multiples have stayed resolutely low. Consequently, there have been accelerated layoffs, with Q1 alone seeing 185,000 redundancies globally. Additionally, 1 in 5 venture fundraises in Q1 this year were down rounds, compared to barely 1 in 20 a year ago, indicating a 3.6x uptick.
Private market valuations have reset to long-term averages, hovering between 5 and 10 year averages, clearly marking 2021 as the outlier year. Seed valuations have shown the most resilience, despite recent volatility. This reset is also reflected in the US, with median valuations in Europe consistently around 50% lower across stages.
The combined value of private and public European tech companies has levelled out at $3 trillion, matching its 2021 year-end high. While growth has been stagnant for the past two years, the ecosystem has added $2T in value since 2017 and has grown at an average rate of 23% per year for the past decade.
In terms of returns, over both long and short-term time horizons, European VC returns match the US, with Europe outperforming on a ten-year horizon. In many cases, VC in both markets is ahead of buyout.
Despite the funding slowdown, early-stage funding in Europe has stayed resilient. The funding for early-stage orsub $15M round funding has only decreased by 21% from around $10.3B to $8.2B in the first half of 2023, compared to H1’22. The funding slowdown in Europe has been largely driven by later stage rounds.
As entrepreneurial ecosystems continue to grow across the region, the global share of funding going to early-stage companies in Europe is now at 29%. This is almost at parity with the US, having nearly halved the gap in the last five years and gained more than 10 percentage points since 2013.
Source: Atomico Report: https://stateofeuropeantech.com/2023-first-look