European tech startups are witnessing another tough year, the funding is steadily falling, largely due to a retreat from US investors
Recent data from venture capital firm Atomico forecasts that total investment volumes in Europe will reach around $50B+ for 2023 in total, based on VC activity to date. This amount represents a 50% drop from the record highs of 2021 and around 38% decline compared to $83 billion registered in 2022.
While American VC funds have previously driven most funding activity in Europe, their recent retreat significantly affected the tech industry.
The main hit was taken by late-stage startups. Similarly to the situation in the global environment tech funding, early-stage startups remained more attractive to investors. On the contrary, later-stage firms are expected to account for 93% of the overall $28 billion loss in investment between 2022 and 2023, estimates Atomico.
At the same time, Atomico sees some signs of “resilience” in Europe’s tech segment, since the overall value of public and private companies managed to regain the $3 trillion mark it attained in 2021. Besides, the funding levels are still roughly 35-40% ahead of what was seen in 2020 and 2019.
The study notes that the VC environment slowdown is not unique to Europe. This global declining investment trend is tracked in the US, China, and the rest of the world. All major regions are expected to record a decrease of roughly 50% by the end of 2023 when compared to 2021 investment volumes.
For technology companies, such a trend often means being pushed to prioritize profitability over growth to remain interesting for investors globally. In addition, the tech market in Europe has seen a significant decline in valuation multiples.
Over the past five years, the European tech sector has “delivered in excess of $500 billion in exit value,” notes Sarah Guemouri, principal of Atomico. Therefore, liquidity challenges emerge at every industry level, while many firms impatiently wait for the IPO window to possibly re-open later this year. “Once this window opens, there will be a strong pipeline of high growth firms – and tens of billions in unrealised value – waiting,” adds Guemouri.
Silver lining brought by generative AI, Fintech and ESG startups
Despite the negative trends, generative AI startups have increased their share of the total investment into AI and machine learning firms to an all-time high of 35%. It represents the highest share ever and a big jump from the 5% share they took up in 2022.
The leading role of the Fintech companies and financial services providers on the European startup stage remained strong, with the biggest share of funding raised in the first half of the year. At the same time, investors are increasingly diversifying their portfolios. While last year Financial Services captured 29% of all funding, this number has come down to 20% in 2023.
Finally, purpose-driven tech’ – technologies that meet UN Sustainability Goals are taking the top third largest investment area in 2023 so far. Besides, Climate and Purpose startups secured their highest share of all funding ever at 18%, a significant climb from 15% in the first half year of 2022.