In a concerning development for the technology sector, European startups are facing a steep decline in venture capital (VC) funding. According to the latest report from Atomico, a leading VC firm, European companies are expected to raise just $42 billion in funding this year, a significant drop from the $85 billion raised in 2022.
Key Takeaway
European startup funding has declined to $42 billion in 2023, less than half of the amount raised in 2022. However, this drop is seen as a return to healthier growth after two extraordinary years of activity. Climate tech has emerged as the leading sector attracting investment, while valuations for European startups continue to lag behind those in the U.S.
Challenges at Every Stage of Funding
The report reveals a decline in funding at every stage, from seed rounds to series C and beyond. Late-stage and larger companies are feeling the impact the most, with only seven unicorns projected to emerge in Europe this year, compared to 48 in 2022 and 108 in 2021.
Despite the decline, there is a silver lining. Atomico suggests that the high funding amounts seen in 2021 and 2022 were outliers, influenced by factors such as lower interest rates and the surge in technology adoption during the peak of the Covid-19 pandemic. Removing these two years from the equation, it appears that funding figures are following a slower, but potentially healthier, growth curve.
Furthermore, the total value of the European tech ecosystem has bounced back to its 2021 record of $3 trillion after dropping by $400 billion in 2022. This recovery is attributed to a continuous influx of new startups raising money and multiple rounds of fundraising that remained stagnant or saw an increase in value.
The Impact of Crossover Investors
One notable trend identified by Atomico is the decline of crossover investors, who invest in both private and public tech companies. These investors, who played a significant role in some of the largest deals in previous years, have largely withdrawn from the European market. In 2021, they participated in nearly 100 mega-rounds in Europe, but in 2023, they only made four investments due to the poor performance of tech companies.
The absence of crossover investors has also affected the number of nine-figure funding rounds, with only 36 such rounds occurring in the first nine months of 2023, compared to several hundreds in the previous two years.
Valuations and Investment Focus
The report highlights that European startup valuations continue to be considerably lower than their U.S. counterparts, ranging between 30% and 60% lower.
Despite the current focus on artificial intelligence (AI) in the tech industry, Atomico’s data reveals that climate tech, including the areas of carbon and energy, accounted for a remarkable 27% of all capital invested in European tech in 2023. This represents a significant increase from previous years and surpasses other traditionally dominant sectors in the region, such as finance and software.
