Over the last year, the European tech industry recorded a decrease in the total capital invested, down by 45%, in line with the global average, which was down 39%, Atomico’s State of European Tech report for 2023 shows.
In details, Europe is on track to raise $45 billion in capital this year, which represents a meaningful drop from 2022’s total of $82 billion.
This mainly depended on the tough macroeconomic conditions that continue to impact investors and founders alike, with less capital flowing through the ecosystem. As American and Asian investors retreat, European investors must plug growth funding gaps.
In the first half of the year, there was a meaningful year-on-year decline in total funds raised, with only $7.4 billion raised, compared with $24 billion in FY2022. 2023 has seen a slowdown in rounds of $100 million and over and only 36 of these so-called “megarounds” were closed in Europe this year. This is down from 163 in 2022 and almost 200 in 2021. In addition, only 7 new companies reached a valuation of $1 billion – including DeepL, Helsing.ai, Synthesia and Quantexa.
The hard fundraising environment means that investors are increasingly selective, and cheque sizes have, on average, become smaller. But as the fundraising environment becomes tougher for VCs, fund cycles are starting to decompress. Investors need to deploy capital throughout the deployment cycle, given the underlying strength of the fundamentals.
According to the report, anyways, the sentiment within the ecosystem remains strong. A survey found that the vast majority of respondents feel as or more optimistic than they were a year ago about the future of European tech. Anyways, in 2023, 80% of founders reported that they are finding it harder to raise capital and have had to change their expectations for funding rounds, indicating a further deterioration of founder perception of fundraising conditions.
There has also been $36 billion worth of mergers and acquisitions. The majority of these have been smaller deals of sub $100 million in value, demonstrating the importance of small M&A in providing liquidity to investors and founders, while also redistributing talent. In the background, publicly-listed tech is starting to show signs of recovery, with the median enterprise value to next-12-months revenue multiple rebounding back above the long-term, 10-year average. This comes after it dipped for large parts of 2022 and the first half of 2023.
At sector level, AI is the biggest theme for funding at Seed level, capturing 11% of all rounds under $5M, as more companies are building on this year’s breakthroughs in large language models. 11 AI-focused companies managed to raise megarounds of $100M or more this year. This indicates that investors’ appetite to fund the sector remains strong despite the turbulent macro environment. Over the past decade, Europe has also marked an over 10x increase in the number of people working in AI roles even claiming a larger resident population of highly-skilled AI professionals than the US.
In addition, the Carbon & Energy sector, which encompasses ‘climate tech’, accounts for 27% of all capital invested in European tech in 2023, tripling its share of total investment since 2021.
Despite the layoffs seen earlier this year, there has been net growth of the number of people working in European tech, meaning the rate of new job creation is more than offsetting these layoffs. In the last five years, European tech has expanded its workforce from 750,000 employees to more than 2.3 million today.
Founded in 2006, Atomico is a venture capital firm which has partnered with over 150 of the world’s most ambitious founders, including those at Supercell, Stripe, Graphcore, Healx, Jobandtalent, Klarna, Lilium, MessageBird, Gympass, Pipedrive and Aiven. Its team of founders, investors and operational leaders come from growth success stories such as Skype, Google and Twitter through to Snowflake, Revolut, Farfetch and Wise.