Investments Of Tech Startups In Europe To Plunge By 39% In Current Year

Technology companies have had a very difficult last 15 months as a result of pressure to prioritise profitability over growth at all costs.

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Atomico predicts that funding for venture-backed startups in Europe will decline from $83 billion in 2022 to $51 billion in 2023. It will be a relief after a disastrous year for technology in 2022, when funding for private tech startups in Europe fell 22% to $83 billion from $106 billion.

Technology companies have had a very difficult last 15 months as a result of pressure to prioritise profitability over growth at all costs.

Over the past 18 months, investors’ reevaluations of the industry have put tremendous pressure on technology companies, driving them to prioritise profitability over growth at all costs.

According to data from venture capital firm Atomico, investment into European tech startups is expected to decline by another 39% this year as the pain in global tech persists.

That was primarily caused by American investors pulling back. In the past, American funds have played a significant role in driving funding activity in Europe. To increase their investments in the area, several renowned VC funds in the U.S. have opened offices in London.

The technology sector had a terrible year in 2018, with investments for private tech startups in Europe falling 22% to $83 billion in 2022 from $106 billion in 2021, according to Atomico.

The fund, which has its London headquarters there and has backed companies like Stripe, Klarna, and Graphcore, released the report as a scaled-down mid-year update.

According to Atomico, there are some indications of “resilience” in the European tech sector, such as the fact that the combined value of public and private companies has once again reached the $3 trillion threshold it did in 2021.

Atomico reported that funding for companies raising under $15 million fell to $8.2 billion in the first half of 2023 from $10.3 billion in the same period a year earlier, indicating that early-stage firms have seen their funding decline less than their later-stage counterparts.

According to Atomico, the $28 billion in investment that will be lost overall between 2022 and 2023 will be accounted for by 93% of later stage firms.

Since investors reevaluated the sector over the past 18 months, pressure has been put on technology companies to prioritise profitability over growth at all costs.

Technology companies that were once highly valued have seen pressure on their shares from global factors like Russia’s full-scale invasion of Ukraine and tighter monetary policy.

To prevent soaring inflation, the Federal Reserve and other central banks have increased interest rates and reduced stimulus from the pandemic era. Investors have been compelled to review their positions in loss-making tech companies as a result, as these companies’ values are frequently based on the anticipation of future cash flows. Companies’ share prices experienced significant downward revisions last year.

Swedish buy-now, pay-later behemoth Klarna reduced its valuation to $6.7 billion by 85%. According to the startup media site Sifted, Checkout.com reportedly reduced the internal tax value of its shares by 15%.

According to Atomico, valuation multiples have significantly decreased across the board in the European tech market.

In comparison to a long-term average of 7.8 times, the median enterprise value of publicly traded software-as-a-service companies is currently around five times revenue.

According to Atomico, 3.6 times as many venture rounds were raised in the first quarter of 2023 as in the same period in the previous year, with 20% of those rounds being down rounds.

The industry has also been plagued by layoffs. According to Atomico, 11,100 people were laid off in Europe during the first quarter, which is about 6% of the 185,000 people laid off globally in the tech sector.

Tom Wehmeier, partner at Atomico, told CNBC that it is still too early to determine whether that is the peak. “Through 2023 and beyond, we would anticipate elevated levels of layoffs. It’s always a fundamental aspect of market cycles.

With 1,406 new founders emerging from businesses founded in the 2000s, Atomico reported that teams made up of former employees of tech unicorns are launching more new businesses than ever.

It is still too early to tell whether the layoffs over the past year have had any impact on the reuse of unicorn talent in new businesses, according to Sarah Guemouri, principal at Atomico.

For instance, many company founders who lost their jobs and founded new businesses have not yet updated their LinkedIn profiles.

It follows a recent report from venture capital firm Accel that claimed tech unicorns in Europe and Israel are creating five times as many startups as they once did, thanks to the continent’s maturing tech ecosystem and its attendant talent recycling.

Despite this, startups were able to raise sizeable sums of cash thanks to an increase in investor interest in the artificial intelligence market.

The highest share ever and a significant increase from the 5% share they held in 2023, startups using generative AI received 35% of all investments made in AI and machine learning firms last year.

Wehmeir stated that “we are in the early innings of what is a new AI supercycle technology” and that “Europe has a seat at the table.” Generative AI is driving a “huge degree of innovation.”

It is essential that we foster the kind of environment necessary for European talent to realise its full potential during the upcoming supercycle.

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