Investment in European tech startups is expected to experience a further decrease of 39% this year, according to Atomico, a venture capital firm. Funding for Europe’s venture-backed startups is predicted to decline from $83 billion in 2022 to $51 billion in 2023. The drop in funding is largely due to a retreat from US investors, who have been a significant driver of funding activity in Europe.
Reasons for the Decline
The decline in funding in Europe’s tech industry follows a brutal year for the technology industry globally. Investment for private tech startups in Europe declined by 22% to $83 billion in 2022 from $106 billion in 2021. The Federal Reserve has raised interest rates and pulled back on pandemic-era stimulus to stave off soaring inflation, which has led investors to reassess their positions on lossmaking tech companies.
Once richly-valued technology companies have seen their shares come under pressure from global factors, including Russia’s full-scale invasion of Ukraine and tighter monetary policy. Additionally, the overall tech market in Europe has seen significant compression in valuation multiples.
Impact on Startups
Later stage firms are expected to account for 93% of the overall $28 billion loss in investment between 2022 and 2023. However, early-stage firms have seen their funding reduced by less than their later-stage counterparts. Atomico states that funding for companies raising sub-$15 million rounds slipped to $8.2 billion in the first half of 2023, down from $10.3 billion in the same period a year ago.
Layoffs have also plagued the industry, with 11,100 layoffs in Europe in the first quarter of 2023, accounting for about 6% of the global tech industry, which laid off 185,000 members of staff.
Positive Signs in the Industry
Despite the challenging situations, there are some signs of resilience in Europe’s tech industry. The overall value of public and private companies has regained the $3 trillion mark attained in 2021. Additionally, more new companies are being started by teams composed of former tech unicorn employees than ever, with 1,406 new founders emerging from companies that were founded in the 2000s, according to Atomico.
Artificial intelligence proved to be a bright spot for the industry, with startups raising notable sums thanks to heightened investor buzz. Generative AI startups accounted for 35% of the total investment into AI and machine learning firms last year, the highest share ever and a big jump from the 5% share they took up in 2023.
Overall, the decline in investment in European tech startups is predicted to continue in 2023. The pain in the global tech industry is mainly due to the retreat from US investors and global factors, including Russia’s invasion of Ukraine and tighter monetary policies. Nevertheless, some positive signs of resilience can be seen in the industry, such as the overall value of public and private companies regaining the $3 trillion mark attained in 2021, a rise in new companies being started by former tech unicorn employees, and the growth of generative AI startups.
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