More than $400 billion in market value has been wiped from European tech companies since the peak of the 2021 boom, as venture capital deals hit a wall in late summer.
The continent’s start-ups enjoyed a funding frenzy in 2021, leading to the creation of more than 100 “unicorns” – tech start-ups valued at over $1 billion.
That figure has fallen to 31 so far this year, according to a report by London-based venture capital firm Atomico, the lowest level since 2017 excluding the coronavirus pandemic year of 2020. More than 14,000 European tech workers have been made redundant, Atomico estimates.
This trend reflects investors’ mistrust of high inflation, rising interest rates and the war in Ukraine. The funding crisis represents the first real test of Europe’s tech scene since a new generation of local companies, led by Spotify, Revolut and King, became international successes.
“Our view is that the difficult macro will persist” through 2023, said Tom Wehmeier, partner and head of research at Atomico. “There is no going back, at least for a very long time, to the conditions we experienced at the end of 2021.”
Since its debut in 2015, Atomico’s annual report on the state of European technology has charted – and applauded – the rise and rise of start-ups in London, Paris, Berlin and Stockholm, as the region finally seemed bridge a decade funding gap with Silicon Valley.
The $85 billion invested in European tech this year will still be more than double the totals of 2019 or 2020, Atomico estimates, although the second half of 2022 saw a sharp decline with just 37 higher value funding rounds. at $100 million, up from 133 in the first half.
A separate study published last month by another venture capital firm, Accel, based on analysis by Dealroom, found that more than 200 venture capital-backed unicorns in Europe spawned more than 1,000 new start-ups. , thanks to what they call “founding factories” such as Delivery Hero, Criteo and Klarna.
Even veteran venture capitalists are struggling to make sense of the timing of start-up funding amid macro-economic and geopolitical upheavals.
“I’ve been in this game for 20 years and it’s exceptionally hard to read tea leaves right now,” said Nic Brisbourne, managing partner of London-based Forward Partners, which has a £95million portfolio. technologies in the start-up phase. businesses. “I feel a real lack of confidence that if I invest now, will this company be able to fundraise again in the next 12-18 months?”
Investors say confidence, not capital, is the problem. Atomico estimates that there is still around $80 billion of “dry powder” available in Europe: venture capital funding that was raised during the boom years and has yet to be deployed by investors.
Cautious investors could get away with it for years. At a recent event in London organized by Accel for fintech start-ups and investors, Eric Boyle, a partner at technology advisers Qatalyst Partners, said he expected the drop in business activity to last. some time, especially with public markets effectively closed to new listings. After 86 initial public offerings at a valuation of over $1 billion in the United States and Europe last year, there have been just three this year.
“We already had a few people asking us when the IPO window would reopen,” Boyle said. “We don’t even think about it. The answer is not soon.
Unless they urgently need capital, most start-ups avoid fundraising, especially after so many fundraisers last year. For a fintech startup, rising now could mean accepting a valuation multiple of up to 10 times its next 12-month earnings, compared to investors paying 40 to 50 times last year, Boyle suggested.
This year’s slowdown also reflects the fact that the frenetic pace of negotiations last year pushed forward many investments that would normally have been made over the course of a few years.
“Normally we fund a great entrepreneur with a great idea,” said Harry Nelis, partner at Accel in London. “A few months ago, a lot of great entrepreneurs got funded when they still didn’t have a great idea.”
The expansion of US tech investors such as Sequoia, Lightspeed, and General Catalyst into Europe over the past two years has only heightened this “fear of missing out” among local VCs, even as they hailed it as validation of the technological maturity of the region.
Some US firms are backing down again, including so-called cross-funds like Tiger Global and Insight Partners, fearing that a recession will last longer in Europe than in the United States. The number of US investors involved in deals over $100 million in Europe has fallen 22% so far this year to 122, after falling from 48 in 2020 to 157 in 2021.
Despite the turmoil, some startup deals are still going, mostly in quieter corners of enterprise software instead of racy bets on crypto or e-commerce.
Paris-based Pigment, which makes business planning software, raised $65m in September. “These are good market conditions for us,” said Eléonore Crespo, co-founder of Pigment. “Our goal is to help companies overcome uncertainty.”
However, after a period of strong growth, European tech entrepreneurs are facing more skeptical investors and recovering times.
“The last two years have really been an aberration,” said Jan Hammer, a partner at Index Ventures, one of Europe’s biggest venture capital firms, which raised a new $300 million seed fund. dollars last month. “The market has taken off.
Additional reporting by Ian Johnston