More than $400 billion in market value has been wiped out of 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 benefited from a funding frenzy in 2021, leading to the creation of more than 100 “unicorns,” tech start-ups valued at more than $1 billion.
That number 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 year of the 2020 coronavirus pandemic. More than 14,000 European tech workers have been laid off, Atomico estimated.
The trend is a reflection of investor wariness in the face of high inflation, rising interest rates and the war in Ukraine. The funding crisis represents the first real test of the European tech scene since a new generation of local companies, led by Spotify, Revolut and King, became international successes.
“Our view is that the challenging macro will persist” well into 2023, said Tom Wehmeier, partner and head of research at Atomico. “There is no going back, at least for a long time, to the conditions we saw at the end of 2021.”
Since it began in 2015, Atomico’s annual “State of European Tech” report has charted — and applauded — the rise and rise of start-ups in London, Paris, Berlin and Stockholm, as the region seemed to finally outperform. decades. 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, though the second half of 2022 saw a sharp setback with just 37 rounds of funding worth more than $100. million, compared to 133 in the first half.
Separate research published last month by another venture firm, Accel, based on Dealroom analysis, found that more than 200 VC-backed unicorns in Europe have spawned more than 1,000 startups, thanks to what they call “founder factories.” ” like Delivery Hero, Criteo and Klarna.
Even VC veterans are struggling to understand the timing of start-up financing, amid macroeconomic and geopolitical upheavals.
“I’ve been in this game for 20 years and it’s exceptionally difficult to read tea leaves at the moment,” said Nic Brisbourne, managing partner at London-based Forward Partners, which has a £95m portfolio of technology in the pipeline. initial. companies. “I feel a real lack of confidence that if I invest money now, will the company be able to raise money again in the next 12 to 18 months?”
Investors say confidence, not capital, is the problem. Atomico estimates that there is still around $80 billion in “dry powder” available in Europe: venture capital funds that were raised in the boom years and have yet to be deployed by investors.
Cautious investors could earn that for years. At a recent event in London hosted by Accel for fintech startups and investors, Eric Boyle, a partner at technology advisers Qatalyst Partners, said he expected the drop in deal activity to last for a while, especially with public markets effectively closed. to new listings. After 86 initial public offerings with a valuation of more than $1 billion in the US and Europe last year, there have been only three this year.
“Some people have already asked us when the IPO window reopens,” Boyle said. “We didn’t even think about it. The answer is not soon.
Unless they urgently need capital, most start-ups shy away from funding activities, especially after so many raises last year. For a fintech startup, raising now could mean accepting a valuation multiple of up to 10 times earnings for the next 12 months, while investors were paying 40 to 50 times last year, Boyle suggested.
This year’s slowdown also reflects that last year’s hectic pace of trading spurred many investments that would normally have been made over the course of a few years.
“Usually we fund a great entrepreneur with a great idea,” said Harry Nelis, a partner at Accel in London. “Several months ago, many great entrepreneurs were financed who still did not have a great idea.”
The expansion of US tech investors such as Sequoia, Lightspeed and General Catalyst into Europe in recent years has only accentuated that “fear of missing out” among local venture capitalists, even as they hailed it as validation of the region’s technological maturity.
Some US firms are pulling back again, particularly so-called “crossover” funds such as Tiger Global and Insight Partners, fearing a recession will last longer in Europe than in the US. The number of US investors involved in deals of more than 100 million dollars in Europe has fallen by 22% so far this year to 122, after going from 48 in 2020 to 157 in 2021.
Despite the turmoil, some start-up deals are still closing, mostly in quieter corners of trading software rather than bold e-commerce or cryptocurrency bets.
Paris-based Pigment, which makes business planning software, raised $65 million in September. “These are good market conditions for us,” said Eléonore Crespo, co-founder of Pigment. “Our goal is to help companies overcome uncertainty.”
Yet after a period of strong growth, Europe’s tech entrepreneurs are facing more skeptical investors and tougher times.
“The last two years have really been an aberration,” said Jan Hammer, a partner at Index Ventures, one of Europe’s largest venture firms, which raised a new seed fund of $300 million last month. “The market got carried away.”
Additional reporting by Ian Johnston