After funding crunch, European tech firms lose $400bn

Investor apprehension poses the first major test of the continent's tech scene since the rise of start-ups Spotify and Revolut.

Since the top of the 2021 boom, more than $400 billion in market value has been wiped from European tech companies, as venture capital dealmaking struck a snag at the end of the summer.

In 2021, the continent's start-ups benefited from a funding frenzy, resulting in the emergence of more than 100 "unicorns" – tech start-ups valued at more than $1 billion.

According to a research by London-based venture financing firm Atomico, that figure has dropped to 31 so far this year, the lowest level since 2017, excluding the coronavirus pandemic year of 2020. According to Atomico, around 14,000 European tech workers have been laid off.

The pattern reflects investor apprehension over increasing inflation, rising interest rates, and the conflict in Ukraine. The funding crisis is the first serious test of Europe's innovation landscape since a new crop of indigenous startups, led by Spotify, Revolut, and King, became international successes.

"Our belief is that the challenging macro will endure" well beyond 2023, according to Atomico partner and head of research Tom Wehmeier. "There will be no turning back to the conditions we witnessed at the end of 2021, at least for a long time."

Since its inception in 2015, Atomico's annual "State of European Tech" report has documented — and applauded — the ascension of start-ups in London, Paris, Berlin, and Stockholm, as the region appeared to be finally closing a decades-long financing gap with Silicon Valley.

According to Atomico, the $85 billion spent in European technology this year will still be more than double the totals of 2019 or 2020, however the second half of 2022 saw a steep drop, with only 37 investment rounds worth more than $100 million, compared to 133 in the first half.

Separate data published last month by another venture firm, Accel, based on Dealroom analysis, discovered that over 200 VC-backed unicorns in Europe had created more than 1,000 new start-ups, thanks to what they call "founder factories" like Delivery Hero, Criteo, and Klarna.

Even VC veterans are struggling to make sense of the current state of start-up finance in the face of macroeconomic and geopolitical upheaval.

"I've been in this game for 20 years and it's extremely difficult to read the tea leaves right now," said Nic Brisbourne, managing partner at London-based Forward Partners, which has a £95 million portfolio of early-stage technology startups. "I have a great doubt that if I put money in now, that company will be able to raise money again in the next 12-18 months."

According to investors, the issue is one of confidence, not capital. Atomico estimates that there is still roughly $80 billion in "dry powder" available in Europe: venture capital financing raised during the boom years but not yet deployed by investors.

Cautionary investors could do so for years. Eric Boyle, partner at tech advisers Qatalyst Partners, said at a recent London event for fintech start-ups and investors that he expected the drop-off in deal activity to linger for a time, especially with the public markets virtually closed to new listings. After 86 IPOs of $1 billion or more in the United States and Europe last year, there have been only three this year.

"A few people have already asked us when the IPO window will reopen," Boyle added. "We don't even consider it. "Not anytime soon," is the answer."

Most start-ups are avoiding fundraising operations until they want funds immediately, especially after so many were funded last year. Boyle noted that for a fintech start-up, financing now could mean taking a valuation multiple of up to 10 times their next 12 months' revenues, when investors were paying 40-50 times last year.

This year's decline also reflects the fact that the hectic pace of dealmaking last year accelerated many investments that would normally have occurred over a few years.

"Normally, we invest a fantastic entrepreneur with a brilliant idea," said Harry Nelis, a London-based partner at Accel. "Several months ago, a lot of brilliant entrepreneurs who didn't have a terrific idea were sponsored."

The recent expansion of US tech investors like as Sequoia, Lightspeed, and General Catalyst into Europe has further exacerbated local VCs' "fear of missing out," even as they celebrate it as evidence of the region's digital maturity.

Some American corporations, particularly so-called "crossover" funds such as Tiger Global and Insight Partners, are pulling out again, worrying that a recession in Europe will continue longer than in the United States. The number of US investors engaging in deals worth more than $100 million in Europe has dropped 22% this year to 122, after rising from 48 in 2020 to 157 in 2021.

Despite the upheaval, some start-up deals are still being completed, primarily in more sedate parts of business software rather than racy crypto or ecommerce investments.

Pigment, a Paris-based software company, raised $65 million in September. "It's good market conditions for us," said Pigment co-founder Eléonore Crespo. "Our purpose is to assist businesses in navigating unpredictability."

However, following a period of rapid expansion, Europe's tech entrepreneurs are confronting increased scepticism from investors and more difficult circumstances.

"The last two years were truly an outlier," said Jan Hammer, partner at Index Ventures, one of Europe's top venture firms, which recently secured a new $300 million seed fund. "The market went out of hand."

By fLEXI tEAM