Tech startup funding in Europe is expected to fall dramatically in 2023 following an unprecedented investment boom over the past two years. According to venture capital firm Atomico’s latest report, total capital invested into European tech startups will plunge 55% to $45 billion this year. This is down significantly from 2021’s record high of over $100 billion.
The pullback comes as high inflation, rising interest rates, and fears of recession have cooled investor appetite for risky startup investing globally. However, Europe looks set to fare better than other major tech hubs like the United States and China which are on track to fall below their 2020 funding levels.
Late-Stage European Startups Delay Fundraising, Slowing Deal Flow
A key driver of Europe’s tech investment decline is later-stage startups delaying plans to raise new funds. Companies that scored high valuations in 2021 and early 2022 are now finding it tougher to attract investors at those levels in the current climate.
Tom Wehmeier, Partner at Atomico explained: “Some of the startups who raised large sums in 2021/early 2022 to hit their billion-dollar valuation will see their valuations drop below the billion-dollar mark. I expect to see more of this next year as those companies are likely to be running out of runway at this point, and will need to return to market in 2024 or 2025 to survive.”
The report notes that over 150 European tech firms gained coveted ‘unicorn’ status with valuations above $1 billion in 2021 and 2022 alone. But market turbulence means many will lose their billion-dollar price tags when fundraising over the next couple years.
Investors Also Slowing Deployment of Capital Impacting Deal Flow
European venture capitalists have also slowed their pace of investments due to the uncertain economic environment. Investors are spending more time evaluating deals and negotiating terms rather than rapidly deploying capital like they did in 2021.
This deceleration in deal flow activity has compounded the drop in late-stage mega-rounds. But Atomico believes this is a healthy change after the “overheated” markets of 2020 and 2021.
Wehmeier commented: “When you consider how overheated those two years were, the fact we are up from 2020 suggests that Europe is heading in the right direction, especially since it is the only global region to be up since 2020.”
Europe’s Tech Scene Still Growing Despite Investment Drop
While falling 55% is a major decline, Europe’s $45 billion tech investment total for 2023 would still represent 18% growth over pre-pandemic year 2020. This is a positive sign of resilience compared to the US and China where deal activity looks set to match or even slip below 2020.
Atomico remains bullish on the long-term growth prospects for European technology. It forecasts the total number of early-stage startups to expand over 60% to 66,000 companies in the next 5 years. The pool of growth-stage startups raising Series B or later rounds should double in size to 8,000 firms.
So while investment totals will fall in 2023, Europe’s tech ecosystem foundations continue strengthening. The continent minted over 250 unicorn startups from 2018 to 2022, despite a tiny fraction reaching that status previously.
Key European Hubs May Face Harsher Investment Slowdowns
Looking closer, some European hubs may endure more drastic slowdowns than others. The UK, Germany, France and Nordic countries have boomed in recent years but could feel this correction most sharply.
For example, the UK expanded its unicorn herd from 15 to 105 companies from 2018 to 2022 per Atomico’s figures. Germany also produced 81 new unicorns in this period versus just two in prior decades. Investor sentiment and valuations in these breakout hubs are most at risk of reversing.
Meanwhile, less developed markets like Central and Eastern Europe, Southern Europe and Baltics/Ukraine may better sustain growth. These regions scored fewer but larger mega-deals in 2021 and 2022, so face less valuation exposure. Their growth outlooks remain strong as investors still recognize untapped potential.
Mature Industries Face Brunt of Pullback As Investors Seek Innovation
Analyzing by sector, Atomico believes more mature tech industries will bear the brunt of falling investment volumes in 2023. These include areas like fintech, transport and food delivery which drove the recent boom.
Investor dollars will keep flowing into emerging innovative spaces like climate tech, agrifood tech, health tech and enabling technologies. These sectors represent high-growth opportunities to positively impact society’s greatest challenges.
So while general funding trends slow in 2023, Europe’s vibrant startup activity continues evolving across cities and sectors. Following a period of irrational exuberance, this necessary correction will set the region’s tech ecosystem on more sustainable foundations going forward. The future stays bright for European technology beyond the downturn.