Ahead of its full-year analysis, Atomico dissects the current 'State of European Tech' in intermediate report for 2023

London-based investment giant Atomico has released a slimmed down 'State of European Tech' report, using data from this year to date to confirm what we already know: it's tough out there.
Ahead of its full-year analysis, Atomico dissects the current 'State of European Tech' in intermediate report for 2023

Pan-European VC firm Atomico has been busy lately, opening new offices in Europe with new local hubs in Berlin and Stockholm and an expansion to its Paris office, adding a new partner and promoting others to partner level, all within six months after delivering its annual mammoth report on 'The State of European Tech'.

But while the latter typically only gets released towards the end of the year, the investment firm is mixing things up a bit in 2023, releasing an almost-but-not-quite-yet H1 report that offers a 'first look' on the current shape of the European tech industry.

And while the report, launched at the SuperVenture conference in Berlin today, tries very hard to strike a positive note, the slimmed down data set shows that times are still rather tough in #EUtech land.

In fairness, that's a global trend, not necessarily a European one, but the numbers are what they are. And they ain't cause for celebration.

Anyone who keeps tracks of how European tech is shaping up, as we do on a daily basis, will not be surprised by any of the core findings in Atomico's report. 

1) Much less capital flowing into European tech compared to the last two years

According to Atomico's data, with some extrapolation magic, European tech investment volumes are tracking at around half of 2021 and are set to reach $51 billion in 2023.

This is about 34% ahead of 2020 at the current pace, but way below the crazy year that was 2021 ($106 billion raised) and even the difficult year 2022 ($83 billion).

Worth noting: for this half-year report, Atomico says it hasn't looked in much detail whether the funding tracked was effectively equity funding rather than debt (which we are still seeing a significant rise in).

1) Funding is down, but the drop is on par with the US and China

The slow-down in investment mirrors that over in the US and China, which have each seen a nearly 50% drop when comparing the current investment pace in 2023 to 2021.

The vast majority (93%) of the decline in investment volume between H1 2022 and H1 2023 is unsurprisingly accounted for by the steep decrease of late-stage funding rounds.

3) Exits = not there

It wouldn't be a market downturn without an all but closed IPO window, and while Tech.eu has been tracking quite a lot of acquisitions in European Tech, most of them are small sales or mergers, and companies simply being opportunistic in this environment. It's a buyer's market for the time being.

Atomico has calculated that M&A and IPO activity in the first half of this year hasn't even reached half the level recorded in all of 2022, and still a whopping $156 billion short of the total exit value in 2020.

Sarah Guemouri, Principal at Atomico and co-author of the 'State of European Tech' report, remains hopeful.

“Over the past five years, European tech has delivered in excess of $500 billion in exit value. However, this year, like last year, remains stagnant. This creates obvious liquidity challenges at every level - for founders, tech employees, LPs - all of which rely on the flywheel of recycled capitaland talent for the progression of our ecosystem. ARM’s plans for a Nasdaq listing, alongside hints from the likes of Vinted and Visma, suggest the IPO window could re-open later this year. Once this window opens, there will be a queue of high growth firms - and tens of billions in unrealised value - waiting,” she remarked in a statement.

4) The bigger they are, the harder they fall

The drop in funding was most pronounced in the UK, which saw a 57% decrease between H1 2022 and H1 2023, compared to 55% in
France and 44% in Germany.

Despite the significant reduction, the UK remains the leader in Europe with H1 investment volumes of $7.4 billion, compared to $4.6 billion in France and $4.5 billion in Germany.

Worth noting: some countries, including France, The Netherlands, Switzerland and Denmark are actually tracking better numbers in the first half of this year than in H2 2022, which could be a sign of prudent recovery.

5) Talkin' 'bout my valuation

According to cap table management software firm Carta, 20% of venture rounds raised in Q1 23 globally were effectively down-rounds, compared to barely 5% a year ago, representing a 3.6x increase.

As you can tell from the slide below, the current market is also still resulting in massive headcount reductions. According to Layoffs.fyi, more than 185,000 people have been laid off from tech companies in the first quarter of 2023 alone.

6) Yes, AI is hot, but so is climate/purpose tech

According to Atomico, generative AI companies received 35% of all AI funding in Europe so far in 2023. This compares to 5% in 2022, but it doesn't tell us how large the percentage is compared to all funding in Europe.

Climate and Purpose (put together) are currently the third largest theme to attract investment in European tech, after Fintech and Software, capturing 18% of all funding (up from 15% in H1 2022).

A few more findings from the report:

  • Atomico pegs the total value of the European technology ecosystem at around $2.97 trillion, close to the record level of $3 trillion in 2021
  • $8.2 billion has been raised by early-stage startups (via $15 million-or-less financing rounds) in H1 2023, compared to $10.3 billion in H1 ‘22
  • 2022 saw a 20% reduction in new founders when compared with 2021
  • The seed funding gap (rounds of sub $5 million) between Europe and the US has almost halved in less than five years (from a global cut of 25% in Europe and 38% in the US in 2018, to 29% vs. 36% in H1 2023.
  • More than 1,400 companies have now been started by alumni of European unicorns started during the 2010s
  • The only two new unicorns of 2023, DeepL and Quantexa, are both in the field of AI

For the full report, head on over here.

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