Funding for European technology companies plunges by nearly half

Funding for European technology companies will plunge by nearly half this year, as US investors increasingly abandon the continent amid a global retreat by venture capital investors.

The amount of money raised by tech start-ups in Europe is expected to reach about $45bn over 2023, according to an annual report compiled by London-based venture capital group Atomico. That is down from $82bn last year.

Venture capital investment has fallen around the world since the pandemic, as rising interest rates hammer the valuations of public technology stocks and push investors to increasingly focus on generating profits.

Atomico partner and head of intelligence Tom Wehmeier said investment in European tech companies remained 18 per cent higher than in 2020, while other regions were lower compared with pre-pandemic levels.

“The European tech environment looks more stable now than at any point since the pandemic,” he said. “We see that bringing back certainty, a bit more predictability and helping restore confidence.”

One reason for the shortfall this year was due to reduced funding from US investors.

For deals involving relatively advanced European start-ups seeking “growth stage” funding, the share of capital from US investors has fallen from 39 per cent in 2021 to 25 per cent this year. So-called crossover investors, many of which are US funds, often participate in late-stage deals but this activity has ground to a near halt.

Venture capital investment in the US continues to dwarf spending in Europe, with nearly triple the level of tech investment this year, according to the Atomico report. China and the rest of the world will each have equivalent levels to Europe.

One bright spot has been the proliferation of massive fundraising deals for artificial intelligence companies. European start-ups such as France’s Mistral and Germany’s Aleph Alpha are raising among the largest financing rounds of the year, raising up to €400mn and $500mn respectively this year.

Of the 36 European tech deals worth more than $100mn this year, 11 of them were AI companies. The US had 37 such AI deals over the same timeframe.

“We see AI being the top theme in terms of number of investment rounds being raised at the early stages,” Wehmeier said.

Large fundraising rounds have been few and far between in Europe this year, after the likes of financial technology start-ups Revolut and Klarna raised hundreds of millions of dollars in funding rounds during the pandemic boom.

Some start-ups that have tapped investors this year needed to do so at substantially lower valuations. In September, Turkish grocery delivery start-up Getir raised $500mn at a $2.5bn valuation, a quarter of what it was worth just 18 months prior.

While larger deals have declined, “early stage” or “seed” deals have remained relatively active as investors focus on smaller bets.

Earlier-stage companies have also seen their valuations remain more resilient than more mature start-ups. While start-up valuations have settled back to long-term averages after rising during the pandemic, that correction hasn’t affected seed stage deals as deeply, according to Wehmeier.

 “The degree of competitive intensity at seed has stayed strong,” he said.