Never has a crisis been so exciting. Startup valuations are plunging, tech layoffs abound and fresh venture capital (VC) is hard to come by. But at Slush, a big annual tech shindig which wrapped up in Helsinki on December 1st, founders and their financiers were partying almost like it was 1999, the height of the dotcom bubble. More than 30,000 people, a record number that included 5,000 entrepreneurs and 3,000 investors, spent two days in a cavernous trade-show, witnessing presentations, panels and lots of laser beams.
Like startups everywhere, those in Europe have been hit by rising interest rates, which make their promise of rich future profits looks less alluring today. This year they are forecast to attract just $45bn in investments, according to “State of European Tech”, an annual report released at Slush by Atomico, a VC firm based in London. That is down by 38% compared with last year and by 55% from a scorching 2021. The median valuation of more mature “growth stage” startups now hovers below the five-year average. Whereas in 2021 Europe created 107 “unicorns” (unlisted firms worth $1bn or more) and last year it produced another 48, so far in 2023 it has added just seven. Many more have been “dehorned”, according to Atomico: 50 this year, on top of 58 in 2022.
Take a longer-term view, though, and Europe’s startup scene as a whole is holding up surprisingly well. In some ways, it is dealing with the crisis better than America’s more established one. Investments in European startups may be down over the past two years, but they are still up by 18% compared with 2020 (see chart 1), except for Britain where they dropped by more than 2%. In America they declined by 1% over that period. And whereas valuations are shrinking overall, “down rounds”, where startups accept a lower valuation when raising fresh capital, are less widespread than one might expect. They comprised only 21% of all rounds this year.
On other measures, too, European tech continues to thrive. Europe now creates more startups than America: around 14,000 between January and September, compared with 13,000 across the Atlantic. The old continent, including Britain, has more than 41,000 young tech firms and about 3,900 more mature ones. Together they employ 2.3m or so people, about twice as many as in early 2019 and more than in Europe’s property sector (excluding construction). The total value of Europe’s private and publicly listed tech companies is again nearing the peak of $3trn reached in 2021. Last year it was $2.8trn.
European tech’s relative resilience can be explained by its increasing maturity. Take the number of companies founded by ex-employees of successful startups. More than 9,000 people who worked for those of today’s unicorns which were created in the 2000s have gone on to found their own businesses. That is about 50% more than the number of people who left unicorns which date back to the 1990s in order to strike out on their own (see chart 2).
Europe also now hosts tech “mafias”, as groups of entrepreneurs that once worked for the same firm are known. The biggest has formed around Skype, which pioneered phone calls over the internet. Skype gave rise to more than 900 startups, which today together employ over 65,000 people. Equally important, successful founders now regularly invest their wealth in new businesses and even form their own VC firms. One of the most notable such VC outfits is Plural Platform, the partners of which include founders of Skype, Wise, an online payment service, and Songkick, a service to discover concerts.
As it continues to mature, Europe’s tech industry is also developing its own characteristics. European founders are less cock-a-hoop than their American counterparts at all things ChatGPT-like: from January to September Europe saw 35 financing rounds backing developers of generative artificial intelligence, compared with 106 across the pond. By contrast, climate-related startups accounted for 27% of all capital invested in European tech in 2023, a much bigger share than in America. Climate-tech firms have now overtaken fintech, until recently Europe’s most represented technology niche.
European tech is unlikely to become as big as America’s just yet. Silicon Valley and its satellites in Austin, New York and elsewhere are still way ahead. America’s herd of unicorns (about 700 on last count) is twice the size of Europe’s (356). Capital is still much easier to come by in America, points out Tom Wehmeier of Atomico, one of the authors of the report. New firms in America are 40% more likely than those in Europe to have secured an injection of VC within five years of founding. And when it is time to go public, European startups still feel the pull of New York, where a listing is likely to raise far more money.
The biggest obstacle to European startups’ ambitions is home-grown, however. The EU has repeatedly tried to create a single digital market as frictionless as the American one, but differences in taxes and regulations still abound. Europe has shown what is possible, says Zeynep Yavuz, who invests on the continent for General Catalyst, an American VC firm. The explosion of enterprise in fintech in recent years was a direct result of bloc-wide regulations drafted in Brussels. If EU leaders really want to strengthen European tech, which they all profess to do, they should spend less time trying to regulate various digital markets and instead create a single truly European one. ■
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