Venture capital (VC) investment across Europe’s tech industry has been on the decline for the third consecutive year, with 2024 expected to yield about $45 billion. This figure reflects the challenges faced by European startups, as highlighted by Atomico's recently published "State of European Tech" report. Although this marks a decrease from last year’s $47 billion, experts see rays of stabilization within the sector, as financial trends begin to improve and valuations climb.
According to Atomico, Europe’s startup ecosystem is showing signs of resilience. While funding levels are lower than years past, the situation has not deteriorated as significantly as it did during the previous year when investment took a steep plunge. Financial experts indicate the drop, which amounts to about $2 billion compared to last year, is noteworthy but has been anticipated.
Tom Wehmeier, the head of insights at Atomico, pointed out areas where European startups still face hurdles. He observed frustrations around regulatory frameworks, access to ample capital, and the need for businesses to scale effectively across Europe’s fragmented market. He stated, "There’s frustrations about the continued challenges faced when it come to regulation, bureaucracy, access to capital and this idea of scaling across the fragmented European marketplace.”
The report is particularly significant as it celebrates the 10th anniversary of Atomico’s annual analyses. Despite current declines, the tech ecosystem has expanded dramatically over the past decade, growing from 35,000 tech companies today to just 7,800 when the reports began. Remarkably, the number of late-stage startups has surged from 450 to 3,400, and the count of companies valued at over $1 billion has grown from 72 to 358.
Venture capitalists, meanwhile, are expressing increasing concerns over liquidity. Exit strategies, primarily mergers and acquisitions (M&A) and initial public offerings (IPOs), have seen significant reductions. To put this starkly, only $3 billion worth of IPOs and roughly $10 billion of M&A transactions were recorded at the point of the report's publication, the lowest levels seen over the last decade.
Analyzing funding avenues, the report showed debt financing has become more prominent, now representing 14% of all VC investments, which translates to about $4.7 billion. This trend indicates startups are opting to leverage debt as access to traditional equity funding becomes harder to secure. Wehmeier speculated, “The big question on debt remains as ever: will all the companies racking it up definitely make good on paying it down?”
The average funding amount for various stages of investment has also demonstrated recovery. Series A rounds have progressed to average $10.6 million—an increase from $9.3 million the previous year. Attractively, Series B rounds now stand at approximately $25.4 million compared to $21.3 million— Series C rounds have risen to around $55 million from $43 million. This upward trend is somewhat encouraging but doesn't match the averages witnessed across the U.S., where overall round sizes continue to lead the way.
The dynamics of how quickly startups can progress through funding stages have been complex as well. Atomico reported the rate at which companies are able to raise subsequent rounds within 24 months has dropped by 20%. Meanwhile, the time frame for moving from Series A to Series B rounds has extended, with only 16% managing to secure funding within 15 months.
On the bright side, after experiencing significant downturns, valuations are on the rise once more. The report indicates startup valuations have begun to improve from their lows of 2023, led by increasing activity within both public and private markets. Interestingly, Atomico noted, “Founders are more open to dilution on larger rounds,” which results in higher metrics during fundraising.
Despite the positive shifts within valuations, founders and investors continue to express lower confidence levels about the market compared to previous years. Surveys conducted by Atomico have shown record low confidence levels, with 40% of founders and 26% of investors admitting they feel less optimistic than the prior year. There’s clearly substantial uncertainty hanging over the European tech investment climate as it stands right now.
While challenges loom, there are optimistic projections for the future. Atomico predicts the European tech market might mint its first $1 trillion tech company within the decade if significant shifts are made, especially concerning capital accessibility and talent retention across the continent.
Reforms to pension schemes across various European nations are being discussed and implemented to potentially increase investments available to tech startups, creating possibilities for sharper growth moving forward. Finance Minister Rachel Reeves recently introduced plans to centralize local pension funds, aiming to open new avenues for capital, allowing tech startups the chance to flourish with local support.
Atomico underlines the significant leap made over the past decade. Investments during the 2015-2024 span surpass $426 billion, dwarfing the prior decade's figures. The anticipation of stability and growth has many hopeful for what could be achieved if Europe can effectively navigate its current challenges. Nevertheless, investors and innovators will need to remain agile and prepared for whatever shifts might arise.
With ambitions aiming toward the sky, the question remains: can Europe’s tech sector turn things around quickly enough to not only recover but propel itself forward dramatically?
