European startup funding to fall by 38% in 2023, but there’s reason for hope

European tech startups will see a 38% drop in investment in 2023 compared to 2022, according to a recent report from Atomico. Specifically, startups are expected to raise $51 billion in funding, up from $83 billion in 2022 and $106 billion in 2021.

But Europe is not alone in having a tough year for technology. The US and China are also looking at a 49% drop in investment in 2023 compared to 2021. According to the report, this global delay in funding is having a domino effect on the flow of capital between regions. For Europe, this translates into a significant reduction in capital from US investors, which will largely affect companies that raise larger rounds at later stages.

While funding slowdowns are visible in all European countries, the biggest drop between 2’22 and 1’23 is expected in the UK, with a 57% drop in investment. It is followed by France with 55% and Germany with 44%.

As a result, founders are adjusting to the new reality, which according to Atomico means layoffs have accelerated in Q1 2023, while valuations are declining and drawdown phases are increasing.

Don’t worry, it’s not all doom and gloom

Despite the rough funding landscape, the total value of the European tech ecosystem is forecast to reach $1 trillion this year, returning to the (highest ever) level in 2021.

The ecosystem also accounts for 29% of global funding going to early-stage companies, almost identical to the US (36%), after nearly halving the gap over the past five years. At the same time, Europe is catching up with the US in terms of startup creation, although the pace has slowed somewhat.

In addition, the continent’s startups continue to lead the way in “purposeful technologies” that align with the UN’s sustainability goals. In particular, investments in climate and purpose have so far reached an all-time high, accounting for 18% of total funding.

Notably, the flow of capital into generative AI is also on the rise. This year to date, tech companies have secured 35% of all AI/ML funding, the highest share ever, jumping from 5% in 2022.

“We should think of this period as a return to first principles,” said Atomico Partner and Head of Insights Tom Wehmeier. “From this cycle, we have an opportunity to build a healthier ecosystem with a clearer focus on quality. In the short term, there will be fewer companies taking off, but those that do break through are more likely to be winners, with a strong base of senior talent and a greater share of the region’s resources.”

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