European tech funding has undergone a significant downturn, dropping to $45 billion in 2023, according to Atomico’s “State of European Tech” report. This decline marks a 45% decrease from the previous year and is a return to pre-pandemic funding levels. However, artificial intelligence (AI) emerges as a bright spot amidst this correction, with several AI companies securing mega funding rounds of $100 million or more.
European tech funding landscape
Total venture funding for European tech companies is projected to reach $45 billion in 2023, down from $82 billion in 2022 and $100 billion in the previous year. The report attributes this decline to a market correction following a period of overheated growth in 2021 and early 2022, where tech valuations and funding levels soared to record highs.
Tom Wehmeier, head of data insights at Atomico, noted that Europe’s tech ecosystem remains resilient compared to its U.S., Chinese, and international counterparts, showing a 19% growth in investment levels since 2020.
AI: The standout category
Amidst the funding slump, artificial intelligence emerged as a standout category. Companies like Aleph Alpha, Mistral, and DeepL secured significant capital from investors, capitalizing on the enthusiasm surrounding OpenAI, the creator of the popular ChatGPT chatbot.
AI companies raised substantial “megarounds,” with 11 AI firms securing funding rounds of $100 million or more. Additionally, at the seed stage, AI attracted 11% of all funding rounds worth $5 million or less, highlighting its attractiveness to investors.
Europe’s AI talent pool also stood out, with the region becoming the top hub for global AI talent. The number of highly-skilled AI roles in Europe has grown tenfold over the past decade, surpassing the U.S. in this regard.
Climate tech gains traction
Climate tech also made significant strides, with funding into carbon and energy-focused companies accounting for 27% of all capital invested in European tech in 2023, tripling the amount seen in 2021. This underscores the growing emphasis on climate solutions and sustainable technologies within the tech industry.
Despite the funding challenges, the combined value of all private and publicly listed tech companies in Europe exceeded $3 trillion in 2023, reclaiming levels seen before the market turmoil of 2022. Last year, the European tech sector experienced a $400 billion reduction in overall market capitalization.
IPOs and M&A activity
The report highlighted the limited IPO activity in Europe in 2023, with very few significant listings. Companies like Arm, the British chip designer, chose to go public in the U.S., with mixed results. While some newly listed firms, including Instacart and Klaviyo, have faced challenges, a healthy pipeline of late-stage companies like Klarna, Revolut, and Monzo are considering IPOs.
Mergers and acquisitions (M&A) activity remained subdued compared to previous years. In 2023, deal transaction value reached $36 billion, with the majority of exits involving smaller deals valued at less than $100 million.
The European tech funding landscape experienced a significant downturn in 2023, but it is not without its bright spots. Artificial intelligence, with its mega funding rounds and growing talent pool, stands out as a promising area of investment. Additionally, the surge in climate tech funding underscores the tech industry’s commitment to sustainability.
As Europe’s tech sector navigates the challenges of market corrections, limited IPOs, and subdued M&A activity, it remains resilient and poised for growth in the areas of AI and climate tech, contributing to a more sustainable and innovative future.
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