The European tech industry has lost more than $400 billion in value this year, according to data from venture capital fund Atomico. The total value of all public and private European tech companies has fallen to $2.7 trillion from a peak of $3.1 trillion at the end of 2021, Atomico reported in its annual report ‘The State of European Technology’ on Wednesday.
Once highly valued tech giants have survived massive declines in their stock values under pressure from global factors, including the Russian invasion of Ukraine and tighter monetary policy.
The Federal Reserve, along with other central banks, is raising rates and unwinding pandemic-era stimulus to prevent inflation. This has prompted investors to reassess their views on loss-making tech companies, whose valuations typically rest on expectations of future cash flows, CNBC reported.
A Tough Year
– It has been a tough year… The war in Ukraine, inflation, interest rate hikes, geopolitical tensions across the continent – said Tom Wehmeier, a partner at Atomico, to CNBC.
– This is the most challenging macroeconomic environment since the global financial crisis – he added.
Some European companies have experienced sharp declines in market value. Klarna, the Swedish ‘buy now, pay later’ group, reduced its valuation by 85% from $45.6 billion to $6.7 billion in what is termed a ‘down round’. Meanwhile, Spotify’s shares fell over 60% last year.
Total funding for European startups through venture capital is expected to drop to $85 billion this year, according to Atomico’s report based on quantitative data and surveys in 41 countries. This is an 18% decrease from over $100 billion raised by European startups in 2021.
However, this is still the second-largest amount ever invested in the European tech ecosystem to date, the fund stated. European tech investments set records last year as participation from American investors surged.
This year has seen a reversal of that trend, with foreign investors largely pulling back. The number of active American investors in so-called ‘mega rounds’ of $100 million or more fell by 22% compared to last year.
– The funding environment is now less liquid. We have transitioned from a period in 2021 when capital was abundant and cheap to a period where it is harder to raise capital and where the cost of capital has increased – Wehmeier said.
A Slowdown Began in the Second Half of 2022
In the first half of 2022, the European tech sector was at its peak, with investment levels still four percent higher than at the same point in 2021, Atomico stated. However, investments began to slow down from July and further decelerated during August and September. Since then, monthly investment levels have averaged around $3 to $5 billion, in line with levels from 2018.
The rate of unicorn creation has also slowed, with the number of new unicorns valued at over $1 billion created in 2022 falling to 31 from 105 last year.
Meanwhile, public listings in the market have nearly disappeared. Only three tech IPOs with a market capitalization of $1 billion or more occurred globally in 2022, with two happening in Europe, Atomico said. For reference, there were 86 such IPOs in 2021.
Europe has not been immune to the wave of tech layoffs. Companies based in Europe have laid off more than 14,000 employees this year, accounting for seven percent of total layoffs globally, the report noted.
At industry fairs such as Web Summit and Slush, founders of ‘well-funded’ unicorns urged their fellow entrepreneurs to keep costs under control and ensure they have enough resources to survive the crisis.
‘There Are Reasons for Optimism’
However, for some investors, not all is lost. Per Roman, a partner at GP Bullhound, told CNBC that he is optimistic about certain technologies, including artificial intelligence, cybersecurity, and green technology.
– There are many positives. Throughout the year and the beginning of last year, we saw a revaluation of the software and internet market, I think that is quite positive and healthy. At the same time, these software layers are managing the world we live in today, whether it’s a hospital, school, or construction site. So, the fundamentals will remain strong over the next decade – Roman said.
There are reasons for optimism, believes Sarah Guemouri, director at Atomico. One reason is the growth of the tech industry in Ukraine. Despite the brutal Russian assault, business activity has returned to pre-war levels for 85% of Ukrainian IT companies, according to figures from the Lviv IT cluster. Since the start of the war, 77% of ICT companies in Ukraine have attracted new customers.
Although the market picture this year has been bleak, investments are still eight times higher than in 2015.
