Despite the scenario linked to global macroeconomic difficulties, the European tech ecosystem is holding up. Investments in the European technology sector have almost halved, going from 82 billion dollars in 2022 to 45 billion in 2023, with a 45% drop in total capital invested in Europe, in line with the world average which fell by 39%. . This has naturally resulted in a decrease in international investment in the European technology sector, with a notable decline in US investor participation in both the early and late stages. But the sector holds up and Europe surpasses the USA in the creation of startups. A resilient sector that employs over 2 million people, and which for 2023 recorded the historic fundraising record by Venture Capital, with 108 billion dollars. This is the photograph taken from the annual report of the Atomico investment fund, State of European Tech 2023.
As regards Italy, with 0.93 billion dollars in investments, over 78 thousand people employed and more than 40 thousand companies belonging to the sector, the technological sector of our country confirms itself as lively, winning 5th place in the EU for the creation of startups and 7th place for funded technology companies.
Not only that, among the 36 European megarounds (of 100 million dollars) in 2023, the one announced at the beginning of November by the Italian spacetech scaleup D-Orbitand led by Japanese industrial giant Marubeni Corporation.
“The snapshot of the 2023 report shows that founders and young talents in Europe are taking risks and tackling more complex problems, ranging from climate change to the explosion of artificial intelligence,” – he tells us Tom Wehmeier, Partner, Head of Intelligence at Atomico and co-author of the report – . “Now we need to build an investor landscape that truly matches the ambitions of our founders. As of today, startups are still 40% more likely to be funded in the US than in Europe, and our public markets continue to hold back on the tech sector. In my opinion, we will be able to fully grasp the value of our technological opportunities only if all the players in the ecosystem are ready to do their part. Which also means getting involved and taking risks.”
The European and Italian scenario, increasingly selective investors
Europe almost halves investments compared to 2022, raising 45 billion dollars in 2023 but the ecosystem remains resilient. This is a sharp decline from the 2022 total of $82 billion, but not surprising considering that the July and August were rather flat and that many companies in an advanced stage of development are delaying fundraising, because investors are taking increasingly longer to inject liquidity.
In Italy $0.93 billion was invested, down from $2.4 billion in 2022 (-61%) but up 26% compared to 2020 ($0.74 billion); Spain recorded investment levels of $1.6 billion, down 42% from last year ($2.7 billion) but up 21% from 2020 levels ($1.32 billion dollars); while Portuguese companies raised $0.152 billion this year, down from $0.51 billion the previous year (-70%) and roughly in line with 2020 levels. In any case, this is still the third biggest year for the European tech sector since records began, indicating that the ecosystem remains resilient and is correcting itself after the peaks of 2021 and early 2022.
In the first half of the year, there was a significant year-over-year decline in total funds raised, at just $7.4 billion, compared to $24 billion in fiscal 2022. The difficult fundraising context means that investors are increasingly selective and that checks have become, on average, smaller and smaller in value. This comes after the largest fundraising period ever recorded within the ecosystem, which means that the total value of dry powder, the funds raised by VCs from their investors but not yet invested, of the European technology ecosystem has reached historical high of 108 billion dollars. However, as the fundraising environment becomes increasingly complex for VCs, investment cycles are starting to decompress.
The rounds slow down
2023 saw a slowdown in rounds of $100 million and above, with only 36 of the so-called “megarounds” in Europe, compared to 163 in 2022 and almost 200 in 2021. One of these megarounds was created in Italy by D-Orbit (the startup based in Fino Mornasco, leader in the space logistics services sector and led by Luca Rossettini). Solo 7 new companies have achieved unicorn status with a valuation of $1 billion, including DeepL, Helsing.ai, Synthesia and Quantexa, all AI-focused companies.
In the State of European Tech survey, 80% of founders said they were finding it more difficult to raise capital and had had to significantly lower their expectations for funding rounds. In terms of the number of companies receiving funding, Italy ranks in the top 10, in seventh place. Southern Europe’s position is even stronger if unfunded companies are included. From the point of view of the number of funded and unfunded tech companies in Europe, Italy is in fourth place (40,773) and Spain in fifth (32,468). Demonstrating how much Southern Europe could improve in the sector with greater access to funds.
Access to capital is increasingly difficult
This year, Europe overtook the United States in terms of the formation of new tech startups, with an estimate of 14 thousand and 13 thousand new founders respectively. Italy ranks 5th followed by Spain in startup formation, with 5% and 4% of new startups respectively. While the creation of startups has slowed globally and in Europe, due to a decline in the number of first-time founders, experienced founders continue to innovate at a rapid pace. However, thanks to greater access to capital in the US ecosystem, American tech startups are 40% more likely to secure venture capital funding within five years of founding. This is despite the fact that, once companies secure a first round of Seed investment, the likelihood of reaching a billion-dollar valuation is the same in Europe as in the United States. The need to guarantee European startups the same access to capital, and therefore to opportunities, as their US counterparts is therefore evident. This problem is particularly acute in Southern Europe which, despite representing 4% of global GDP, receives only 1% of global private technology investments.
Technology IPOs in (slight) recovery
After six consecutive difficult quarters, in September this year the listing of ARM, a British chip manufacturing company, finally opened the IPO window for the European tech sector, accompanied by listings such as that of the German cloud infrastructure provider IONOS.
Mergers and acquisitions worth $36 billion were also carried out. Most of these are small, with a value of less than $100 million, demonstrating the importance of small mergers and acquisitions in providing liquidity to investors and founders in redeploying talent. Therefore technological IPOs are starting to show the first signs of recovery, with a ratio between the value of the company (listed on the stock exchange) and its turnover returning above the long-term average, over the ten years.
Young talents are (still) attracted to the tech sector
Despite layoffs at the start of the year, there has been net growth in the number of people working in Europe’s tech sector, meaning the rate of new job creation is more than offsetting the layoffs. Over the past five years, the European technology industry has grown its workforce from 750,000 employees to over 2.3 million. In Italy the number of workers in the sector is more than 78 thousand units, in Spain at 126 thousand, in Portugal it is equal to 31 thousand. Talent from all over the world is crossing borders to join the European tech scene. This year’s data shows that Europe is a net beneficiary of industry talent from the United States. Italy gained 20 thousand net employees, while Spain gained 25 thousand. Early-stage startups account for nearly double the new entrants into the tech sector in each quarter this year compared to growth-stage companies, indicating how critical the early-stage ecosystem has become for job growth. In Europe, the peak of layoffs was reached in May 2023.
Europe leads on investments in AI
AI is the largest funding theme at the Seed level, with 11% of rounds under $5 million, as more and more companies are taking advantage of this year’s innovations in sophisticated language models. But this isn’t just a trend: AI has maintained a steady share of total funding over the past five years. 11 AI companies raised megarounds of $100 million or more this year, despite the general decline in funding. This indicates that investor appetite for financing the sector remains strong, despite a turbulent macro environment. Europe leads the world in AI talent. Over the last decade, the Old Continent has seen a more than 10-fold increase in the number of people working in AI-related positions and also boasts a larger resident population of highly skilled AI professionals than the United States. Spain has more than 9 thousand people working in AI, Italy 6,300, Portugal 2 thousand.
Europe faces humanity’s challenges starting from climate change
The Carbon & Energy sector, which includes “climate technologies”, represents 27% of all capital invested in the European technology industry in 2023, tripling its share of total investments from 2021. The Climate tech it is the sector that has raised the most capital, surpassing both fintech and software.
“Sustainability and climate” was the second most common theme even for rounds under $5 million. These data demonstrate that the theme of sustainability continues to attract founders and continues to see early-stage entrepreneurial and startup activity flourish.
These are the parts not to be missed from the photograph taken by State of European Tech 2023.