Notes:Data is as of 30 September 2023. Excludes the following: biotech, secondary transactions, debt, lending capital, and grants.
Over the course of 2023, we've seen investment levels stabilise, including at the Growth level, where there has already been much commentary, continued robustness at the Seed stage, and the emergence of green shoots amidst a tough macro environment. Click here to see the charts that interested us the most.
The decrease in investment since 2021 is mainly due to a slowdown at the growth stages. However, after a sharp drop right after the peak, there has been a stable total investment volume for the past five quarters.
There are two important things to note. First, early stage investment has stayed stable despite the turbulence in investment volume since 2021, reflecting the vibrancy of Europe's early stage startup scene. Second, if we exclude the overheated 18-month period from Q1 2021 to Q2 2022, we get a clearer view of the trajectory of consistent, long-term growth in investment in the European tech ecosystem.
Of course, the market reset isn't solely a European concern: it's a worldwide phenomenon with Europe facing the same downward trend in investment as every other region globally. There has been a notably consistent reduction in global private tech investment not only in Europe, but also in the US, China, and beyond.
However, zooming out a few years, Europe has continued on an upward trajectory and is on track to raise 18% more compared to 2020. We are the only region globally where long term growth has not flattened out. Meanwhile the US, China and Rest of World are on track to land on or below 2020 figures.
Not surprisingly, the highly visible impact of the market reset is mirrored in the short-term performance of venture capital. One-year VC returns are now well into negative territory in both Europe and the US, as a consequence of increased down rounds, write-offs, and markdowns reflecting in the data.
This undoubtedly makes for painful, if not unexpected reading for investors. In VC, however, what matters is the long-term perspective, given that returns take 10 years or more to be realised. In this regard, European VCs have consistently outperformed over two decades, at least matching or, in most cases, beating benchmarks from US VCs, European buyout, and public equities.
It’s one thing to have great talent, but are they working on the hardest problems?
Here, we look at the flow of talent into and within the tech industry, broken down by theme. This helps us to quantify talent flows and identify the sectors drawing in top talent, whether they are completely new to the tech industry or moving jobs within it.
Sustainability and health take the #1 and #2 spots, clearly reflecting the powerful magnetic effect of purpose-led companies in attracting talent.
An analysis of the flow of earliest-stage investment by sector provides a useful forward-looking indicator of the sectors most likely to dominate future later-stage investment.
Looking at the distribution of sub-$5M rounds - which provide a general proxy for Pre-Seed and Seed investment trends - Software, Carbon & Energy, and Health are the top three most important sectors for early stage investment in 2023, followed by Enabling Technologies and Digital Infrastructure.
This chart also highlights the outsized share of investment into the Carbon & Energy sector in later rounds, which captured 28% of all capital invested in rounds of $5M or more.
The fact that AI is flourishing under the radar in Europe should not be a surprise. Europe has a strong technical talent pool, owing its strength to world-class scientific and technical institutions and the depth of its engineering talent.
This strength extends into the field of AI. Over the past decade, Europe has not only witnessed a greater than 10x increase in the number of people working in AI roles, but also claims a larger resident population of highly-skilled AI professionals compared to the US.
Of course, many of these AI professionals are working in roles at US-headquartered technology companies that have built a large AI research presence in Europe, such as Alphabet or Meta. But as Mistral AI - a company founded by European former leading AI researchers at Meta and DeepMind - demonstrates, these European-based pools of AI talent have become an incredibly rich breeding ground for the founders and talent behind the next generation of European AI companies.
The story of Skype is far from unique in Europe today. In fact, the European tech ecosystem has witnessed an industry-wide surge in the number of new companies launched by individuals that have spun out of Europe's billion-dollar companies. In doing so, they benefit significantly from the established knowledge and networks they take with them.
Remarkably, nearly 9,000 companies have been initiated by alumni of European exited unicorns that were founded during the 2000s. To put this into perspective, it is nearly a staggering 50% increase compared to the unicorns founded in the 1990s.
It is not difficult to imagine how this network effect will significantly influence Europe's path in the next ten years.
One of the 'north star' metrics for the European tech ecosystem is its total value, as measured by the combined equity value of all tech companies headquartered in the region, across both public and private markets.
For context, after a peak of $3T in 2021, 2022 saw a reduction of total ecosystem value equivalent to around $400B. The rallying of the public markets this year, however, has helped this number bounce back to the $3T mark.
This rebound in ecosystem value has also been supported by the continual influx of new companies starting and raising private capital for the first time, as well as the fact that, despite a large increase in the number of down rounds, the overwhelming majority of follow-on capital deployed into the ecosystem has been through flat rounds or up rounds.
There is a distance to travel, but the steps being taken to encourage the flow of institutional capital from European pensions funds and other asset managers will increase the depth of capital for entrepreneurs, add to the resilience of the funding markets and enable more value to be retained in Europe from our significant talent, creative, and science base.