State of German Tech

Germany has been experiencing a similar slowdown in investment levels to the rest of Europe this year. Based on investment data up to the end of September, this year’s total funding for Germany was expected to be approximately $8B, 57% lower than 2021 and 27% lower than the 2022 figures. However, latest data shows investment levels are lower than initially projected. The end of year funding for Germany was $6B, 42% lower than 2022.

The decline is not surprising given the dual effect of many later-stage companies delaying fundraising, as well as materially slower deployment pacing by investors, which have both served to drive the large decline in the prevalence of outsized, growth stage investment rounds - the biggest factor in the lower amounts of capital invested.

While the decline from the peak in 2021 is large, it's worth highlighting that 2023 was the third-largest year on record for Germany by total capital invested, and twice the volume seen 10 years ago in 2014. In fact, the resetting of investment levels appears to reflect a correction to the long-term upwards trajectory, following two outlier years of overheated activity.

The combination of the withdrawal of crossover investors and the general slowdown in late-stage investment activity is unsurprisingly reflected in a huge decline in the number of so-called mega-rounds, meaning round sizes of $100M or more. In the peak of 2021, there were almost 200 rounds of this magnitude, including more than 50 rounds greater than $250M.

While this number declined slightly in 2022 to 163 rounds of $100M or more (of which 38 were greater than $250M), the first nine months of 2023 saw a far more significant decrease. In the first nine months of 2023, there have been 36 rounds of $100M or more, of which only seven have been sized in excess of $250M.

That same trend was witnessed in Germany, where mega-rounds dropped from 21 in 2022 and 43 in 2021, to 10 in 2023.

Predictably, a reduction in late-stage funding round volume and a major reset in the valuation environment has led to a huge drop in the number of companies surpassing the billion-dollar valuation milestone for the first time in 2023.

2023 is on track to see the lowest number of new $B+ companies emerge from Europe in the last decade, with just seven as of the publication deadline at the end of October 2023. Of these seven, the most, a total of four, came from Germany.

In last year's report we first introduced the concept of de-horned unicorns, $B+ companies whose valuation has dropped below this milestone since first hitting it. In 2022, we mapped 58 dehorned unicorns. This year, that number has reduced slightly, with 50, meaning some companies have seen their valuation lifted back up above the billion-dollar level in 2023. For clarity, when referring to $B+ companies, we have in mind tech companies that command that valuation today.

Not surprisingly, given the relative maturity of their tech ecosystems and deeper pools of local talent, capital, and more established public markets, countries like the UK, Germany, the Netherlands, and Sweden have secured the highest count of $B+ exits to date. These exits, of course, are critical for the continued growth and development of local ecosystems due to the flywheel effect that is unleashed through the subsequent recycling of capital and talent.

Critically, given the importance of companies successfully going through the full lifecycle from inception to a billion-dollar liquidity event, it's of note that billion-dollar exits have now been realised in 22 different countries across the region, including 18 countries that have seen this milestone surpassed on more than one occasion. Great companies truly come from anywhere in Europe.

On a GDP-adjusted basis, Europe continues to lag behind in terms of its share of total capital invested globally in technology. Europe, as defined by the 50 countries included in the State of European Tech report, accounts for 21% of global GDP. By comparison, the projected total of $45B of capital invested in the region will equate to around 18% of global investment volumes. By comparison, the US accounts for 25% of global GDP, but a massive 46% share of total capital invested.

Looking at a sub-regional level, the UK & Ireland's share of GDP and total global investment volumes are broadly aligned at around 4% each. Every other sub-region, however, records underperformance in terms of investment volumes if adjusted to their relative share of global GDP. The gap is particularly pronounced for Southern Europe and Central and Eastern Europe.

Slicing the data on a per-country basis helps to identify the biggest opportunities to close the gap. In both Germany and Italy, for example, there is still a gap of more than two percentage points to catch up between their respective shares of global GDP and global private tech investment.

Inevitably, any measure of startup activity in absolute terms will be dominated by the largest countries by population and GDP. We therefore adjust for the size of the country to draw comparisons that benchmark the relative level of startup activity. Here, the density of funded startups is adjusted for population to identify countries with the highest density of funded startups per capita.

On this basis, smaller countries with active startup ecosystems rise to the top. Estonia, as in prior years of producing this analysis, takes the top spot. This also serves to highlight the fact that many large countries, such as Germany, Italy, and Spain, have significant room for growth if they want to compare more favourably with countries that have succeeded in creating a greater relative density of funded startups, on a population-adjusted basis.

One proxy for the relative scale of startup ecosystems across Europe is the absolute count of startups and scaleups that have received different levels of external capital investment. This does not, of course, tell the full story, as there are many exceptional startups that choose never to raise any external funding, but it is still a useful measure of the relative depth and maturity of tech ecosystems across the region.

Unsurprisingly, the countries that have the largest absolute investment volumes also have the highest number of funded companies. The UK leads with almost 13,000 funded tech companies in total, and has the largest count of companies across all buckets of total capital raised.

The number of funded startups in the UK, France, and Germany (around 23,000) is greater than the total for the rest of Europe combined (around 21,600).

The data is also helpful to better understand the relative distribution of funded companies, according to how much capital they have raised. The vast majority of funded companies (76%) have raised less than $5M in total. This also reveals interesting comparisons between countries in terms of the relative number of companies across the different levels of funding raised. Italy, for example, has a similar number of early stage startups that have raised less then $5M in funding compared to the Netherlands, but far fewer larger-scale companies that have raised $50M or more.

Even in the face of challenges in the capital markets and concerning indicators, like layoffs, that have the potential to impact the attractiveness of joining the industry, European tech is not losing its strong appeal for talent and has not seen an exodus of talent out of the industry. In fact, new positions are constantly being created, and talent from outside of tech continues to look past any perceived risk to place significant bets on the European tech sector.

Although there has been a slowdown in the number of net new joiners into the tech industry over the past six quarters across Europe, it's remarkable that in just five short years, Germany’s tech workforce is 2.6 times greater now than it was in 2018, at over 200,000 people.

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. With the second largest number of AI roles in Europe, and with companies such as Aleph Alpha paving the way for German talent.