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The name “The State of European Tech” is deliberate. Each year we set out a macro snapshot of our ecosystem. We are not seeking to answer every question, but to chart progress and prompt further interrogation of how we can realise European tech’s potential.
The report writing process, involving rigorous data analysis, is condensed into an intense four week sprint late in the year. It’s an incredible team effort and the generosity of those who give their time is always a highlight of the project. Of course, one big question dominated our thoughts this year: how would Covid-19 and its consequences affect European tech? 2019 ended on a high, with a record $38.6B of capital invested, close to 180 $1B+ companies and $16B closed by European venture capital funds. Five years of continuous success had created a solid foundation of belief in European tech, both within our ecosystem and globally. Then the Covid-19 storm hit, trailing in its wake fears of deep economic recession and retrenchment by founders and investors.
The data shows that our ecosystem has more than survived, although not without cost.
European tech has undeniably been a net beneficiary of the shift to digital.
Total investment is projected to exceed a record $41B in 2020, driven by an increase in $100-250M “megarounds”. We should not forget how far we’ve come in just five years. In 2016, a panel at Slush - the conference run by our partner on this report - discussed “How To Raise Above $10M in Europe”. In 2020, no one blinks at a $10M seed round.
Behind this headline progress sit thousands of individual stories of adversity and resilience.
Many founders had a tough ride this year; nearly half of those who responded to our survey said they found it harder to get funding, alongside the challenges of pivoting their products and declining sales. Wellbeing ranked amongst our founders’ greatest challenges of the year.
Yet many European companies have continued to rapidly scale.
In November, Hopin set the record for Europe’s fastest ever company to hit a billion-dollar valuation: 17 months from founding. We now have 115 VC-backed companies valued at over $1B. Spotify and Adyen hit $50B. $100B valuations are starting to feel inevitable, not aspirational. We no longer need to sell the European tech story to LPs. Institutional investors from Europe and around the world poured three times more money into Europe’s tech industry than five years ago. As our ecosystem matures, the share of venture capital funding from government agencies is declining and now accounts for less than 10% of VC funds raised in Europe's most mature markets.
International investment has not dried up as some feared it might this year.
In fact US investors participated in a record number of rounds. It turns out that when everyone is working remotely, Europe feels even less remote. More people are waking up to the fact that great companies can come from anywhere; great talent can work anywhere; and great investors can invest from anywhere.
I’m sometimes asked for the bear case for European tech. My answer is that we will fail to realise our potential if we do not systematically recycle capital and talent at scale. There is already evidence of this flywheel working.
Alumni of Zalando, Spotify, Klarna, Skype, Just Eat and others are now building a new generation of companies. Nearly 80% of angels who responded to our survey have worked at a tech start-up and or founded their own business.
First, we need to see more of our leading tech companies find paths to liquidity that benefit European builders and investors while retaining our world-class talent. This means more companies listing on Europe’s public markets. There has been significant ‘value leakage’ in past exits of $1B+ VC-backed European companies, with US listings and M&A buyers accounting for 52% of total exit value. We have a pipeline of IPO candidates valued at over $150B but despite some major successes such as The Hut Group and Allegro, this year Europe has seen far fewer IPOs than the US, and only three at $1B+. This also means enabling companies that aren’t going to be global category leaders to exit early and recycle talent and capital, by creating liquidity at all stages. US companies ‘fail faster’; they are 50% more likely to exit after a first round of funding than European companies.
On this front, there are signs of change. Europe’s venture capital, private equity and public markets are drawing together in ever closer union, creating more exit options, a strong pipeline of IPO candidates and deeper pools of experienced talent. Over the past couple of years, private equity-led buyouts have emerged as a viable path for VC-backed companies such as Pipedrive and Idealista. As publicly listed VC-backed companies like Adyen, Spotify and Zalando scale further they will continue to acquire other tech companies. There are signs that traditional companies are becoming active tech buyers: two of Europe’s largest VC-backed exits of 2020 were the billion-dollar acquisitions of Flaschenpost by German multinational The Oetker Group and Charlotte Tilbury by Spanish multinational Puig.
Second, we need to see a step change on diversity and inclusion in European tech. Underrepresented founders have found it even harder to raise capital than their peers this year, grim data is emerging on the amount of capital going to black founders and progress on funding to female founders has stalled since 2018. This inequity is excluding talent and ideas. Only by fixing it will we fuel our flywheel and generate even greater outcomes.
Another huge opportunity lies ahead if Europe’s startups can be front and centre of the fight against one of the world’s biggest problems: climate change. Investment into Europe’s climate-focused start-ups has soared to over $11B cumulatively in the last five years. The European Commission’s expansive Green Deal has been a key policymaker focus in 2020 and has the potential to be an important catalyst for continued investment in this area.
To realise its potential as an engine of economic growth, European tech needs supportive regulation and government action. Governments responded rapidly to support startups in the wake of COVID-19, injecting $11B in relief funds across Europe, though the impact of this investment is not yet clear. Positive policy initiatives are emerging, including on visas and employee stock options, as the EU's Startup Nation Standard builds upon national commitments. Yet more education and awareness raising is needed; only 20% of founders and investors believe the concerns of start-ups and scale-ups are being heard by European policymakers.
For a vision of European tech’s future, we need look no further than Klarna and UiPath, our first VC-backed tech companies to reach valuations of $10B while still private. Their scaling journey has taken time: both were founded in 2005. But let’s imagine two things. First, how much greater the challenges of founding a company in Sweden or Romania in 2005. Second, how many more $10B+ companies - and $100B+ companies! - Europe will build as it’s flywheel spins faster and faster.
We hope that this report continues to provide a helpful, data driven look at Europe’s tech ecosystem in a year of unforeseen volatility and uncertainty, and validates our optimism about where we can go from here.
Partner at Atomico and co-author of the report