“One of my pals remained in technology,” Fred Plais, the CEO of Platform.sh, a Paris-based cloud services business, recalls vividly what occurred in Europe in 2001. His last company, an internet search engine, went bankrupt after the dot-com bubble burst, as did the majority of the other businesses he knew.
The situation was similar in 2008, due to the global financial meltdown. Once again, European technology firms lost far more than their American counterparts. On July 1, 2022, the Wall Street Journal reported that Klarna, a Swedish buy-now-pay-later darling, was attempting to raise fresh capital at less than a fifth of its peak valuation of USD 46 billion. This fuelled fears that the looming downturn and plummeting tech valuations would hit Europe harder than the United States.
Regardless of such instances, Europe’s entrepreneurs and venture capitalists appear considerably stronger than in the past, and far less reliant on foreign expertise and funding. They might even withstand the storm better than their American colleagues this time.
Examine the boom to get a sense of why. Even by frenzied global standards, 2021 was a smash in Europe. According to PitchBook, a data provider, venture capital (VC) investments on the old continent surpassed €100 billion (USD 118 billion) in a single year for the first time. Startup valuations skyrocketed, bringing the number of European “unicorns,” or private companies worth more than USD 1 billion, to around 150 today, accounting for roughly 13% of the global total. Although Europe’s digital ecosystem remains roughly one-third the scale of America’s in terms of venture capital investments, it has more than doubled in size since 2020.
Some of this expansion is a consequence of extra capital flowing into Europe, where startup valuations have trailed behind those in the United States and Asia. According to PitchBook, American VC firms would spend USD 83 billion in European acquisitions in 2021, a threefold increase over 2020. Non-traditional investors, domestic and international, such as hedge funds and corporate venture capital arms, discovered Europe as well, participating in roughly USD 100 billion in transactions, a 150% increase from 2020.
As Klarna’s attempt to raise cash suggests, this overabundance of capital will stop this year in Europe and abroad. Fortunately for European tech, this is not the end of the story. “The European flywheel has taken off,” says Sarah Guemouri of Atomico, a London-based venture capital firm, referring to the premise that success in technology only produces more and more positive results. Flywheels spin at the company level when more users convert into quality service, which attracts more customers, and so on. They can also assist in energizing the entire sector.
You got to risk something to gain something
European venture capitalism appears to be self-sufficient. Another data supplier, Dealroom, examined the lives of 38,000 startup executives in 2021. Almost two-fifths have already worked for small startups and larger organizations, indicating a rising collective experience. Similarly, Mosaic Ventures, another European venture capital firm, observed that two out of every three unicorn founders were repeating entrepreneurs.
European entrepreneurs are growing more ambitious as they gain experience and are better at conveying a compelling story about what they aim to achieve. Nadine Hachach-Haram is the creator of Proximie, a healthcare firm that uses virtual reality to allow surgeons to monitor surgeries remotely. She is on a mission to create a “borderless operating room.”
Avi Meir, the founder of TravelPerk, a business travel management website located in Barcelona, intends to become a hub for “human interactions amongst distant workers,” such as by providing tools for organizing in-person team meetings. Nicolas Brusson, the CEO of BlaBlaCar, which began as a Parisian service to organize shared automobile rides between cities, hopes to transform it into a “multimodal platform” that combines a demand for buses and maybe trains globally. It may appear to some to be marketing jargon, but it is just what investors and prospective employees want to hear.
Capital is being amassed and reinvested in the industry. According to PitchBook, European funds have raised approximately €100 billion in venture capital over the last five years. Almost half of it has yet to be spent, leaving European venture capitalists with enough “dry powder” to keep firms afloat even if the crisis continues. European investors also put a lot of money into early-stage firms. According to Dealroom, by 2021, European startups will have received a third of all investments in funding rounds of up to USD 5 million globally, almost as much as their peers in America.
The proportion of “angels,” or high achievers who invest a portion of their tech fortune in other firms, is also increasing. Some people start their own VC firms. Taavet Hinrikus, co-founder of Wise, an international payments service, and three other European innovators launched Plural, a €250 million fund, on June 28th. Lower-level executives have also begun to invest because many European IT workers are paid in part with their employer’s shares. According to Dominic Jacquesson of Index Ventures, a transatlantic venture capital firm, only approximately 10% of shares were granted to employees a few years ago. Because of regulatory changes and increased societal acceptability of stock options in Europe, the proportion is around 17%, not far from the 20% or more that is common in the US.
The digital ecosystem’s structure is also stronger now, although it was previously a scattered collection of odd success stories, like Skype, a video-conferencing site purchased by Microsoft; or Spotify, a Swedish music-streaming software. In a recent report on European unicorns, Credit Suisse investment banker Richard Kersley and his colleagues classified the companies as “enablers,” such as payment services like Klarna and Checkout.com, and “disrupters,” such as Getir, a Turkish delivery app, that thrives by piggybacking on such infrastructure.
In addition to more domestic knowledge and resources, as well as a more robust structure, European enterprises have certain competitive advantages that will be useful in a leaner, post-pandemic environment. One example is their thriftiness. Although private companies are not compelled to reveal such figures, there are indications that their “burn rate,” or the rate at which they spend money raised, is lower, at least among younger startups. It also helps because employing software professionals in Barcelona or Berlin is half the price of hiring them in San Francisco or Seattle.
However, when they grow into unicorns, those distinctions appear to fade. American and European companies raised roughly the same amount of cash before reaching that status: USD 378 million on average, compared to USD 392 million for enterprises that have achieved a valuation of more than USD 1 billion since the beginning of 2021.
Meanwhile, mature firms in Europe are less geographically diverse than their competitors in America, both concerning markets and VC support. Because domestic markets and talent pools in Europe are small and corporations quickly expand outside. Veriff, an Estonian online identification service, recently built a branch in Barcelona due to a shortage of engineers in Tallinn.
As a result, according to Atomico, over 80% of European tech firms have a global reach, compared to the 61% of Silicon Valley-based organizations. Only one in every five European enterprises has a single office in its native country, while slightly more than half have offices in three or even more countries. The ratio is flipped in Silicon Valley. Such variety is advantageous during a crisis.
According to Credit Suisse’s assessment, recession-prone companies such as customer services are far less prominent than in America. Because of the EU’s more open financial regulations, one-third of European unicorns work in fintech, frequently providing payment services to other companies. According to the bank, about a quarter of unicorns might be classified as “sustainable” businesses, which are expected to prosper as the globe becomes more serious about combating climate change.
All of this illustrates why the number of unicorns in Europe has increased this year. PitchBook added 42 new pitches in the first six months, compared to 37 in the same period in 2021. The future quarters will very certainly be more difficult. But so are Europe’s tech firms, which recently raised USD 140 million (the valuation was undisclosed, but approached unicorn territory). That means Mr. Plais, the company’s CEO, won’t be looking for work anytime soon.
The bloodbath is happening
Europe’s tech industry has lost more than USD 400 billion in value in 2022 and the bloodbath is still going on, according to venture capital firm Atomico, reported CNBC.
The combined value of all public and private European tech firms has fallen to USD 2.7 trillion from a peak of USD 3.1 trillion in late 2021, Atomico said in its annual “State of European Tech” report.
The figures once again underscore what has been a rough year for tech. Once richly-valued technology companies have seen their shares come under pressure from global factors, including Russia’s invasion of Ukraine and tighter monetary policy. Expect the news of staff downsizing and other cost-cutting measures in the coming months.
The United States Federal Reserve and other central banks are raising rates and reversing pandemic-era stimulus to stave off soaring inflation. That’s prompted investors to reassess their positions on lossmaking tech companies, whose values typically rest on the expectation of future cash flows.
“It’s been a tough year — war in Ukraine, inflation, interest rate hikes, geopolitical tensions all across the continent. It’s the most challenging macroeconomic environment since the global financial crisis,” Tom Wehmeier, a partner at Atomico.
In Europe, some companies have seen precipitous drops in their market values. Klarna, the Swedish buy now, pay later group, slashed its valuation by 85% from USD 45.6 billion to USD 6.7 billion in a so-called “down round.” Shares of music streaming service Spotify, meanwhile, have fallen over 60% in 2021.
Overall venture capital funding of European startups is expected to drop to USD 85 billion by 2022 end, according to the Atomico report, which is based on quantitative data and surveys in 41 countries. That is down 18% from the more than USD 100 billion European startups raised in 2021.
It was nevertheless the second-highest amount ever invested in the European tech ecosystem to date, Atomico said. European tech investment shattered records in 2021 as participation from U.S. investors surged to new heights.
The year 2022 has seen a reversal of that trend, with foreign investors largely retreating. The number of active US investors in “mega-rounds” of USD 100 million or more dropped 22% from 2022. And that’s not good news at all for the tech sector.