After falling sharply in 2023, European technology funding appears to have stabilized in 2024, according to the latest European State of Technology report, but signs continue to point to tougher times ahead.
An annual study produced by European venture capital firm Atomico points out that startups in the region are on track to raise $45 billion this year. While this is far from the 50% decline expected in 2023, it is still $2 billion lower than a year ago. (Note: Atomico originally projected $45 billion in 2023, which was later revised to $47 billion in 2023.)
Atomico has been producing these reports every year for the past decade, so this latest edition has generated a lot of buzz about how much things have grown.
There is no denying that Europe's technology ecosystem is experiencing explosive growth. According to Atomico, there are currently 35,000 technology companies in the region that can be classified as “early stage,” including 3,400 late-stage companies and 358 companies valued at more than $1 billion. Compare this to 2015. At that time, there were only 7,800 early-stage startups, 450 late-stage startups, and only 72 technology companies valued at more than $1 billion. But there's also plenty of sobering reading about some of the challenges of the moment, and signs of how geopolitical and economic instability continues to weigh on the market, despite the glowing talk of the AI boom.
Some of the breakout statistics are:
The exit fell off a cliff. This is one of the most stark tables in the report, highlighting some of the liquidity pressures that ultimately trickle down to early-stage technology companies. Simply put, the European technology industry is currently relatively free of M&A and IPOs. According to S&P Capital statistics, as of the report's publication in mid-November, 2024 saw just $3 billion in IPO value and $10 billion in M&A. Both of these are down significantly from the overall trend, and both have otherwise increased steadily and “consistently exceeded the $50 billion annual threshold.” (Admittedly, sometimes all you need is one big deal in a year. For example, in 2023, ARM's $65 billion IPO accounted for 92% of total IPOs, but clearly that's not enough for many companies.) It hasn't had a knock-on effect: Atomico says trading volumes are at their lowest level in a decade.
Image credit: Atomico
Debt is increasing. As you can imagine, debt financing is filling the cash gap, especially for startups looking to finance their growth. So far this year, debt financing has accounted for 14% of all venture capital investments, totaling about $4.7 billion. This is a significant increase compared to last year, with debt accounting for just $2.6 billion of funding in 2023 and 5.5% of all VC investments, according to Dealroom statistics.
Image credit: Atomico
Average round size will rebound. Last year, the average size of all series A-D funding in Europe decreased, with only seed rounds continuing to increase. But while the number of funding rounds in the region has declined overall, startups that manage to close deals are raising more money on average. Series A is currently valued at $10.6 million (2023: $9.3 million), Series B at $25.4 million (2023: $21.3 million), and Series C at $55 million (2023: $43 million). The United States continues to outpace Europe in overall circular size.
However, don't expect the rounds to go up in quick succession. Atomico has seen a 20% decrease in the average number of startups raising funding within 24 months, and a longer time for companies to convert from Company A to Company B in a “compressed” period of 15 months or less. I pointed out that it started to take longer. Only 16% raised a Series B during that period in 2024. As you can see from the table below, the number of rounds this year has decreased compared to last year.
Image credit: Atomico
AI continues to lead the pack. As in 2023, artificial intelligence continued to dominate the conversation. Atomico elaborates on this with a chart showing a sharp rise in mentions of AI in earnings calls.
Image credit: Atomico
And it continues to be a strong theme among private companies. Between Wayve, Helsing, Mistral, Poolside, DeepL, and many others, AI startups lead the pack when it comes to Europe's biggest venture deals this year, raising a total of $11 billion. Still, Atomico points out that “Europe has a long way to go to close the gap with the US in terms of AI funding.” It turns out the US has invested $47 billion in AI companies this year, thanks to big rounds for companies like OpenAI. That's right, that's $2 billion more than all European startup investments combined.
The UK is now the largest market for AI funding in the region (thanks to Wayve), the company said.
Valuations are improving…Startup valuations are now trending upward again after “hitting bottom” in 2023, Atomico writes, due to a slow recovery in public market activity. It's a thing. Some of that may be due to large funding raised by certain companies in specific areas such as AI. More generally, the rule seems to be that founders tend to accept larger rounds of dilution early on, which leads to higher valuations. And startups raising late-stage funding are picking up some of the early excitement and raising down rounds, Atomico said. European startups have lower valuations on average than their U.S. counterparts, ranging from 29% to 52% lower, according to Atomico.
(In the Series C diagram below, the average valuation for U.S. startups is $218 million, while the average valuation for European startups is $155 million.)
…But emotions are not like that. If confidence is a strong indicator of market health, market motivators may have some work to do going forward. Atomico conducts annual surveys of founders and investors asking how they feel about market conditions compared to a year ago, and it appears that confidence has reached a low level in 2024. In a candid assessment of how founders and investors view the market at the moment, a record proportion (40% and 26%, respectively) said they are less confident than they were 12 months ago.
Image credit: Atomico
Source link