European startup funding will fall by 38% in 2023 – however there may be motive for hope

According to Atomico’s latest report, European tech startups will see an investment fall of 38% in 2023 compared to 2022 levels. Specifically, startups are expected to raise $51 billion in funding – down from $83 billion in 2022 and $106 billion in 2021.

But not only Europe is experiencing a difficult year for the technology industry. The US and China also expect investment to fall by 49% in 2023 compared to 2021. According to the report, this global decline in funding is having a knock-on effect on capital flows between regions. For Europe, this means a significant reduction in capital from US investors, which will primarily affect companies raising larger financing rounds at later stages.

While the slowdown in financing is visible across all European countries, the sharpest drop between H2’22 and H1’23 is expected in the UK, with investment falling by 57%. France follows with 55% and Germany with 44%.

As a result, founders are adjusting to the new reality, which Atomico says is causing layoffs to accelerate in the first quarter of 2023 while valuations plummet and layoffs increase.

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Despite the difficult funding landscape, the total value of Europe’s tech ecosystem is expected to reach $1 trillion this year, returning to the (highest) level of 2021.

The ecosystem also accounts for 29% of global funding going to early-stage companies — almost on par with the US (36%) after the gap has almost halved over the past five years. At the same time, Europe is catching up with the US in terms of start-up creation, albeit at a slightly slower pace.

Additionally, startups on the continent continue to lead the way in “purpose-driven technology” that aligns with the United Nations’ Sustainable Development Goals. In particular, investments in “Climate and Purpose” have hit an all-time high so far, accounting for 18% of total funding.

It is also worth noting that the flow of capital in generative AI is increasing. So far this year, companies developing the technology have secured 35% of all funding for AI/ML – the highest share ever – up from 5% in 2022.

“We should look at this time as a return to basic principles,” said Tom Wehmeier, partner and head of insights at Atomico. “Out of this cycle we have an opportunity to build an even healthier ecosystem, with a clearer focus on quality. In the short term, there will be fewer companies emerging, but those that do break through will be more likely to be winners, with a strong foundation of high-level talent and a larger share of the region’s resources.”

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