European startup funding to drop 38% in 2023 -- but there's cause for hope

European startup funding to drop 38% in 2023 -- but there's cause for hope

European tech startups will see a 38% investment drop in 2023 compared to 2022 levels, the latest report by Atomico finds. Specifically, startups are expected to raise $51bn in funding -- down from $83bn in 2022 and $106bn in 2021.

But Europe isn't alone in navigating a tough year for tech. The US and China are also looking at a 49% investment decrease in 2023 compared to 2021. According to the report, this global retraction in funding has a domino effect on the flow of capital between the regions. For Europe, this translates to a significant reduction of capital from US investors, which will mostly impact companies raising larger later-stage rounds.

While the funding slowdown is visible across all European countries, the biggest fall between H2'22 and H1'23 is expected in the UK with a 57% investment drop. This is followed by France at 55% and Germany at 44%.

As a result, founders are adjusting to the new reality, which, according to Atomico, means that layoffs were accelerated in Q1 2023, while valuations are dropping and down rounds are increasing.

Don't worry, it's not all doom and gloom

Despite the rough funding landscape, the European tech ecosystem's total value is forecast to reach $1tn this year -- climbing back to (the highest ever) 2021 levels.

The ecosystem also accounts for 29% of the global funding going to early-stage companies -- almost at parity with the US (at 36%), after nearly halving the gap in the past five years. At the same time, Europe is leveling with the US in terms of startup creation, although the pace has slowed somewhat.

In addition, startups in the continent continue to lead in "purpose-driven tech" that meets the UN's sustainability goals. Specifically, investments in "climate and purpose" have so far reached an all time high, representing 18% of the total funding.

Notably, the flow of capital in generative AI is also on the rise. This year to date, companies developing the technology have secured 35% of all funding going to AI/ML -- the highest share ever -- jumping from 5% in 2022.

"We should think about this period as a return to first principles," said Tom Wehmeier, Partner and Head of Insights at Atomico. "From this cycle we have the opportunity to build an even healthier ecosystem, with a clearer focus on quality. In the short-term, there will be fewer companies started, but the ones that break through will more likely be winners, with a strong foundation of senior talent and greater share of the region's resources."