Venture capital investment into Europe’s tech industry plunged by half in 2023 as investors continued to reel from the effects of high interest rates, according to data from venture capital firm Atomico.
However, artificial intelligence was a standout category that saw continued mega funding rounds.
Atomico’s “State of European Tech” report, published Tuesday, showed that overall funding for European venture-backed companies is projected to decline 45% in 2023 from a year ago.
Total venture funding for European tech companies will reach $45 billion this year, Atomico expects. That’s down from $82 billion in 2022, which is itself down from $100 billion the previous year.
Atomico said that this year was a case of correction and a reversal to the pre-pandemic years which saw a wild rise in valuations and funding levels as the tech industry secured record amounts of capital flows.
Tom Wehmeier, head of data insights at Atomico, told CNBC that where Europe stood out was that the region is actually up on the past three years compared to its U.S., Chinese, and other international counterparts.
“There has been this reset after an overheated and unsustainable period of growth in 2021 and early 2022,” Wehmeier told CNBC. “Now you see that new reality is embedded and green shoots are starting to emerge.”
U.S. and Asian institutional investment into European tech faded in a big way, Wehmeier said, as “tourist” funds like Tiger Global and Coatue, who flooded the market in 2020 and 2021, retreated in the last year or so as macroeconomic headwinds caused them to get cold feet.
Whereas the U.S. has declined 8% and China slipped 9% for overall venture funding since 2020, Europe has seen investment levels grow 19% in the same time period, in a sign of resilience for the region.
Green shoots
Still, tech has benefited from a rush of interest in artificial intelligence.
Companies like Aleph Alpha, Mistral, and DeepL have raised hundreds of millions of dollars’ worth of capital from investors at high valuations thanks to the hype swirling around OpenAI, which is behind the wildly popular ChatGPT chatbot.
According to Atomico, AI was the biggest pull for fundraising rounds amounting to $100 million or more, with 11 AI companies bagging these so-called “megarounds.”
At seed stage, AI was the buzziest space for investors, attracting 11% of all funding rounds worth $5 million or less, Atomico said.
Meanwhile, Europe is the top hub for global AI talent, with the number of highly-skilled AI roles rising 10-fold over the past decade and outstripping the U.S.
Climate tech was another standout sector, according to Atomico. Funding into companies in the carbon and energy space accounted for 27% of all capital invested in European tech in 2023, three times more than in 2021.
According to Atomico, the combined value of all private and publicly listed tech companies in Europe topped $3 trillion in 2023, regaining that level after slumping well below it in 2022.
Last year, the European tech sector saw $400 billion wiped off its overall market capitalization.
IPO window remains closed
There have been virtually no IPOs of significant scale in Europe this year.
Arm, the British chip designer, went public in the U.S., and its performance has been lackluster since. Company shares are up from its debut price, but the performance of Arm, and other recently listed tech firms like Instacart and Klaviyo, haven’t convinced other tech leaders to pursue stock listings.
Still, Wehmeier said there’s now a healthy pipeline of companies looking to tap the public markets. Late-stage companies like Klarna, Revolut and Monzo are looking closer to the IPO gates than they’ve ever been.
Meanwhile, mergers and acquisitions activity remained muted compared to earlier years. Deal transaction value reached $36 billion in 2023, with the majority of exits being smaller, sub-$100 million value deals, Atomico said.