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Klarna: The payment service has lost a lot of its rating.
However, the fintech is still one of the heavyweights in the European tech sector
Photo: picture alliance/ dpa
For years, the tech sector was flooded with cheap money and valuations seemed to know no bounds.
But the hunt for records in 2021 was followed by an emergency stop in the second half of 2022: Investments in European technology companies fell by around 18 percent this year to 85 billion euros.
Additionally, the value of public and privately held tech companies in Europe has fallen by more than $400 billion since the start of this year.
While tech companies are cutting costs and laying off thousands of employees, large numbers of US investors have withdrawn from the market.
At first glance, venture capitalist Atomico's annual report "The State of European Tech" paints a bleak picture of the state of the industry.
Money, Talent, Innovation: "The Puzzle Remains Intact"
The authors of the industry study, which is based on surveys of thousands of start-up investors, founders and employees as well as extensive data analysis from 41 European countries, remain optimistic.
They speak of the increasing strength of companies to master the crisis and of the willingness of investors to continue investing in the sector despite the current difficult conditions.
"The true success of the industry revolves around innovation, talent and building companies for the long term. The important pieces of this puzzle remain intact," says Atomico partner Tom Wehmeier, one of the authors of the study.
With more than 44 billion US dollars, European venture capital funds also have plenty of "dry powder" available to invest in young technology companies when the right opportunity arises - especially since valuations are now significantly more attractive.
Measured against the previous year's records, the decline in investments and valuations in the tech sector is considerable.
But in absolute numbers, the capital injections are still at a very high level.
"The fundamental strength of the tech sector has changed less than we think," says Wehmeier.
The following overview shows the most important findings of the "State of European Tech 2022" report.
Investments remain at a high level despite the crisis
Money in abundance, growth at any price: In the record year 2021, venture capitalists invested almost 105 billion dollars in European tech companies.
This peak will now be followed in 2022 by a decline of 18 percent to around 85 billion US dollars.
In the German market, financing fell even more sharply from EUR 19 billion to EUR 11 billion.
Overall, however, this is still the second strongest financing year in the history of the industry.
Investments fell sharply, especially in the second half of 2022.
The current macroeconomic environment is "the most difficult since the global financial crisis," says the report.
"Nevertheless, this year's investments more than double those of 2020 (around $38 billion at the time)."
Less willing to take risks – valuations plummet
Investors' declining appetite for risk in the stock market, as well as in the venture capital market, have dampened valuations in the industry.
The value of public and privately held technology companies in Europe has fallen from $3.1 trillion to $2.7 trillion year-to-date - a loss of around $400 billion.
Nevertheless, there can be no question of low valuations in the sector: European tech companies are currently still worth five times as much as in 2015.
IPOs: "The IPO window is closed"
In addition to rising interest rates, one of the biggest negative factors in the sector is the fact that venture capitalists currently have almost no opportunity to sell their investments through an IPO.
In the record year 2021, a total of 86 companies with a valuation of more than one billion dollars in Europe and the USA managed to go public.
In 2022, there were only three IPOs of this magnitude -- a 96 percent drop.
An IPO, a classic exit for venture capital investors, is currently not an option for investors.
The reluctance to make new investments has increased accordingly.
The number of unicorns is declining
By 2021, 105 tech companies had surpassed $1 billion in valuation, achieving "unicorn" status - a sign that the capital market is overheating.
That number has dropped to 31 new unicorns in 2022 (as of late October).
But this number is also well above the level of 2020 (25 unicorns).
Among the 31 new unicorns were four German ones: the tax startup
Taxfix
, the electronics rental company
Grover
, the sports app
OneFootball
and the gastro app
Choco
.
Large financing rounds: US investors are withdrawing
The reluctance of investors can also be seen from the number of larger financing rounds with a volume of more than 100 million dollars.
According to the study, there were still 133 financing rounds of this magnitude in the first half of 2022.
In the second half of the year (as of July to October), however, significantly fewer of these large financing rounds were completed, so far there are 37. This is also due to the fact that the participation of active US investors in these rounds has fallen by 22 percent compared to the previous year.
The number of active European venture capitalists, on the other hand, has even increased slightly.
"The financing rounds that we got used to in the record year 2021 were astronomically high,"
says Sarah Guemouri,
co-author of the report.
"The full year 2022 is still well above the level of 2020. The current market turbulence should not obscure the fundamental progress of the tech sector."
Tech companies are cutting thousands of jobs
Nevertheless, 82 percent of the founders surveyed stated that it is currently much more difficult to collect capital.
Secondly, investors pay much more attention to profitability: As a result, many tech companies in Europe have to economize and have to lay off thousands of employees.
According to the study, more than 200,000 employees in the industry have lost their jobs worldwide.
In Europe, companies have so far laid off around 14,000 employees, which means that Europe accounts for around 7 percent of layoffs worldwide.
Founders and company bosses are now faced with the difficult task of remaining innovative and growing despite the significantly reduced number of employees.
Growing resilience - and good chances for the survivors
Nevertheless, the longer the crisis lasts, the more companies will be able to survive in a difficult market environment.
The authors of the study also attribute the increasing resilience of companies to the fact that a large number of tech founders have now gained plenty of experience of crises.
Second, the growth opportunities for companies that survive the current consolidation remain intact: the market is then reallocated among the crisis winners.
This also applies to the top talent in the industry: "Talent stays with the ecosystem and is redistributed within the industry," according to the study.
Investors are becoming more cautious, but according to the Atomico study, they will remain in the industry.
"In 2022, more than 3,200 different investors have so far participated in at least one financing round in Europe," says Wehmeier.
"These are mostly experienced, long-term oriented and active investors who continue to seek opportunities in the European tech sector."
Talent, money and a willingness to take risks are still there in sufficient measure: if conditions on the capital market improve again by the end of 2023, young tech companies should also feel the effects.