A new report has surfaced about the state of the tech industry in the European region. The findings – startups will not raise as much money as they did last year but investors are still pouring in more capital than they did in 2020.
The research material is titled “State of European Tech 2022” and it was created by Atomico – a leading British venture capital firm that oversees more than $5 billion for its investors and whose portfolio includes big names in the startup space such as Stripe and Klarna.
According to Atomico’s findings, the startup industry is poised to bring as much as $85 billion in capital injections in 2022. Even though this number is lower than the $100 billion venture capitalists poured into startups last year, it is still the second highest on record.
For the survey’s respondents, macroeconomic variables have weighed the most to cause this drop in the amount of funding that tech startups were able to bring in this year in Europe.
However, other interesting negative catalysts were mentioned such as adverse policy decisions, negative sentiment in the public markets, lack of available talent, and geopolitical risks such as the war between Russia and Ukraine.
A Lot of Dry Powder Indicates that VCs Are Getting More Cautious
The year started on a positive tone as demonstrated by the amount of capital invested into firms within the region, as it reached a peak at $113.7 billion including debt and grants. However, the figure started to climb down progressively since the beginning of April, marking what appears to be the beginning of a downtrend.
The report notes that there is a significant amount of uninvested capital sitting on the coffers of both venture capital and growth capital firms and that it has been growing since 2017, moving from approximately $40 billion back then to over $80 billion by the end of 2021.
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This is considered to be both positive and negative at the same time by Atomico’s researchers as a lot of dry powder indicates that there is a lot of money available for the right opportunities. However, it also signals that VC firms have adopted a more cautious approach.
“It is reassuring that there will still be some level of capital liquidity within the market, even if conditions become tighter in 2023 than they have been during the second half of 2022. The pace at which that capital is deployed, however, is something to watch out for as investors recalibrate their plans to a new market reality”, the report reads.
It is Harder for Startups to Raise Capital and It May Get Worse
One statistic that is particularly helpful to read the room in the European VC space is the opinion of those who lead the startups – also known as the founders – about how hard it is for their firms to raise capital in this environment.
The Atomico survey illustrates a big change in this particular aspect as 82% of the respondents said that it was now “harder” to raise capital than it was 12 months ago. The percentage of respondents that said this was 64% higher than a year ago and 27% higher than in 2020.
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Venture capitalists agreed with this view and the majority of them responded that the fundraising process was now lengthier and that the decision-making process on the investor side slowed down significantly.
Finally, when it comes to valuations, there has been a sharp drop in the number of unicorns – companies valued at $1 billion or more – in the European region compared to last year, with the figure moving from an all-time high of 105 last year to just 31 companies thus far in 2022.
The capital markets may be poised to get worse in the near future according to the respondents – at least until the macroeconomic backdrop gets better. In this regard, more than 30% of those who were surveyed said that the energy crisis, inflation, and geopolitical instability will “worsen” within the next 12 months.
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