December 8, 2021

Report Details Europe's Rapidly Growing Tech Sector

During my time serving as an advisor to a German tech firm in the late 2000s, I had the opportunity to learn more about Europe's tech sector. While the United States was experiencing a rise of its own tech sector, I was surprised at the lethargic growth of the sector in Europe. As explained by The Economist, "That a continent shattered by two world wars produced far fewer businesses destined for high growth in the second half of the 20th century is perhaps unsurprising. But Europe never recovered its appetite for high-growth business creation. In the past three decades, America has spawned four behemoths—Google, Amazon, Tesla and Facebook, now known as Meta—whose valuations have topped $1trn."

What is more, "Not one of Europe's corporate youths, meanwhile, has risen as high as $100bn. One champion of the 2000s, Skype, was in 2011 bought for $8.5bn by Microsoft. The other, Spotify, is today worth only $48bn. SAP, the closest thing the continent has to a tech giant, was founded three years before Microsoft and is worth less than a fifteenth of it."

Over a decade later from advising the German tech firm, I was pleased to read an article by Ryan Browne, a technology reporter for CNBC in London, proclaiming "Europe's tech sector is on fire." Focusing on a report produced by Atomico, a UK-based venture capital firm, Mr. Browne writes that "Start-ups in the region are on track to haul in a record $121 billion in funding this year ... roughly three times the $41 billion of capital raised in 2020. It's the first time European start-ups have raised more than $100 billion in a single year, and highlights surging interest from investors in the continent's rapidly-growing tech industry."

"'It's been a defining year for European tech,' Tom Wehmeier, Atomico's head of insights, told CNBC. 'I think what we've seen in the numbers is that European tech is creating value faster than ever.'"

Titled the State of European Tech 2021, below are the report's key findings:
  • Record growth drives new milestones. "Europe is firmly positioned as a global tech player in 2021, with a record $100B of capital invested, 98 new unicorns, and the strongest ever startup pipeline, now on par with the US. European tech is creating value at its fastest pace, adding $1 trillion in just 8 months. While geographical differences in maturity level remain, talent mobility and distributed success is powering newer hubs."
  • Talent is betting on tech. "The European tech talent pool is deeper and more experienced than ever, as talent is recycled across the continent. Yet there is still a way to go; talent acquisition tops the list of challenges for founders, alongside fundraising. Many founders – particularly those from underrepresented backgrounds – are finding it as hard as ever to access capital."
  • European entrepreneurs are shaping their own path. "European tech has become a breeding ground for companies across all sectors. From frontier tech to crypto and enterprise SaaS, European founders can build successful companies from Europe. A new generation of entrepreneurs is putting social and climate impact at the core of their mission. The ecosystem is aware of the need to improve diversity and inclusion, but has much left to do to make that happen."
  • Investing in Europe is more attractive and dynamic than ever. "VC has become the leading funding mechanism for entrepreneurs, but to stay competitive, VCs have to keep innovating. As the opportunity set matures, global investors are doubling down: from seed rounds to public markets, there are now more international investors and buyers active in Europe. While investors across the board have more conviction in European tech, pension funds still lag behind on their allocation to tech."
  • Outcomes defy expectations in private and public markets. "Europe continues to produce more tech IPOs than the US, $1B+ IPOs are becoming the norm, and record-breaking exit activity reached an astonishing $275B in deal value. Still, Europe is only in the first innings of its tech journey, with all indicators now pointing towards many trillions in value to be added over the next decade, even in a conservative scenario."
  • From stumbling blocks to building blocks. "European tech is on a strong trajectory, with venture capital delivering consistently benchmark-beating returns. However, funding, talent and policy are all critical components we must continue to fine tune. With more collaboration across private and public sectors, we can supercharge the next decade for tech. And with better accountability from founders and investors, we can deliver more on inclusivity and sustainability."

While the report paints an optimistic scene, "Not all is rosy in European tech," CNBC's Mr. Browne notes. "Despite venture-backed companies raising record levels of funding in Europe, early-stage firms are being squeezed, according to Atomico." Moreover, "Less than 1% of venture capital invested in the first nine months of 2021 went to companies that were founded this year, a figure that has typically ranged from 1-3% in earlier years."

Mr. Browne also points out that "diversity remains a key issue. Only 1.3% of venture capital funding in Europe goes to start-ups with ethnic minority founding teams, Atomico said, citing a survey of more than 5,000 tech professionals in the region." And "the lack of pension fund allocation to start-up investments" is another hurdle "with European pension funds earmarking less than 0.02% of their $3 trillion for venture capital funds."

"Yet change is in the air," the aforementioned article by The Economist explains. "Venture capitalists, who want to sniff out the next Google while it is still being run from the founders' kitchen tables, are homing in on European startups. There are many more to choose from. European entrepreneurs who would once have gone west to start a business are now likely to start up at home rather than in Silicon Valley."

The Economist
 adds that "A new influx of capital is proof of an altered mood. Ten years ago, European firms grabbed less than a tenth of all venture capital (VC) money invested globally, though Europe’s share of global GDP was a little over a quarter." Encouragingly, "This year has seen dealmaking volumes soar in many regions, but particularly in Europe, which now attracts around 18% of global VC funding, says Dealroom, a data provider (see chart 1). That funding is at an all-time high, pumping up values for European startups. The continent now boasts 65 'unicorn cities,' or those which have produced a privately held startup worth more than $1bn. That is more than any other region."

What are your thoughts about the sate of Europe's tech sector? What opportunities or risks are you seeing?

Aaron Rose is a board member, corporate advisor, and co-founder of great companies. He also serves as the editor of GT Perspectives, an online forum focused on turning perspective into opportunity.

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