The State of the European Tech Report: Total VC Investment in European Tech to Exceed a Record $41B in 2020
In December, the London-based VC fund Atomico released its annual The State of the European Tech Report. According to the report, total venture capital investment in European tech companies is about to exceed a record $41B in 2020, driven by an increase in $100-250M “megarounds”. ‘In 2020, no one blinks at a $10M seed round’, the report states.
One big question dominates the analyses this year: how will Covid-19 and its consequences affect European tech?
The data shows that the ecosystem has more than survived, and has undeniably been a net beneficiary of the shift to digital.
Nearly half of those who responded to the 2020 survey says they found it harder to get funding, alongside the challenges of pivoting their products and declining sales. Wellbeing ranked amongst founders’ greatest challenges of the year.
Yet many European companies have continued to rapidly scale. The ecosystem now has 115 VC-backed companies valued at over $1B. Spotify and Adyen hit $50B. $100B valuations are starting to feel inevitable. In November, Hopin set the record for Europe’s fastest ever company to hit a billion-dollar valuation: 17 months from founding.
According to the report, institutional investors from Europe and around the world poured three times more money into Europe’s tech industry than five years ago. As the ecosystem matures, the share of venture capital funding from government agencies is declining and now accounts for less than 10% of VC funds raised in Europe’s most mature markets.
International investment has not dried up. In fact, US investors participated in a record number of rounds. It turns out that when everyone is working remotely, Europe feels even less remote. More people are waking up to the fact that great companies can come from anywhere; great talent can work anywhere; and great investors can invest from anywhere.
Nearly 80% of angels who responded to the survey have worked at a tech start-up and or founded their own business. Alumni of Zalando, Spotify, Klarna, Skype, Just Eat and others are now building a new generation of companies.
Key insights from the report
More of the European leading tech companies should find paths to liquidity that benefit European builders and investors while retaining our world-class talent. This means more companies listing on Europe’s public markets. There has been significant ‘value leakage’ in past exits of $1B+ VC-backed European companies, with US listings and M&A buyers accounting for 52% of total exit value. Europe has a pipeline of IPO candidates valued at over $150B but despite some major successes such as The Hut Group and Allegro, this year it has seen far fewer IPOs than the US, and only three at $1B+. This also means enabling companies that aren’t going to be global category leaders to exit early and recycle talent and capital, by creating liquidity at all stages. US companies ‘fail faster’; they are 50% more likely to exit after a first round of funding than European companies.
According to the report, there are signs of change. Europe’s venture capital, private equity and public markets are drawing together in ever closer union, creating more exit options, a strong pipeline of IPO candidates and deeper pools of experienced talent.
Second, we need to see a step change on diversity and inclusion in European tech. Underrepresented founders have found it even harder to raise capital than their peers this year, grim data is emerging on the amount of capital going to black founders and progress on funding to female founders has stalled since 2018. This inequity is excluding talent and ideas. Only by fixing it the ecosystem will fuel the flywheel and generate even greater outcomes.
Another huge opportunity lies ahead if Europe’s startups can be front and centre of the fight against one of the world’s biggest problems: climate change. Investment into Europe’s climate-focused start-ups has soared to over $11B cumulatively in the last five years. The European Commission’s expansive Green Deal has been a key policymaker focus in 2020 and has the potential to be an important catalyst for continued investment in this area.
And last but not least, European tech needs supportive regulation and government action in order to realise its potential as an engine of economic growth. Governments responded rapidly to support startups in the wake of COVID-19, injecting $11B in relief funds across Europe, though the impact of this investment is not yet clear. Positive policy initiatives are emerging, including on visas and employee stock options, as the EU’s Startup Nation Standard builds upon national commitments. Yet more education and awareness raising is needed; only 20% of founders and investors believe the concerns of start-ups and scale-ups are being heard by European policymakers.
The full State of the European Tech Report with data, graphs and analyses of the survey results is available here.