Over $400 billion has been wiped off the value of Europe's tech industry this year

Over $400 billion has been wiped off the value of Europe’s tech industry this year

The Klarna logo displayed on a smartphone.

Raphael Henrique | SOPA Pictures | Light Rocket via Getty Images

Europe’s tech industry has lost more than $400 billion this year, according to venture capital firm Atomico.

The combined value of all public and private European tech companies fell to $2.7 trillion from a high of $3.1 trillion at the end of 2021, Atomico said in its annual “State of European Tech” report on Wednesday.

The numbers underscore what has been a tough year for the technology. In the past, highly-valued tech companies have seen their stocks pressured by global factors, including Russia’s invasion of Ukraine and monetary policy tightening.

The Federal Reserve and other central banks are raising rates and rolling back pandemic-era stimulus to avoid soaring inflation. That prompted investors to reevaluate their positions in loss-making tech companies, whose values ​​are typically based on expectations of future cash flows.

“It’s been a tough year – war in Ukraine, inflation, interest rate hikes, geopolitical tensions across the continent,” Tom Wehmeier, a partner at Atomico, told CNBC. “This is the most challenging macroeconomic environment since the global financial crisis.”

In Europe, some companies have experienced dizzying falls in their market values. Klarna, the Swedish buy now, pay later group, slashed its valuation by 85% from $45.6 billion to $6.7 billion in a so-called “fund round”. Shares of music streaming service Spotify, meanwhile, have fallen more than 60% in the past year.

Global venture capital funding for European startups is expected to drop to $85 billion this year, according to the Atomico report, which is based on quantitative data and surveys in 41 countries. This represents an 18% drop from the more than $100 billion in European startups raised in 2021.

It is nonetheless the second highest amount ever invested in the European tech ecosystem to date, Atomico said. European tech investment broke records last year as US investor participation soared to new heights.

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This year has seen a reversal of that trend, with foreign investors largely retreating. The number of US investors active in “mega rounds” of $100 million or more fell 22% from a year ago.

“It’s a less liquid funding environment now,” Wehmeier said. “We have gone from a period in 2021 where capital was plentiful, where it was cheap, to a period where it is more difficult to raise capital and the cost of capital has increased.”

The downturn started in the second half

In the first half of 2022, Europe’s tech sector was on fire, with investment levels still 4% higher than the same period in 2021, Atomico said.

However, investment started to slow from July and slowed further in August and September. Since then, monthly investment levels have averaged between $3 billion and $5 billion, which is in line with 2018 levels.

The rate of unicorn creation has also slowed, with the number of new unicorns over $1 billion minted in 2022 falling to 31 from 105 last year.

Meanwhile, quotes on public markets have all but evaporated. Only three tech IPOs with a market capitalization of $1 billion or more took place globally in 2022, including two in Europe, Atomico said. In 2021, there were 86 such IPOs.

And the region was not immune to the wave of tech layoffs. According to the report, companies based in Europe have laid off more than 14,000 employees this year, representing 7% of total layoffs worldwide.

At trade shows like Web Summit and Slush, founders of well-funded unicorns have encouraged fellow entrepreneurs to control their costs and ensure they have enough runway to survive a downturn.

“There are a lot of advantages”

Yet for some investors, all is not bleak. Per Roman, a partner at GP Bullhound, said he was optimistic about the promise of certain technologies, including artificial intelligence, cybersecurity and environmental technologies.

“There are a lot of benefits,” Roman told CNBC on Monday. “Right now, we’ve seen throughout the year, early last year, the software and internet markets reassess, I think that’s pretty positive and healthy. It’s in strong bubble for some time.”

“At the same time, these software layers manage the world we live in today, whether it’s a hospital, school or construction site. So the fundamental fundamentals will stay strong. over the next decade.”

There are reasons for optimism, says Sarah Guemouri, director at Atomico. One is the growth of the Ukrainian tech industry. Despite Russia’s brutal attack, business activity has returned to pre-war levels for 85% of Ukrainian IT companies, according to figures from the Lviv IT cluster. Since the start of the war, 77% of ICT companies in Ukraine have attracted new customers.

And although the market situation is bleak this year, investments are still eight times higher than they were in 2015.

“Overall, the series needs to be viewed from a much longer time horizon,” Guemouri told CNBC. “It’s still quite remarkable on many levels. For us, what really excites us is the future and the opportunity ahead of us, which continues to be huge.”

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