$400 billion erased from European tech market in 2022, Atomico says

The Klarna logo displayed on a smartphone.

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

The combined value of all public and private European tech firms is set to fall from a peak of $3.1 trillion to $2.7 trillion at the end of 2021, Atomico said Wednesday in its annual “State of European Tech” report.

The figures underline what a tough year it has been for tech. Once richly valued technology companies have seen their shares come under pressure from global factors, including Russia’s invasion of Ukraine and tighter monetary policy.

The Federal Reserve and other central banks are raising rates and reversing pandemic-era stimulus to curb rising inflation. This prompted investors to re-evaluate their positions on loss-making tech companies, whose valuations are usually based on the expectation of future cash flows.

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

In Europe, some companies have seen their market values ​​fall sharply. Swedish Buy Now, pay later group, Klarna slashed its valuation by 85%, from $45.6 billion to $6.7 billion, in a so-called “down round”. Shares of music streaming service Spotify, meanwhile, have fallen more than 60% in the past year.

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According to the Atomico report, which is based on quantitative data and surveys across 41 countries, the total venture capital funding of European startups is expected to drop to $85 billion this year. This is 18% less than European startups with over $100 billion raised in 2021.

Yet it was the second largest amount invested in the European tech ecosystem to date, Atomico said. European tech investment broke records last year as participation from US investors reached new highs.

Investment firm says there's 'lots of upside' for tech

This year saw a reversal of that trend with foreign investors pulling out on a large scale. The number of active US investors in “mega rounds” of $100 million or more decreased 22% from the previous year.

“Now it’s an environment of less liquid funding,” Wehmeyer said. “We have gone from a period in 2021 when capital was abundant, to when it was cheap, to one where raising capital was difficult and where the cost of capital increased.”

Slowdown started in the second half

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

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However, investment started slowing down from July and declined further during August and September. Since then, monthly investment levels have averaged around $3 billion to $5 billion, in line with 2018 levels.

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

Meanwhile, public market listings have virtually disappeared. Atomico said there were just three tech IPOs with a market cap of $1 billion or more globally in 2022, two of which took place in Europe. In 2021, there were 86 such IPOs.

And the sector wasn’t immune to the wave of tech layoffs. According to the report, European-headquartered firms laid off more than 14,000 employees this year, accounting for 7% of total layoffs globally.

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

‘There’s a lot going wrong’

Yet, for some investors, all is not doom and gloom. Per Roman, partner at GP Bullhound, said he is excited about the promise of some of the technologies, including artificial intelligence, cyber security and environmental technology.

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“There’s a lot of upside,” Roman told CNBC on Monday. “Right now, we’ve seen throughout the year, beginning last year, a revaluation of the software and internet markets, which I think is quite positive and healthy. It’s been in strong bubble territory for a while.”

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

There are many reasons to be optimistic, says Sarah Guémouri, principal at Atomico. One is the development in Ukraine’s tech industry. Despite Russia’s brutal onslaught, business activity has returned to pre-war levels for 85% of Ukrainian IT companies, according to data from the Lviv IT cluster. Since the start of the war, 77% of ICT firms in Ukraine have attracted new customers.

And while the market picture was bleak this year, investments are still up eight times compared to 2015.

“Overall, the series needs to be viewed through the lens of a longer time horizon,” Guimoury told CNBC. “It’s still a pretty remarkable one on many levels. For us, what we’re really excited about is the future and the opportunities that lie ahead, which are huge.”

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