The Klarna logo displayed on a smartphone.
Rafael Henrique | SOPA images | LightRocket via Getty Images
The European tech industry has lost more than $400 billion in value this year, according to venture capital firm Atomico.
The combined value of all public and private European tech companies has fallen to $2.7 trillion from a peak of $3.1 trillion in late 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. Once highly valued tech companies have seen their stocks squeezed by global factors, including Russia’s invasion of Ukraine and tightening monetary policy.
The Federal Reserve and other central banks are raising interest rates and reversing pandemic-era stimulus to stave off rising inflation. That has 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, rate hikes, geopolitical tensions across the continent,” Tom Wehmeier, a partner at Atomico, told CNBC. “It is the most difficult macroeconomic environment since the global financial crisis.”
In Europe, some companies have seen their market values fall precipitously. Klarna, the Swedish buy-now pay later group, cut its valuation by 85% from $45.6 billion to $6.7 billion in a so-called “down round.” Shares in music streaming service Spotify have fallen over 60% over the past year.
According to the Atomico report, which is based on quantitative data and surveys in 41 countries, total venture capital funding for European start-ups is expected to fall to $85 billion this year. That’s down 18% from the more than $100 billion that European startups raised in 2021.
According to Atomico, it is still the second-highest sum that has been invested in the European tech ecosystem so far. European technology investment broke records last year as participation from US investors soared to new heights.
This trend reversed this year, and foreign investors largely withdrew. The number of active U.S. investors in “mega-rounds” of $100 million or more is down 22% year-over-year.
“It’s a less liquid financing environment now,” Wehmeier said. “We have transitioned from a time in 2021 when capital was plentiful and cheap to a time when raising capital is more difficult and the cost of capital has increased.”
The slowdown 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 at the same point in 2021, Atomico said.
However, investment started to slow from July and continued to slow in August and September. Since then, monthly investment levels have averaged around $3 billion to $5 billion, which is the same as 2018 levels.
The rate of unicorn creations has also slowed, with the number of new unicorns worth over $1 billion minted in 2022 falling to 31 from 105 last year.
In the meantime, stock market listings have practically disappeared. In 2022, only three tech IPOs with a market cap of $1 billion or more took place globally, two of them in Europe, Atomico said. In 2021 there were 86 such IPOs.
And the region wasn’t immune to the wave of tech layoffs. According to the report, companies headquartered in Europe have laid off more than 14,000 employees this year, accounting for 7% of all layoffs worldwide.
At industry shows like Web Summit and Slush, the founders of well-funded unicorns encouraged their fellow entrepreneurs to keep costs under control and ensure they had enough runway to weather a downturn.
“There is a lot up”
Still, not all is doom and gloom for some investors. Per Roman, a partner at GP Bullhound, said he was optimistic about the promise of certain technologies, including artificial intelligence, cybersecurity and environmental technology.
“There are many benefits,” Roman told CNBC on Monday. “Right now the year, early last year, we’ve seen the software and internet markets appreciate, I think that’s pretty positive and healthy. It has been in strong bubble territory for some time.”
“At the same time, these layers of software drive the world we live in today, whether it’s a hospital, a school or a construction site. So the core fundamentals will remain strong over the next decade.”
There are reasons to be optimistic, says Sarah Guemouri, director at Atomico. One of them is the growth in the technology industry of Ukraine. Despite Russia’s brutal attack, 85% of Ukrainian IT companies have returned to pre-war levels of activity, according to figures from the Lviv IT Cluster. Since the beginning of the war, 77% of ICT companies in Ukraine have acquired new customers.
And although the market picture has been bleak this year, investment is still eight times what it was in 2015.
“Overall, the show needs to be viewed with a much longer time horizon,” Guemouri told CNBC. “It’s still quite remarkable on many levels. What we’re really excited about is the future and the opportunity that lies ahead, which continues to be huge.”