European startups got less money this year,but the sentiment is improving. Target: AI & climate tech
Petr Šíma: Forget about the United States, Europe has already overtaken it in the number of new startups. Moreover, it is the only region where the volume of capital invested in startups this year will be higher than in 2020, by 18 percent. Let's leave aside 2021 and early 2022, when startup valuations skyrocketed and investors bought whatever they could. That was an anomaly. This year, $45 billion will flow into European startups, according to a fresh analysis by Atomico. This is the third highest figure after the two years mentioned above and confirms that the ecosystem is on a strong footing.
Despite tough macroeconomic conditions, total money invested in startups has returned to $3 trillion. It has managed to recoup some $400 billion that "evaporated" during last year's turmoil. According to the analysis, there should also be no repeat of the layoffs waves that hit the tech sector in 2022, but the good news is that the number of investors focusing exclusively on Europe is growing. This means that there are plenty of suitable investment opportunities on the continent and no need to look in America for them.
The sentiment in the industry is much better this year than a year ago, according to Atomico's survey. Some 50 percent of respondents are more optimistic about the future of the European tech sector than 12 months ago - roughly double the proportion compared to last year. There has been an improvement across Europe.
In a European comparison, optimists are most prevalent in Poland, where 57 percent of Polish respondents have a more positive view of the future. This is a huge jump compared to last year. And a huge inspiration for the rest of Europe. Sentiment has also improved in Portugal, Spain and Norway. The Czech Republic is not listed in the report, but at DEPO Ventures we are currently launching our own survey to detail the sentiment in the Czech startup environment.
Artificial intelligence and climate instead of fintech
It's been a year since the public was introduced to artificial intelligence, and generative language models like ChatGPT have been tried by just about every internet user since then. American companies have gained strong competition in Europe in the form of companies such as Mistral AI and Aleph Alpha. Startup founders have also jumped on the AI bandwagon: its share of total investment has shot to an all-time high of 17 percent. For early-stage startups, the share of investment is as high as 33 percent.
In addition to artificial intelligence, startups focusing on sustainability or climate and health technologies also made it into the top three most popular sectors among investors. The authors of the Atomico report point out that it is complex and complicated problems such as AI or climate tech that attract much more talent in Europe than in the US.
And this in turn attracts capital, which sees the potential to solve today's most pressing problems in these areas. The climate tech sector represents 27 percent of all capital invested in European technology in 2023, more than doubling its share compared to 2021. Investors, on the other hand, are turning away from fintech start-ups, which has long attracted the largest share of investment.
Opportunity for local investors
But not everything in the startup world is rosy. People in the European startup ecosystem are still very concerned about a number of things, the biggest being access to capital and lack of resources. They also fear that geopolitical instability, i.e. the ongoing war in Ukraine and the conflict in the Middle East, will catch up with them. They also don't hide their fears about macroeconomic conditions, as the fall of economies into recession could affect startup business and investor sentiment.
Entrepreneurs also cite Europe's deteriorating competitiveness due to increasing regulation as another concern. In fact, the EU has just a few days ago tentatively agreed on a set of rules for the world's first comprehensive regulation of artificial intelligence. They will not come into force until 2025, but if politicians tie up development too tightly, it could deter many startups and investors.
The current situation, which is reflected in the decline of US investors' interest in Europe, favours local players. Local capital is more important than ever. It would help create a stable environment for funding startups across all stages, especially in the later stages. While the early stages have always been dominated by domestic capital over foreign money in abundance, the later stages have relied on international capital. This could change.
The best way for talent
We have already said that less capital went into private European tech companies this year than last year. This is true for almost all countries, including startup superpowers like the UK, France and Germany. Yet there are three countries on the continent that have seen growing capital inflows this year - Lithuania, Romania and Luxembourg. This may be an example for the Czech Republic, which ranks 23rd out of 30 countries in the amount of capital invested. Compared to the much smaller Lithuania, only a quarter of the money went into startups in the country.
As the founder of a Finnish startup, Aiven Oskari Saarenmaa, says, let's start believing in ourselves. "Europe has the talent, innovation and legacy of disruptive innovations such as the World Wide Web and Linux. We need to foster a culture that believes in the power of ideas and capabilities, encouraging bold entrepreneurship and fostering the entrepreneurial spirit", says Saarenmaa. There is nothing more to say, I agree 100%. Startups in the early stage of development help create quality jobs and it moves the whole industry forward.
We can take inspiration from Estonia, which remains a paradise for startups. It is still true that this small but mighty Baltic state has the highest number of funded startups per capita in Europe and also the most billion-dollar companies per capita. The story of Skype, which was the main trigger for the Estonian miracle, has already been replicated elsewhere in Europe. The number of new companies founded by individuals who have emerged from Europe's billion-dollar companies is growing. This is good news because the whole ecosystem is getting stronger as a result.