The path ahead

By June, a total of $55.5 billion had been invested in European tech, placing the first half of 2022 on par with last year’s record levels for the same period. However, this initial boost was driven by spillover from the previous year’s investment activity, and we’re on track for a 42% decrease for the second half of the year compared to 2021.

We all know that the IPO market is mostly closed. Globally, there have been just three IPOs valued at $1 billion or more, two of which were in Europe, compared to last year’s 86. M&A activity, while one of the only remaining routes to exit for founders, has also dropped off. The compression of the public market has trickled down to the private markets, with investment round sizes now shrinking, after inflating in 2021. Series A valuations have fallen 50%, while Series C valuations are down 60% from their highs at the end of 2021.

For founders facing slower revenue growth and diminishing cash reserves, reticent to raise at a lower valuation, this means doing more with less. Layoffs have been one of the most visible, and difficult, indicators of the economic slowdown, as hundreds of firms made the hard decision to reduce headcount to manage cash burn. The pace of layoffs has increased in the second half of the year and more pain is likely to come in 2023.

Yet, despite the somewhat gloomy headlines, we’ve emerged from the process of writing this report feeling more optimistic about the European tech opportunity. The technology ecosystem as we know it is barely twenty years old and in that time we’ve matured at an incredible rate. Real success for the sector is less about short-term valuations, and much more about talent, innovation and long-term company building. The crucial pieces of this puzzle remain in place. Investors are sitting on record amounts of dry powder to deploy - $84 billion across European venture and growth funds alone, up almost 3x in just the last five years. Europe has 160,000+ start-ups, many still hiring, and a community of 2.6 million start-up employees more experienced, more connected and better equipped than ever. In terms of the underlying strength of our ecosystem, far less has changed than we think.

Digital transformation is not going away. Tailwinds continue to propel the sector forward, and with the world facing significant challenges, technology must be our solution. New estimates suggest that the EU alone will need to double its number of technology specialists - and create 11 million more roles by 2030 - in order to meet the growing demand for new tech. We’re still very early in Europe’s journey.

That’s not to say there won’t be more hard choices on the horizon. Leaning into the difficult decisions of this period - be that down rounds, layoffs or closing up shop, is crucial. The true strength of European tech is about building a future-facing ecosystem that can withstand economic cycles and come through stronger. Many founders today have only ever experienced bull market conditions. The slowdown is a chance to build more resilient businesses, with the perspective and maturity to endure for the long term.

And there’s evidence the tech community agrees. According to our survey, there is optimism across all groups - founders, operators, VCs, LPs, policymakers - despite the macroeconomic turbulence. 44% of respondents feel more optimistic about European tech now than they were twelve months ago. This rises to 77% when you include those who say they feel the same as a year ago. There is consensus about the future of European tech.

With less froth, and the consolidation that comes from a downturn, Europe has the opportunity to focus resources on technologies that solve meaningful problems and have the greatest chance of success. Investment in purpose-driven technology has actually sped up this year, despite the market turmoil. While total capital invested in tech is up 3.1x on 2018, climate tech investment has increased 6.7x in the same period.

During a downturn, perceptions of opportunity and risk inevitably evolve. But as this report shows, innovation doesn’t stop, and neither does entrepreneurship. While a recession may hit short-term consumer spending and business investment, technology continues to transform the way we live and work. 

That’s why our message to founders, governments, and LPs is clear: this is not the time to sit back. Whatever is happening in the markets, the fundamentals of this ecosystem haven’t changed. The opportunity for Europe is greater than ever.

2022 looks like the year the sea changed.

The rapid, Covid/WFH-fuelled technology run of 2021/22 appeared to reverse. Tech market valuations declined: $400B+ in value has been erased since the start of 2022. The NASDAQ ended 13 years of value appreciation to close down c. 47%. Median revenue multiples contracted from 18.6x to 5.4x. The 2021 SPAC party may have ended and IPO markets seem to have “closed”. It appeared that investors in 2022 were no longer racing to submit term sheets. Many Tech companies embarked on well-publicised staff lay-offs. The overall share of de-horned unicorns now stands at 16% of all companies that had at one point scaled to the billion-dollar milestone, after 45 companies lost their unicorn status in 2022.

People became interested in geopolitics.

The war in Ukraine continues to have a profound impact on the world. The relationship between China and the West has shifted. Supply chain challenges, among other things, contributed to escalating inflation rates (the UK reporting inflation of 11.1%, the highest in 41 years as of November 2022). Central banks responded by increasing interest rates.

Valuation methodologies have changed.

The cost of capital has risen. The path to profitability has become an increased focus area, and investors look like they have shifted away from the market’s longstanding appetite for growth-at-all-costs, towards profitable growth. Earnings and cash flow metrics now appear to be equally as important to many investors as ARR, revenue and growth are.

Wherever there is a challenge, there is also a potential opportunity.

There is now estimated to be a record level of dry powder waiting to be deployed (2.3x the level of 2017) and, with the technology sector at a recent cyclical valuation low, it could be an excellent time to deploy it. The potential opportunity in Europe looks to have been acknowledged by numerous of US private equity firms who have recently established offices in Europe.

European tech M&A moderated in H1 2022, but appeared to pick up in Q3.

Announced deal value in 2022YTD was $35bn, down 49% from the same period last year. Activity seems to have picked up again in Q3 with a number of sizeable transactions targeting public UK tech companies in particular as acquirors sought to capitalize on the publicly listed valuation environment (e.g. AVEVA, Microfocus, Euromoney, EMIS and Ideagen, among others). We might expect to see continued take-private activity in 2023 as the expectations of boards and shareholders may adjust for the new valuation paradigm, driving further the shift to private markets.

Robust capital markets are important to the European tech flywheel.

European and global technology businesses suffered in 2022. Lower market liquidity still represents an issue in European Capital Markets generally, with fund outflows being observed across Europe compared to net inflows globally. Buying opportunities are predicted if valuations across Europe normalise. Some listing frameworks are becoming more flexible through initiatives like the Hill and Austin reviews, making European Capital Markets a place where innovative companies may find it easier to thrive. In 2023, the market could see a return to growth capital raises and IPOs, however, the latter, in our view, is still unlikely to occur prior to H2’23. 

On a positive note, investors have $44B in dry powder reserves - an increase of 13% from 2020. However, the pace of capital finding its way into the innovation economy has slowed. Companies are drastically reducing costs and focusing on profitability and runway extension. While a challenging environment, one that many European founders have never experienced, as an ecosystem we’re more prepared to navigate this period of uncertainty better than at any other time in our history.  

It’s impressive to see the market adapt to new challenges using the lessons learned during the pandemic.  Management teams and boards are better prepared and approaching this challenging environment with tenacity, flexibility, and agility; all traits that our innovation ecosystem is famous for.  

At Silicon Valley Bank UK, we’re confident that we will emerge stronger as a sector. At the early stages we’re seeing strong activity pre-seed as VCs look to cement relationships earlier on. Series A investment continues to be robust and is being coupled with debt financing to support company growth and cash runway. Our ecosystem remains hugely attractive to foreign investors who participate alongside domestic European sources of capital; a weaker pound has also helped in this respect.   

While the exit route via public markets remains all but closed, private M&A has seen a huge uptake with 1,600+ deals completed so far in 2022, as later stage companies generate growth and scale through acquisitions. We believe this trend of consolidation will continue and aid the recycling of capital, talent, and experience. The actions our founders, investors, and key players in the industry are taking will ensure we’ll be well positioned once the backlog of IPO-ready businesses exit in the coming years, and liquidity finds its way back into the market.