Highlights for policymakers

The technology sector's increasing importance for the overall European economy's growth is underlined by its remarkable gains over the past 10 years. The Gross Value Added ('GVA') of the European tech sectors has increased at around 2x the rate of non-tech sectors, doing so consistently over the past decade, including throughout the toughest periods of the pandemic. GVA is a useful economic productivity metric that measures industry-level contribution to the economy, net of the impact of subsidies and taxes compared to GDP.

The sheer scale of the tech opportunity is further emphasised by the magnitude of global tech spend, which has more than doubled over the past 20 years, reaching more than $4.2 trillion in 2021.

Tech has reached this scale by transforming how we live and work as producers and consumers, but now promises to reshape so much more, from energy sovereignty to biodiversity preservation, to defence and cybersecurity, to AI safety, and far beyond.

Purpose-driven tech is inching back towards the record it reached in 2020, representing close to one-fifth of total capital invested. While purpose-driven companies address any of the United Nations' SDGs, Planet Positive is a subset of SDGs which target sustainable use of the planet's resources. This year, Planet Positive companies gained further market share of the broader tech market, capturing 19% of total European funding so far this year, up from 15% last year. Year to date, this represents $10.3B invested in tech companies with Planet Positive themes.

Climate tech, the smallest subset addressing only SDG 13, Climate Action, stands at $6.9B YTD. While all three categories have exhibited upward trendlines since 2018, both 2020 and 2022 - two years defined by global crises - saw spikes in their share of overall investments.

Climate Action (SDG 13) has received the most funding overall and has accelerated with 4x more funding than 2017-2019's cumulative figure. But other themes are accelerating and, in particular, Life on Land (SDG 15), Responsible Consumption and Production (SDG 12), and Industry Innovation and Infrastructure (SDG 9) have had even higher growth multiples since 2017-2019 levels, 6x, 4.7x, and 4.6x respectively.

Despite this growth, it is telling that SDGs 15 and 14 - Life on Land and Life below Water - remain at far lower overall funding levels compared with the other climate-related SDGs listed.

This likely reflects the continued challenge over funding (and monetising) innovations / deep tech related to biodiversity, oceans, and general natural capital resources requiring more patient capital. But numerous entrepreneurs, investors, and policymakers continue to try to crack this case; hopefully the growth rates we see here - since 2017, 25x and 5x respectively - are harbingers of much more growth and innovation to come in these important areas.

Drilling down on some of these 'basic' technologies, it's clear that European tech has remarkable room for growth. Almost all economic sectors show a distinct lack of uptake across several core technologies - with less than 50% uptake of one or more. As you'd expect, the Information and Communication Technologies sector (ICT) itself is the only one to buck the trend, with the highest penetration of core technologies like cloud computing and customer relationship management systems (CRM).

The adoption of cloud computing varies from sector to sector, but has only reached 50% penetration within ICT and professional, scientific, and technical activities. Meanwhile, CRMs fall at or below 50% penetration for all sectors but ICT.

Most notably, 33% of retail businesses don't have a website. Similarly, only 47% of accommodation, food, and beverage service activities have so far adopted online ordering, reservation, and booking services, despite the Covid-19 pandemic necessitating online ordering for many businesses in order to keep the lights on.

The durability of the adoption curves for even these more basic technologies will continue to drive large-scale growth for the tech ecosystem.

Both economically and socially, Europe stands benefit greatly from accelerating the rate of digital transformation. Recognising this, governments are exploring the role they can play in catalysing change. In our survey, for example, we asked respondents to give their view on the type of role - if any - governments should play in providing capital to European startups and scaleups.

Overall, only 5% of respondents say they don't see any role for government funding at all. The most common call to action is for governments to provide capital in the form of grants to startups, selected by 61% of respondents, while 44% call for loans and other forms of debt financing.

Responses vary significantly between different groups, who unsurprisingly are more eager for government support of their own activities. While the majority of founders (51%) see value in direct equity investments by governments into early-stage startups, only 23% of VC respondents agree. On the other hand, while 75% of VCs see a role for government investing as a limited partners into VC funds, just 30% of founders share the same view. The overarching conclusion, however, is that governments have many tools with the potential to be impactful, if well-designed and executed. We explore this further in the subsequent sub-chapter (3.4): Fostering entrepreneurial ecosystems.

Government agencies are still a critical source of funding for the European venture asset class. In 2021, just under 20% of all funds raised by European VCs originated from government sources.

This, however, represents a sharp decline from 2020 levels, when as much as 30% of all VC funding raised in Europe came from government agencies. In absolute terms, investment from government agencies across Europe equates to around $2.8B per year. This is a small amount compared to the total venture funding raised by European private technology companies that has averaged more than $90 billion over the past two years.

Funds raised by VC remain highly concentrated in certain geographies, with more than 90% of European VC funding captured by just 10 countries. The UK and France alone represent more than 50% of the funds raised, even though they account for just 25% of total European GDP, and 19% of the European population.

This means there is a huge amount of untapped potential. Nearly 60% of the European population lives in a country whose share of total European venture funding is significantly smaller than their share of the European population.

Similarly, looking at each country's share of total European GDP, many are still considerably underweight when it comes to the scale of their venture industry. For example, while Germany, Austria, and Switzerland (DACH) is the third largest ecosystem in Europe by overall venture funding raised, this is still small in proportion to its overall economy as represented by GDP. Other countries are well capitalised relative to their population: The Netherlands comes out on top, with nearly 4x the proportion of total funding compared to its proportion of Europe's population. This is followed by the UK and Switzerland at 3x above, and France at 2x above.

Europe's tech industry has historically been small proportionate to its total economic significance - with its share of total tech investment lower than its share of global GDP.

However, this gap is closing. Europe now captures 19% of global capital invested, relative to 23% of global GDP. Comparatively, Asia captures 22% of investment, but 33% of GDP.

The US tech ecosystem is still the most overweighted on the global scale - with a share of tech investment 2x greater than its share of GDP, and 12x greater than its share of the global population.

To dive deeper into the question of what lies ahead for the European tech ecosystem in 2023, we asked survey respondents to share, in free text format, their perception of the greatest challenges of the coming 12 months.

We analysed response themes using a language model to group responses by their semantic meaning. For example, responses relating to geopolitical instability may include related words such as “politics”, “governments“, and “wars”. Each group was then labelled with representative words, and further grouped into manually identified high-level areas. For the purpose of this analysis, each response was attributed to one primary theme only, providing a set of mutually exclusive answers.

The top two challenges highlighted by survey respondents were not surprising. The number one concern, especially among founder responses, is accessing venture capital. This was followed by the challenges posed by the macroeconomic environment and geopolitical instability.

In addition to a primary theme, we then attributed additional themes to each response, capturing other areas that were perhaps less prominent but expressed by respondents nonetheless. In this analysis of respondent sentiment, we have taken into consideration these secondary themes. While some answers only mentioned one specific challenge, many responses mentioned multiple challenges. These are therefore not mutually exclusive. For example, while 26% of all respondents cite access to capital as a primary theme, ~40% of all respondents express this concern when taking into account primary and/or secondary themes.

We also looked at how perceptions varied across different respondent types. Interestingly, the stack rank of challenges is exactly the same for all respondent types: the macroeconomic environment ranks top overall, followed by access to venture capital, and then the risk of a lack of innovation.

There are, however, a few notable differences. LPs, for example, are far more likely to have cited access to capital as one of the greatest challenges. We can only speculate, but we presume this reflects an understanding from the top of the capital stack as to how capital liquidity - or rather a lack of - is a defining feature of down cycles.

Unsurprisingly, the challenge of accessing talent, on the other hand, was not on the radar of LPs, but often cited by founders and C-Level executives working in tech companies.

Despite the many challenges ahead, the resilience of the European tech ecosystem and its ability to 'weather the storm' is reflected in a strong continued sense of optimism in the future of European technology. 77% of all survey respondents are either more optimistic or retain the same level of optimism as they did 12 months ago.

Surprisingly, only 23% of respondents have seen their optimism lessen compared to last year. This is likely because insiders within the European tech ecosystem are able to differentiate between the short-to-mid-term impacts of a financial downturn and the longer-term prospects of the European tech industry, which is ultimately dependent on the strength of the entrepreneurial ecosystem and the tailwinds of technological innovation.