The tech downturn: How are European startups faring?

The first half of 2022 rocked the world of tech. A cocktail of Russia’s invasion of Ukraine, rising inflation and poor public market performance has finally started to hit European tech.

Last month Swedish buy now, pay later (BNPL) star Klarna saw its valuation slashed to $6.7bn — from a high of $46bn roughly a year ago — and speedy grocery delivery unicorn Gorillas is reportedly on track to raise fresh funding at a reduced valuation.

And despite a significant amount of capital still being deployed in the first half of 2022 — $59.3bn across 4,000 deals — the days of free-flowing VC cash seem to be over.

But what does the data tell us about the tech downturn?

VC funding started to dip in Q2

The first quarter of 2022 showed signs that this year would keep pace with 2021. A total of $31.6bn was invested in Europe, according to Dealroom data — the second highest quarter of all time.

But that seems to be changing. Despite the first half of 2022 being Europe’s second highest six months for VC investment, that’s being propped up by Q1 — Q2 shows signs of slowing. Dealroom data shows a total of $27.1bn invested during Q2 2022, the lowest total since Q1 2021. There was a dip in funding across all rounds, from pre-seed to Series C+.

It’s worth noting that this data could change as more rounds are reported and data is updated — private market data tends not to be the most reliable or transparent — but it likely won’t change the overall trend.

Late-stage (Series B+) VC activity was down 8% in Europe and 19% in the US during H1 2022, per Dealroom data. As Europe typically lags behind the US, this is a data point worth watching in Europe. Things could deteriorate further in the next six months.

Early-stage funding — pre-seed to Series A — fared better on paper. Investors at the earliest stages in Europe also tell Sifted they’re less exposed to any slowdown as the companies that they back won’t be thinking about raising huge rounds or even exiting until many years from now. And a fair few early-stage firms have actually launched this year, including Cornerstone VC and Creator Ventures.

Activity at these stages during H1 was up in Europe by 21% compared to the same half last year. That’s better than the US, which saw a 13% increase.

Quarter-on-quarter funding data, however, shows this may be starting to slow. Pre-seed to Series A funding during Q1 2022 was $4.7bn, according to Dealroom data. In Q2 that dropped to $4bn.

The start of Q3 also shows that trend continuing. Month-on-month seed-stage funding in Europe went up in June, when €595m was raised across 254 rounds, but then dipped in July to €433m raised across 219 rounds.

2021’s boom in investment was also driven by an influx of non-European capital — a large percentage of that from the US. There are signs that foreign investors may be pulling back — albeit slightly — from European investments.

Foreign investors contributed 50% of VC cash that flowed into Europe in 2021, and 64% of VC cash in rounds larger than $100m. Those figures so far in 2022 are 47% and 59%, respectively.

Though that’s not a huge dip, this is also a data point to monitor as we head into the next two quarters; European tech’s slowdown could be accelerated if the foreign investors that freely deployed cash on the continent last year get cold feet.

VC deal count data shows the extent of the tech downturn

The overall funding amounts still look fairly healthy because of big rounds (more on those later); VCs are still sitting on lots of capital they need to spend, and that’s concentrating in the best-performing companies. So to really see the investment slowdown take hold, deal count can be a better proxy.

Money still flowed into startups: the biggest rounds in H1

In the first half of 2022 the largest round went to payments giant Checkout.com, which raised $1bn in January at a $40bn valuation — which now makes it Europe’s most valuable private company (though some might dispute that price tag now).

The other largest rounds in Europe in H1 were continent-wide. Estonia’s mobility startup Bolt raised €628m in January in a round led by Sequoia Capital. Swiss carbon dioxide removal company Climeworks saw the largest investment round ever for a carbon capture startup when it raised $620m (CHF600m) in April.

In Croatia, electric car manufacturer Rimac Automobili raised a $536m Series D round that valued the company at more than $2bn. And in France, neobank Qonto became a unicorn when it raised a €486m Series D in January.

There were also two whopping Series A raises in the first half of the year. The UK’s revenue-based financing startup Bloom raised £300m, while carbon recovery startup Perpetual Next — one of Sifted’s climate tech soonicorns — raised €320m and hit unicorn status.

Sifted’s take on the tech downturn

Investors are pulling back in Europe but that doesn’t necessarily mean that you can’t raise. Instead of the growth-at-all-costs approach prevalent during the last decade the focus during the tech downturn will be on traction and tangible business models.

Investors say they are deploying cash more carefully, and so will be putting even more scrutiny on key metrics like traction and product-market fit, as well as team dynamics.

As the data shows, the downturn is here, and the likelihood is that things will worsen across the coming quarters — all round types will be affected. The sense among founders and VCs, however, is that after the days of indiscriminate funding in 2020 and 2021, some caution might be a good thing.

Tom Nugent is Sifted’s digital editor. He tweets @TJNugent92.