Europe has long been regarded as a tech underdog, overshadowed by the giants of the industry in the United States and China. However, as of June 2023, it's becoming increasingly clear that Europe is poised to emerge as the next global tech superpower. The signs are promising, and the continent is brimming with potential.
Impressive Numbers Tell the Story
The headline figures are hard to ignore. The European tech industry is now valued at a staggering $3 trillion, boasting a remarkable compound annual growth rate (CAGR) of 27% since 2015. Europe has also nurtured more than 300 firms with valuations exceeding $1 billion, spanning 29 different countries. These numbers alone demonstrate the region's undeniable potential.
The Triad of Success: Innovation, Talent, and Capital
Europe's tech boom is powered by a blend of innovation, talent, and capital, essential ingredients for any global tech superpower. Despite economic downturns, the region's tech ecosystem remains robust and resilient.
One of the most striking developments is Europe's burgeoning early-stage tech pipeline. In recent years, the continent has nearly closed the gap with the United States in terms of the number of new startups created annually. Europe also commands 30% of global early-stage funding (rounds under $5 million) compared to the U.S.'s 36 % — a gap that has been halved in just five years. With a 24 % CAGR over the past decade, Europe is on track to surpass the United States in this category within five years.
Additionally, the conversion rate of these early-stage opportunities into billion-dollar unicorn firms is equal in both markets, with 1.9 % of seed-funded startups achieving unicorn status.
European Tech Funding Landscape: Insights from 2016-2021 Seed to Series A Transition
Delving deeper into the European tech landscape, we find intriguing insights from the period between 2016 and 2021. While seed funding in Europe experienced a surge, most seed rounds—over 80 %—remained in the range of $1-4 million. During this time, there was a notable doubling in the share of Series A funding rounds exceeding $15 million, while Series A rounds below $7 million decreased from half to one-third.
The transition from seed to Series A funding, for the 2016-2018 cohort, typically took around 24 months, but this timeline might be extended by at least six months due to reporting lags. Conversion to Series A funding occurred within 36 months, aligning with the 2012-2015 cohort's pattern, with over 80 % of companies making this transition in this timeframe.
However, the challenge lies in the conversion rate from seed to Series A funding within 36 months for the 2016-2018 cohort. Only one in every four to five companies managed to secure Series A funding during this period. Interestingly, companies that received seed investments from specialized seed-focused venture capital (VC) funds demonstrated a higher conversion rate, with one in three successfully progressing to Series A. Remarkably, only a select few seed-focused VCs that primarily led or co-led funding rounds achieved a conversion rate exceeding 50 %. Despite the surge in Series A funding, the conversion rate from seed to Series A has shown little improvement, remaining relatively unchanged between the 2012-2015 and 2016-2018 seed cohorts.
Leading the Way in Purpose-Driven Tech
Europe's leadership in purpose-driven technology is a critical advantage. More than half of early-stage investments in companies addressing the UN's Sustainable Development Goals globally come from Europe. Even during economic downturns, Europe has remained committed to this sector, while North America and Asia reduced their investments significantly.
A Wealth of Talent
Historically, talent has been a concern for Europe. However, the continent now boasts twice as many software developers as the United States and is home to four of the world's top ten technical universities, compared to three in the U.S. Furthermore, 18 % of the world's AI research talent resides in Europe, a figure on par with the United States.
What sets Europe apart is the emergence of experienced, multi-cycle leaders. Skype set the stage in 2005, and now, with the rise of alumni networks like BlaBlaCar, Klarna, and Adyen, a new generation of tech talent is emerging. Over 1,400 companies have been founded by alumni of European unicorns born during the 2010s, a significant increase from the 1990s.
Europe's Path Forward
While Europe's tech industry is undeniably on the rise, challenges remain. One notable area for improvement is funding. Europe's dry powder for tech investment stands at $44 billion, significantly lagging behind the United States and Asia. Europe must reduce its dependence on volatile external sources of capital.
To bridge this gap, local pension funds and life insurance companies need to invest in tech growth, as is common in the United States. Government initiatives, such as Scale Up Europe, are a step in the right direction, but private sector involvement is equally vital. Regulatory changes, like adjustments to Solvency II, could be game-changing in attracting more institutional capital.
Additionally, Europe needs to create an attractive environment for IPOs and listings, alongside deeper and more liquid pools of institutional capital. Recent European IPOs have shown promise, but there is room for improvement.
Conclusion
In summary, European startups and venture capital are on a trajectory to outshine any other region in the next decade. The data and the firsthand experience of the ecosystem indicate that Europe's tech potential has been underestimated for too long. Rather than merely following the footsteps of the U.S., Europe can create a better technological future, one that is forward-looking, durable, and purpose-driven. The stage is set for Europe to become the next global tech superpower, and it is a role it should embrace with confidence and ambition.
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Sources: The next global superpower, Atomico
Dealroom, The Journey to series A
