Startup Investments...Can Generative AI Reignite the Industry?

Investment in European tech startups is expected to decrease by 39% this year, according to venture capital firm Atomico’ State of European Tech (https://stateofeuropeantech.com/2023-first-look). Funding for venture-backed startups in Europe is projected to decline from $83 billion in 2022 to $51 billion in 2023. The reduction in funding can be attributed to a retreat by U.S. investors, who have previously been significant drivers of funding activity in Europe. The drop in funding follows a challenging year for the technology industry, with investment in private tech startups in Europe declining by 22% in 2022.

Despite the overall decrease in funding, there are some signs of resilience in Europe's tech industry. The overall value of public and private companies in the region has reached the $3 trillion mark achieved in 2021. However, the tech market in Europe has seen a compression in valuation multiples, with the median enterprise value of public software-as-a-service companies declining to five times revenue from a long-term average of 7.8 times.

The increase in down rounds is also a matter of concern. 20% of the venture rounds raised in the first quarter of 2023 were down rounds, a significant rise compared to the previous year. Layoffs have affected the industry, with 11,100 job cuts in Europe accounting for about 6% of global tech industry layoffs. High levels of layoffs are epected to continue throughout 2023.

On the bright side, there has been a notable trend of new companies being founded by teams composed of former employees of tech unicorns. Atomico reported that 1,406 new founders emerged from companies established in the 2000s. Although the impact of the layoffs on talent recycling remains uncertain, among tech giants, many eyes have been following the Twitter-Thread saga. Reaching 100 million users in less than two weeks from launch, Meta Threads was unquestionably built thanks to many Twitter recently laid off ex-emplyoees .

Despite the overall downturn, artificial intelligence (AI) has shown promise in the industry. Generative AI startups raised significant sums, accounting for 35% of total investment into AI and machine learning firms in 2022, a substantial increase from the 5% share they held in 2021. Generative AI is driving a high degree of innovation and Europe has a seat at the table in this new AI supercycle technology.

In summary, European tech startups are facing a decline in investment, primarily due to a retreat by U.S. investors. The tech industry has experienced challenges, including valuation compression, an increase in down rounds, and layoffs. However, AI powered startups have emerged as a thriving segment, garnering significant funding due to increased investor enthusiasm.

Most analyst think we are in the early stages of a new AI supercycle technology with a substantial degree of innovation propelled by generative AI. Creating an enabling environment that empowers European talent to unleash the potential of the upcoming supercycle is of utmost importance.

Note: image generated on DALL-E OpenAI image generator.