Slush: A spotlight on the Nordics 

Total capital invested into the European tech ecosystem in 2023 is on track to reach around $45B, starkly highlighting the impact on capital flows as a result of the shift in the broader macro landscape. This will be down more than half (55%) from the record year of 2021, when investment volumes surpassed the threshold of $100B for the first time.

This also represents a steep drop-off of 45% from 2022's total of $82B. Nordic countries have been impacted by the same funding retreat as broader Europe, with 2023 total investment levels projected to $4.5B, roughly half compared to the 2022. The decline is not surprising given the dual effect of many later-stage companies delaying fundraising, as well as materially slower deployment pacing by investors, which have both served to drive the large decline in the prevalence of outsized, growth stage investment rounds - the biggest factor in the lower amounts of capital invested.

While the decline from the peak in 2021 is large, it's worth highlighting that 2023 is on track to be the third-largest year on record by total capital invested, and is on track to come in at four times the volume seen 10 years ago in 2014. In fact, the resetting of investment levels appears to reflect a correction to the long-term upwards trajectory, following two outlier years of overheated activity.

The combination of the withdrawal of crossover investors and the general slowdown in late-stage investment activity is unsurprisingly reflected in a huge decline in the number of so-called mega-rounds, meaning round sizes of $100M or more. In the peak of 2021, there were almost 200 rounds of this magnitude, including more than 50 rounds greater than $250M.

While this number declined slightly in 2022 to 163 rounds of $100M or more (of which 38 were greater than $250M), the first nine months of 2023 saw a far more significant decrease. In the first nine months of 2023 to date, there have been 36 rounds of $100M or more, of which only seven have been sized in excess of $250M.

The same trend has been particularly pronounced in the Nordics, where the mega-round count reached unprecedented highs in 2021 and 2022 and has since retreated to pre-2020 levels.

This year's survey reveals a largely positive bend to industry sentiment, with around half of respondents registering a more optimistic outlook for the future of European technology compared to 12 months ago. This is approximately double the share of respondents who reported a waning sense of optimism over the past year.

Looking at how sentiment compares across countries, the picture is broadly aligned. In every country, the share of respondents with a positive outlook far outweighs the share that reported a negative change over the past 12 months. Nevertheless, around a quarter of respondents in all countries do say they are now less optimistic compared to this time last year.

There are certain countries that stand out as particularly positive amongst survey respondents. 57% of respondents based in Poland are more positive about the future, the highest share of any individual country and a huge leap from last year. Similarly, 50% or more of respondents from Portugal, Spain, and Norway also reported improved sentiment over the past 12 months.

Reflecting the multiple compression of the public markets, valuations in the private sphere are also returning to normalised pricing levels, once again framing 2021 as an exceptional year.

Valuations across stages in Europe are now hovering around 5- and 10-year long-term averages. The notable stage exception is Seed, where despite a levelling off of median Seed pre-money valuations in 2023, there has not yet been a correction to long-term pricing averages in the same way that has been evident at every stage from Series A and later.

This shift back toward longer-term averages in Europe mirrors what is happening in the US. Notably, however, median valuations in Europe continue to be 30-60% lower than in the US across all stages.

As seen in regional investment volumes, at the country-level, early stage funding has proven far more resilient across countries, while significant declines in growth stage funding rounds account for most of the decline in total capital invested.

On a GDP-adjusted basis, Europe continues to lag behind in terms of its share of total capital invested globally in technology. Europe, as defined by the 50 countries included in the State of European Tech report, accounts for 21% of global GDP. By comparison, the projected total of $45B of capital invested in the region will equate to around 18% of global investment volumes. By comparison, the US accounts for 25% of global GDP, but a massive 46% share of total capital invested.

Looking at a sub-regional level, the UK & Ireland's share of GDP and total global investment volumes are broadly aligned at around 4% each. Every other sub-region, however, records underperformance in terms of investment volumes if adjusted to their relative share of global GDP. The gap is particularly pronounced for Southern Europe and Central and Eastern Europe.

Slicing the data on a per-country basis helps to identify the biggest opportunities to close the gap. In both Germany and Italy, for example, there is still a gap of more than two percentage points to catch up between their respective shares of global GDP and global private tech investment.

One proxy for the relative scale of startup ecosystems across Europe is the absolute count of startups and scaleups that have received different levels of external capital investment. This does not, of course, tell the full story, as there are many exceptional startups that choose never to raise any external funding, but it is still a useful measure of the relative depth and maturity of tech ecosystems across the region.

Unsurprisingly, the countries that have the largest absolute investment volumes also have the highest number of funded companies. The UK leads with almost 13,000 funded tech companies in total, and has the largest count of companies across all buckets of total capital raised.

The number of funded startups in the UK, France, and Germany (around 23,000) is greater than the total for the rest of Europe combined (around 21,600).

The data is also helpful to better understand the relative distribution of funded companies, according to how much capital they have raised. The vast majority of funded companies (76%) have raised less than $5M in total. This also reveals interesting comparisons between countries in terms of the relative number of companies across the different levels of funding raised. Italy, for example, has a similar number of early stage startups that have raised less then $5M in funding compared to the Netherlands, but far fewer larger-scale companies that have raised $50M or more.

Inevitably, any measure of startup activity in absolute terms will be dominated by the largest countries by population and GDP. We therefore adjust for the size of the country to draw comparisons that benchmark the relative level of startup activity. Here, the density of funded startups is adjusted for population to identify countries with the highest density of funded startups per capita.

On this basis, smaller countries with active startup ecosystems rise to the top. Estonia, as in prior years of producing this analysis, takes the top spot. This also serves to highlight the fact that many large countries, such as Germany, Italy, and Spain, have significant room for growth if they want to compare more favourably with countries that have succeeded in creating a greater relative density of funded startups, on a population-adjusted basis.

The impact of this relative decline of US capital invested into European tech companies differs by country. Looking at the four largest European markets by overall investment volumes, there is a clear pattern of increases in the relative volume of US capital invested leading up to the peak in 2021, followed by two subsequent years of decline.

What is notable, however, is that the relative weight of US investment to European investment differs quite significantly between these countries. At the peak in 2021, every dollar invested into either a UK or German tech company by a European investor was matched by US investors to the tune of 86 cents in the UK and as much as 93 cents in Germany. By comparison, the equivalent number for French tech companies was around half, at 43 cents.

The number of countries that have produced a breakout, billion-dollar company is one of the clearest indicators of tech entrepreneurship and the diversity of Europe's startup ecosystems. Today, a total of 356 companies are currently valued in excess of $1B, and they have been started and scaled from 29 countries and 136 cities.

This includes not only countries that have only produced a single billion-dollar company to date (including Bulgaria, Latvia, and Slovenia), but also eight countries that have more than 10 current billion-dollar companies, led by the UK (105), Germany (54), and France (37).

Unsurprisingly, the market reset has also resulted in a growing number of $B+ companies being 'dehorned', meaning they have seen their valuation fall to under a billion dollars. This year, at least 50 companies have been "dehorned" to date, either via down rounds, share price compression, or by going out of business entirely.

This creates challenging times for companies, their founders, employees, and investors, but is also a natural feature of the startup and scaleup lifecycle.

The emergence of billion-dollar companies is a simple but useful measure of startup success. It is also an indicator of a country's ability to foster innovation and create a supportive environment for the development of high-growth startups.

The number of billion-dollar companies can therefore be used to benchmark progress, especially if normalised on a per capita basis to adjust for different country populations. On this measure, as it has done for years, Estonia continues to stand out as the leader in billion-dollar company density, with 4.5 companies valued at over $1B per every one million inhabitants.

Of course, a small population can help boost per capita measures. Similar to Estonia, other smaller countries such as Sweden (2.4 $B+ companies per 1M inhabitants), Malta (2.0), and Norway (2.1) are all punching above their weight. Nevertheless, the UK's strong startup scene is reflected in the amount of $B+ companies per capita too, ranking way above the European average of 0.9 with 1.6 $B+ companies per 1M residents.

As highlighted in the Executive Summary, the meteoric rise of tech entrepreneurship in Europe has resulted in the number of new tech startups founded each year in Europe exceeding that in the US for each of the past five years. On average, around 15,200 new tech startups have been founded per year in Europe, compared to 13,700 in the US.

But which countries are the biggest contributors to tech startup formation across Europe? And which countries, if any, are seeing their share of tech startups being founded faster, in relative terms, than those across the rest of the region?

The UK leads the way in terms of the number of tech startups founded each year, accounting for approximately a quarter of all new companies each year in Europe. The fastest-rising country in terms of share of new tech startups created each year is France, which has seen its share increase from 18% in 2019 to 22% in 2023.

While the top 10 countries account for a significant percentage of total tech startup creation each year (83% in 2023), a meaningful share of new tech startups (17%) are being started away from these more established clusters of startup activity.

The distribution of ecosystem values varies by region, but in the past five years, has stayed quite stable.

UK & Ireland is home to the largest share of private tech, capturing 33% of the European ecosystem value.

France & Benelux take home 22%, largely thanks to their significant public market value and the Netherlands being home to ASML, the largest European listed tech company. SAP in Germany is the next biggest public tech giant in Europe, boosting DACH into third place with 21%.

Together, these three regions capture 76% of the combined ecosystem value in 2023, again underscoring the prevailing disparities across different parts of Europe. That said, the rest of Europe has done some catching up, increasing their share of the pie from 17% in 2019 to 24% in 2023.

Europe is an attractive destination for tech talent. Looking at the talent moving across borders to start a new job in European tech, it's clear that employees tend to follow the money.

Countries that have raised the largest amount of funding, such as the United Kingdom, France, and Germany, tend to also attract most foreign talent. This makes sense as rapidly growing companies need this influx of employees to keep expanding.

Interestingly, there are a few outliers to this trend. Switzerland, Sweden, and Norway stand out as relatively underweight in net new talent entering the country vs. the volumes of funding raised. Language skills and immigration law may be barriers for relocation to these countries.

Europe - our top countries individually, as well as the Rest of Europe - is a net beneficiary of talent movement, with more talent entering from overseas than leaving.

However, digging more into the numbers clustered under 'Rest of Europe', it becomes evident that the top funded countries are attracting talent away from smaller European ecosystems. While Ukraine was already seeing a net negative flow in talent historically, this was exasperated by the war, with tech talent leaving the country at an unprecedented scale. Other European countries suffering from significant brain drain are Belarus and Hungary.

While it is tempting to create a negative narrative around talent leaving their home countries, the so called "brain drain" does ultimately benefit the European ecosystem. Talent mobility is important to allow for cross-fertilisation as new talent brings with it a new perspective and a wealth of experience.

Even in the face of challenges in the capital markets and concerning indicators such as layoffs that may impact the perceived attractiveness of joining the industry, European tech has not seen an exodus of talent. In fact, new positions are constantly being created, and talent from outside tech continues to look past any perceived risk to place significant bets on the European tech sector.

Although there has been a levelling off in the rate of increase of net new joiners into the tech industry over the past three quarters, and a very small overall decline in total headcount in Q3 2023, it's remarkable that in just five short years, European tech has expanded its workforce from slightly over one million employees to more than 2.3 million today. Of this, the Nordics contribute roughly 10% in 2023, with the tech talent base scaling similarly by more than 2x since 2018.

The fact that AI is flourishing under the radar in Europe should not be a surprise. Europe has a strong technical talent pool, owing its strength to world-class scientific and technical institutions and the depth of its engineering talent.

This strength extends into the field of AI. Over the past decade, Europe has not only witnessed a greater than 10x increase in the number of people working in AI roles, but also claims a larger resident population of highly-skilled AI professionals compared to the US.

Of course, many of these AI professionals are working in roles at US-headquartered technology companies that have built a large AI research presence in Europe, such as Alphabet or Meta. But as Mistral AI - a company founded by European former leading AI researchers at Meta and DeepMind - demonstrates, these European-based pools of AI talent have become an incredibly rich breeding ground for the founders and talent behind the next generation of European AI companies.

The legislative environment can play a significant role in a pension fund investor’s appetite and ability to invest in the venture asset class. American and Nordic pension funds are often cited as role models for regions earlier on in their journeys, combining appropriate safeguards with a balanced portfolio risk. This is also reflected in the levels of investment flowing into VC, with North American and Nordic LPs on average accounting for the largest shares across the past five years. 

Despite representing one of the biggest ecosystems in Europe, pension funds in the UK and Ireland only represent 6% of pension funds committed to European VC in 2022. To put this further into scale, in 2022 UK & Irish pension funds committed a total $52M to European venture funds, while Irish and UK tech companies themselves raised $31B in that year, a sum several hundred times higher.

VCs based in the Nordic countries are the largest beneficiaries of local pension funds' investment activities. Interestingly, the Nordics is also the region in Europe with the highest share of funding raised from non-local pension funds, highlighting the need for a strong base of local LPs in order to attract overseas interest.

The Netherlands continues to lead Europe in terms of total public tech market cap. It is also home to four of the top 10 largest European tech companies by public market cap. ASML on its own is a true multi-hundred-billion-dollar European tech giant, accounting for 52% of the Netherlands' total market cap.

Meanwhile, the UK leapfrogged France, largely thanks to the ARM mega-listing, which contributed 34% of the country's total market cap in 2023. Without a helping hand from ARM, the UK would have underperformed year-on-year.

Similarly, the German public tech market is heavily reliant on SAP's performance, as it contributes a whopping 53% to Germany's total tech market cap. The stock price recovery of SAP is also reflected in Germany adding $33M to its market cap.

The European public tech markets continue to be concentrated among a few top players, where the top three account for 35% of the total 2023 market cap and the top 10 for 58%.