Layoffs and lean times ahead for Europe’s startups amid inflation and energy crisis

Article by Jacob Bourne | Aug 18, 2022

The trend: After a record amount of investment in 2021, Europe’s tech startup industry is facing layoffs and falling valuations.

After garnering over $100 billion in startup capital last year, Europe’s venture capitalists warn of an impending industry bloodbath, per Insider.
Although Europe’s startups snagged $58.6 billion in VC funding during the first half of 2022, signs point to a bleaker second half marked by the abrupt end of easy funding rounds, uncontrolled spending, and smooth transitions from private to public markets.
There’s also a growing trend of startups raising funds through “internal rounds” from existing investors to keep outsiders from making unfavorable valuation assessments.
“The age of entitlement is over,” Michiel Kotting, partner at Northzone, told Insider. “That applies to investors, employees, founders.”

Notable startups taking a hit: Plummeting valuations and layoffs are already hitting subsectors like consumer tech, fintech, and SaaS.

Sweden’s payments firm Klarna is valued at $6.7 billion down from $46 billion in June 2021.
London-based virtual conference platform Hopin just laid off 29% of its staff.
Berlin’s rapid grocery delivery startup Gorillas laid off 300 employees and is “burning a lot of cash” as a valuation hit looms.

How we got here: Interest rate hikes to battle inflation, the war in Ukraine, and Europe’s energy crisis have eviscerated the foundation that fueled startup growth in recent years. A subsequent pullback of “tourist investors” compounds the harm just as shifts in post-pandemic spending pick new startup winners and losers.

Low interest rates helped direct record capital to startups as the number of unicorns—startups reaching valuations of $1 billion—doubled between 2019 and 2021.
However, that unprecedented growth now appears to be too much of a good thing as companies struggle to maintain their valuations with funding drying up due to higher interest rates.
The continent’s energy crisis driven by climate change and insecure natural gas supplies from Russia has triggered higher prices, industry shutdowns, and hindered data center operations.
An influx of non-traditional VC investors from the US, which contributed to Europe’s inflated startup valuations over the past year, are now backing out due to the downturn.

What to watch next: The turn of events correcting overheated growth doesn’t bode well for the continent’s near-term startup landscape, but the longer-term outlook is less clear.

We’ll likely see investors have more of an upper hand in setting deal terms, including demanding higher liquidation preferences.
Yet a slew of tech startups hiring for open roles could mean that the industry might quickly adapt to leaner times as demand persists for their products and services.
The longer view will largely depend on how long it takes to curb inflation and how Europe’s energy sector fares over the winter months.