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.