In 2021, the European tech ecosystem was in rude health, smashing the $100 billion mark in VC funding for the first time. Two years later, however, that number had halved, with the annual State of European Tech report placing annual funding for 2023 at $45 billion.
The wider economic context cannot be ignored. 2023 saw another challenging macro environment. However, it’s important not to let a broad, region-wide perspective gloss over the performance and characteristics unique to each market. The UK, for example, had a strong year according to HSBC, with VC funding reaching $22 billion, surpassing pre-pandemic levels, following a funding acceleration in the second half of 2023.
While tech ecosystems in other European nations didn’t fare as well in comparison, we shouldn’t get carried away and extrapolate too much from total funding numbers. The UK boasts more scale-up tech companies compared to other European nations. That’s a positive, of course, but it also means we can expect more talent to leave these now mature companies in search of new early-stage adventures.
Indeed, looking across the continent, the same State of European Tech report found that Europe is still vastly outpacing the US in terms of the number of tech founders entering the market, despite the higher barrier to entry now in place. This is promising for the months ahead, where we’re observing key trends and opportunities shaping Europe’s tech ecosystem for the better. So, let’s explore these in more detail.
Paris set to capitalise on strong groundwork
In years gone by, France was often associated with bureaucracy – a business climate that could be off-putting for entrepreneurs. However, it would be inaccurate to view France in the same light today. Smart government support for startups has led to resilient early-stage funding. The Bpifrance public investment bank, in particular, has injected tens of billions into French startups, providing a steadfast source of early-stage capital. This strategic support is a key factor behind France experiencing a smaller decline in VC funding in 2023 compared to other major European tech hubs.
Funding is just one piece of the puzzle, though. France’s success can also be attributed to the government’s broader measures to foster an environment conducive to start-ups. This includes the Tibi programme, designed to channel more institutional money into late-stage funds, innovation tax credits, technology excellence centres financed by public-private partnerships, and innovation clusters that connect innovators within the same region.
In the coming months, expect to see intensified competition for funding at the pre-seed and seed levels in France. Several recent fundraising successes have equipped regional funds with significant capital ready to be deployed, alongside a higher-than-average presence of super angel investors. Billionaire Xavier Niel plans to invest 200 million euros in AI, aiming to position France at the forefront of the field. This move complements the growing interest from large Family Offices, pan-European investors, and French venture firms in supporting the thriving ecosystem.
In terms of the technology sweet spot for the French ecosystem, AI is the stand-out. Local players including Mistal AI, poolside and Raive are building foundational models in addition to activity in the AI tooling and application spaces. The presence of local Google and Meta AI research labs further strengthens the French case for being the leading European hub for AI. Fintech and climate tech are also fixtures of the French tech ecosystem. Mistral is particularly exciting and worth mentioning. Here’s an early-stage company that capitalised on its EU roots and managed to strike a partnership agreement with Microsoft despite Microsoft’s very public association with OpenAI. An achievement of this scale is pretty mind-blowing.
Overall, France has done a great job in its efforts to offer incentives for start-ups of the kind that have been hugely successful in the U.S. but haven’t been well replicated in Europe historically. That puts the local ecosystem on a great footing for the future.
Germany is a frontrunner in future-shaping technology
Despite being labelled the world’s worst-performing major economy in 2023, there are grounds for optimism regarding the future of Germany’s tech sector. While France has been making significant strides in AI, Germany has not been far behind. Mega funding rounds for German AI firms such as Aleph Alpha, DeepL, and Helsing in 2023 underscore the country’s robust ecosystem for frontier technology that is shaping the future of AI.
The German government has made clear its ambitions to invest more in homegrown and European VCs. Through its Future Fund and state-backed KfW Capital, the German state is investing and committing billions to start-ups and VC funds that align with its strategic vision. As a result of this targeted direction of funding, we expect to see Germany become one of the frontrunner ecosystems for renewable materials and more advanced areas of green technology in the years ahead.
The reality is, however, that any start-ups looking to benefit from large 2024 funding raises in Germany will have to demonstrate a commitment to the country’s domestic technology and public sector. This is down to the German state’s particularly active and influential sway role over regional VC funding. While there are positive signs of more institutional money in Germany being earmarked for growth capital, it still lags behind its contemporaries in funding per capita. Figures from the German start-up association, for example, reveal that while France invested a total of €107 per capita in start-ups in 2023, Germany only invested €85 per capita.
As German society hunkers down for a tricky economic period, the tech start-ups aligned to the public sector’s vision for Germany’s long-term tech leadership are set to benefit from raises.
Arbitrage opportunities are a boon for EU tech
Prominent players in the tech ecosystems of France and Germany are making significant strides in AI, a movement that cannot be discussed without acknowledging its origins in the U.S. The launch of OpenAI’s ChatGPT in November 2022 marked a pivotal moment, showcasing the transformative potential of generative AI and dominating tech discourse since. According to the latest annual CEO survey by PwC, 32% of CEOs have integrated generative AI into their companies, while 58% view it as a key to enhancing their products and services.
The swift rise of AI has significantly impacted the technology job market. The role of an AI engineer, scarcely known two years ago, has become crucial, leading to a surge in demand for AI talent that far exceeds the available talent pool in the U.S. This demand has driven substantial salary increases, with leading AI tech roles now commanding salaries around the million-dollar mark.
The situation in the EU tells a different story. The impact of the ChatGPT innovation was gradually absorbed, preventing a sudden spike in tech worker salaries and maintaining more reasonable compensation levels compared to the U.S. The EU benefits from a solid foundation of engineers from Eastern European countries, a talent pool that can be progressively adapted to meet the needs of AI startups. The EU’s straightforward visa policies further facilitate this process. Consequently, the EU’s tech ecosystems are in a strong position to rival U.S. technology in the burgeoning field of AI.
In summary, Europe’s edge over the U.S. in nurturing new tech founders is evident. The concerted efforts in France and Germany, underscored by significant government support, enable startups to thrive even during economic downturns. Despite Germany’s traditionally lower levels of venture capital, the government’s dedication to climate and deep tech has been pivotal in developing a leading regional ecosystem for these technologies. As AI continues to define the future of tech, Europe, with its robust ecosystems and favourable job market conditions, is poised to lead the next wave of innovation. European startups are well on their way to becoming the future champions of AI.
