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European tech becomes more decentralised as some hubs grow, but there’s still more to do
Munich, Stockholm and Cambridge are highest on unicorn density for large, medium and small cities respectively. Estonia retains its place as the most entrepreneurial country for the first time ever, and other regions in Central and Eastern Europe show resilience by finding alternative routes to funding. B2B, crypto & web3 and the creator economy are cementing as European strengths across the board.
Insights
The top 5 hubs still dominate investing activity
The five largest hubs by total capital invested (London, Berlin, Stockholm, Munich and Paris) are home to companies that between them captured 54% of total investment into the region in 2021, up from 49% in 2017.
Raising capital is still hard for most
Almost one-fifth of founders say it has become harder to raise capital in 2021, while a further 40% or so believe the environment remains unchanged from the past year, which itself was a year that saw a record number of founders responding that fundraising had become harder.
Could physical location lose its importance? Founders believe so
Startup founders and senior leaders see a decreasing importance across every consideration related to location - the most obvious shifts in sentiment related to the importance of having a physical office location, relocating employees and proximity to investors, which had all decreased in importance among more than 50% of respondents.
Just like any other region, Europe faces its own set of divides. Shedding light on some of these challenges provides a basis to reflect upon ways that all participants can make sure the flywheel that is spinning faster than ever before benefits a diverse set of actors. The illustration below presents at a high level where some of these tensions exist as well as potential challengers to the status quo. This article explores location and the differences in consumer and enterprise, while subsequent chapters and articles also build upon this theme through the lens of company status and stage.
The geographical funding divide widens in Europe
Increased levels of investment in more established, growth stage companies has widened the funding divide in favour of Europe's most developed tech ecosystems. While the level of per capita investment in top and second quartile countries spiked materially in 2021 compared to prior years, this has not been mirrored by investment patterns into countries in the lower quartiles. The upper and second quartiles are mostly composed of countries from Northern and Western Europe, while the bottom two quartiles are heavily weighted towards countries from Southern and Eastern Europe.
Capital invested ($M) per capita by quartile, based on rank of countries by per capita capital invested in 2021
- Top quartile
- Second quartile
- Third quartile
- Bottom quartile
- Notes
- All Dealroom.co data excludes Israel and the following: biotech, secondary transactions, debt, lending capital, and grants. 2021 is annualised based on data to September 2021. Population data from UN, with data shown for countries with >300,000 inhabitants.
The general perception is shifting and building a company in Europe is now seen more as an advantage rather than a limitation.
Raising funds in Europe is still a different experience from raising funds in the US. European founders still fly out to the US for fundraising. Sometimes for expertise, sometimes for fair market offers.
Twice as much invested in UK tech, compared to Germany and France
On a cumulative basis over the past five years, the total amount of capital invested in UK tech companies has nearly reached $75B. This is more than double the amount of capital invested in the second and third largest countries; Germany and France.
Beyond the top five countries, change is on the horizon
The top five countries by capital invested remain unchanged from 2020. However, across the rest of the top 20, the significant inflow of VC capital in 2021 has served to shake up the ranking: Spain has overtaken Switzerland to land in sixth position, while Ireland has dropped out of the top ten after a 5% decline in capital invested. Despite being Europe’s fourth largest economy by GDP, Italy has also fallen outside of the top 10 countries for capital invested. The impact of mega rounds is also discernible in the rankings. Vinted’s $200M was material for Lithuania, and the two $100M+ rounds raised by Rohlik boosted the funding picture in the Czech Republic.
The top 5 hubs still dominate investing activity
The flywheel that underpins entrepreneurial activity and investment flows is spinning fastest in Europe’s most well-developed tech hubs. As a consequence, these hubs are home to the greatest number of scale-ups raising large growth rounds. This results in the five largest hubs by total capital invested (London, Berlin, Stockholm, Munich and Paris) accounting for an increased share of total capital invested in the Europe. In fact, these five cities alone are home to companies that between them captured 54% of total investment into the region in 2021, up from 49% in 2017. Interestingly, their share of total deal count has fallen over the same period, indicating the potential for cities not currently in the top five to account for an increased share of funding amongst future cohorts of companies.
Right now we are hiring people all across different cities in Europe, like Amsterdam, Berlin, Stockholm, London, to join us without the necessity of relocating to Madrid with their families. This has allowed us to have access to a broader talent pool.
The “work from anywhere” revolution has affected us in a way that we are now accessing talent that we could not access given our former company policy and the willingness to relocate everyone to Madrid, where we are based. In terms of decentralisation, I believe that this is a big trend that will even create new Tier 2 Tech-Hubs in smaller cities, where people can work and have a higher quality of life.
London consolidates its position as the top European tech hub
London’s position as the leading European tech hub – as measured by total capital invested – was further consolidated in 2021. The city raised $18.4B in the first nine months of 2021: 2.6x the amount raised in Berlin in second place. But all across Europe, tech hubs have seen levels of investment scale at an unprecedented pace. Berlin, for example, recaptured its position behind London, having seen investment levels increase by 150% year-on-year. A total of 11 cities have already raised in excess of $1B during the first three quarters of 2021 and it’s likely that number will exceed 20 by the end of the year. By comparison, just four European cities surpassed that milestone in 2020. The impact of mega rounds is also visible in the ranking, propelling some cities into the top 20 on the basis of one outlier company.
Venture capital in Sweden and Ireland is highly concentrated in primary hubs
In order to better understand the distribution of capital invested across different hubs within a single country, we categorised cities as primary or secondary hubs based on the total amount of capital invested during the last five years. The level of concentration varies significantly across the top ten countries by capital invested. Investment into Sweden and Ireland, for example, is overwhelmingly concentrated in the primary cities (Stockholm and Dublin, respectively), while it is more widely distributed in countries including Spain and Germany. Switzerland is also an outlier, with large amounts of funding flowing to secondary cities such as Zug and St Gallen.
Capital invested into secondary cities in the top 10 European countries by capital invested in the last five years
- 2021
- 2021 Europe's average
- Notes
- All Dealroom.co data excludes Israel and the following: biotech, secondary transactions, debt, lending capital, and grants. 2021 figures show data up to September 2021. Hubs are defined as the cities that have raised the most funding in five years.
Deal count in Europe’s leading hubs remain constant
2021 was a record year for capital invested in most European primary hubs, yet the number of rounds raised by companies in the top 20 hubs stayed flat on average. This figure remains unadjusted for the reporting lag that results in an underrepresentation of total deal volume until more time has elapsed. London, unsurprisingly, remains the top European hub by total deal count, with a number that is 2.5x higher than the second largest hub.
UK companies benefit from disproportionate access to VC investors
There is evidence that links the destination of venture capital to the source location of the investing VC fund manager. This is intuitive, but also supported by empirical studies, such as recent research published jointly by the EIF and Invest Europe (“The VC Factor - Pandemic Edition”). This translates into more “local” funding available for companies located within the geographic proximity of investors. In this context, it is interesting to see the unequal geographic distribution of VC funds raised by country relative to the respective share of European GDP or population. This type of analysis shows how the UK and France account for a disproportionate share of VC funds raised in Europe, while Germany and Italy stand out due to a lack of depth of local funds raised, relative to the size of their economies and populations. It is, of course, important to note that there is a significant volume of cross-border investment activity.
Share of VC funds raised by country, relative weight of GDP and population
- Venture funding by VCs raised (2016-2020)
- European GDP
- European Population
- Notes
- Based on the country of the fund management team. Taken from the European Data Cooperative, developed by Invest Europe. EDC data converted at EUR:USD of 1:1.1856, the rate on 30 June 2021.
Despite all of the fast-paced changes that are keeping the consumer space fresh in Europe, what remains constant are the underlying ingredients of success in the consumer space – the importance of building an authentic brand and putting end customer experience first.
Despite market uncertainties, the exciting European consumer landscape continues to be accelerated by underlying consumer trends including: impact of digital transformation; rise of eco-consciousness; increased importance of creator economy; developments in blockchain technology and its potential to transform our digital experiences; morphing relationship to ownership, among many others! With every year we also continue to be more and more excited by the increasing global ambitions of European consumer founders and their relentless focus to innovate and transform the sectors in which they operate.
Local VC firepower lags in Central and Eastern Europe
Analysing levels of VC investment at the sub-regional level reveals even more striking differences than those at the regional level. What stands out most is the low level of VC firepower raised by funds based in Central and Eastern Europe. This sub-region accounts for just 5% of all funds in Europe, despite its 10% share of European GDP and 27% share of the European population.
Share of VC funds raised by region, relative weight of GDP and population
- Venture funding raised by VCs (2016-2020)
- European GDP
- European population
- Notes
- Based on the region of the fund management team. Taken from the European Data Cooperative, developed by Invest Europe. EDC data converted at EUR:USD of 1:1.1856, the rate on 30 June 2021.
31% of unicorns from Central and Eastern Europe are bootstrapped
Lack of local VC funding has not prevented the emergence of many breakout success stories from Central and Eastern Europe. These regions are now home to 28 unicorns, including decacorns such as UiPath and Yandex. While there is clearly no shortage of incredible entrepreneurial talent, the region’s leading companies have had to find alternative paths to fund their growth. In fact, the number of non-VC-backed unicorns as a share of total unicorns from the region is almost five times higher than for the rest of Europe. While 31% of unicorns from the CEE did not raise venture capital, the total for the rest of Europe is just 7%. It’s clear that resilient talent in CEE has been able to thrive in spite of lacking access to more mature private capital markets.
I strongly believe that CEE has a massive potential to become a cradle of Europe's most valuable companies.
Ever since our early days with Skype, at Atomico we've been watching technology transform every industry and region in Europe and Central and Eastern Europe is no exception. Specifically, as someone who was born in Moldova, I strongly believe that Central and Eastern Europe has a massive potential to become a cradle of Europe's most valuable companies. Most of the ingredients are already there - determined founders, skilled talent and clockwork execution - and the flywheel is already spinning, This will help the flywheel to spin faster and faster - this year, 9 Central and Eastern European unicorns joined the herd, increasing the total by 50% from the 2020 number. We have historically seen it through many of our investments, such Skype, Supercell and Aiven among others, and one can also clearly see that in this report - companies like Romanian-founded UiPath are blazing a trail, with Prague-based Rohlik - which raised not one but two $100M+ rounds this year. Personally, I am thrilled to continue supporting companies close to my home, and help breed the next generation of global game changers.
VC funding and startup count generally rise hand-in-hand
One way to better understand the factors that shape distribution of capital across Europe, is to explore the relative level of entrepreneurial activity in different countries. This chart measures the ratio of startups per capita in different countries, set against the level of investment per capita. The data follows an intuitive trendline, with the volume of investment growing in line with increased startup density. There are, however, some interesting outliers. Estonia, for example, has the highest startup density of any European country, while Sweden is the best capitalised in terms of investment per capita. It should be noted that the comprehensiveness of startup activity tracking varies between countries, so the data is imperfect.
Number of start-ups per 1M population versus capital invested ($) per capita
- Notes
- All Dealroom.co data excludes Israel and the following: biotech, secondary transactions, debt, lending capital, and grants. 2021 figures show data up to September 2021. Population data from UN, with data shown for countries with >300,000 inhabitants.
🥁...Estonia retains its place as the most entrepreneurial country in Europe
The scale of startup activity in Europe continues to rise, with the total count of verified tech companies from the continent currently at over 175,000, according to Dealroom. On a per capita basis, Estonia retains its leadership position as the region’s most entrepreneurial country for tech startups, followed by Iceland and Ireland. This methodology provides an interesting ranking of countries in terms of overall entrepreneurial activity, and highlights Estonia's continued leadership as the most entrepreneurial European country for tech startups.
Number of start-ups per capita by country
- Start-ups per 1M inhabitants
- European average
- Notes
- All Dealroom.co data excludes Israel and the following: biotech, secondary transactions, debt, lending capital, and grants. 2021 figures show data up to September 2021. Population data from UN, with data shown for countries with >300,000 inhabitants.
Central and Eastern Europe prepare for take-off
Another interesting way of better understanding geographical differences in the funding landscape is looking at the distribution of funded companies by founding decade and by country. The picture is not always intuitive, but it highlights the weighting of the overall startup landscape in certain regions, such in the Baltics, towards more recent generations of startup cohorts. As expected, countries that are more ‘mature’ and have been through many cycles of startup generations spanning a longer time horizon have a greater overall weighting towards companies from earlier founding decades. Countries such as Romania or Slovakia rank towards the bottom of the list, which is consistent with the fact that they have yet to see the same level of recent growth in entrepreneurial activity and company formation.
Could physical location lose its importance? Founders believe so
Attitudes toward the importance of physical location are shifting. This may point to an increased dispersion of startup activity and investment flow later down the line. When asked whether considerations related to location had become more or less important for their business over the past 12 months, startup founders and senior leaders were more likely to state a decreasing importance across every considerations. The most obvious shifts in sentiment related to the importance of having a physical office location, relocating employees and proximity to investors, which had all decreased in importance among more than 50% of respondents.
Proximity to investors is less important to founders
The pandemic has forced investors to adapt and make major adjustments to their investment processes. One benefit has been increased funding accessibility for founders based in hubs that may have once been considered secondary within their country. It remains to be seen how these changes will evolve going forward, but it is interesting to note that there is a strong indication of meaningful change in sentiment. Many founders and senior leaders from a wide range of cities have found physical proximity to investors to matter less in the last 12 months.
Stockholm lost the most in importance to builders
For respondents based in one of the four primary tech hubs, we asked how they had seen the importance of being headquartered there evolve over the past 12 months. Across both founders and operators (C-level executives, department heads and employees) the trend speaks to an overall decrease in importance. It is most pronounced for Stockholm where 44% of operators rate it as either less important or not a success factor. Paris stands out as counter narrative amongst the pack with over 80% of founders finding it had either stayed the same or gained in importance. It is also interesting to compare and contrast the views of founders and operators - the latter tend to be more radical, even in Paris where 26% don't think it is a key success factor versus just 8% for founders.
B2B unicorns overtake B2C by a large margin
The changing shades of the European tech landscape are also reflected in the growing importance of companies with a business-to-business (B2B) focus. European tech originally built its reputation in consumer-oriented (B2C) tech products and services, but the more recent rise of B2B software has transformed the region’s influence and relevance in the global enterprise software market. In last year’s report, we highlighted the fact the number of VC-backed enterprise unicorns had surpassed the number of consumer unicorns for the first time, ending the year at a ratio of 54:53 (Enterprise:Consumer). At the time of publication, this gap has grown to 106:87 (Enterprise:Consumer).
B2B investment activity outpaces consumer
The change in focus towards B2B opportunities is reflected in the distribution of capital raised and deal volume between B2B and B2C companies. During the first nine months of 2021, B2B companies raised $55B, versus $39B raised by B2C companies. On a deal count basis, B2B companies have accounted for more than 75% of total funding rounds in 2021 to date.
B2B dominates at the early stages
Europe’s increasing orientation toward B2B software is especially pronounced when looking at the share of funding rounds of different sizes. It’s fair to say that larger growth rounds are typically raised by companies from older vintage founding years. The fact that funding in these rounds is distributed more evenly between B2B and B2C reflects the greater prevalence of consumer companies in those vintage years. Looking at smaller rounds sizes – a proxy for earlier round stages – the heavier weighting towards B2B companies is pronounced.
Share of capital raised (%) and deal count by client focus in 2021
- Business focus
- Consumer focus
- Notes
- All Dealroom.co data excludes Israel and the following: biotech, secondary transactions, debt, lending capital, and grants. 2021 figures show data up to September 2021. Population data from UN, with data shown for countries with >300,000 inhabitants.
Are investors favouring B2B over B2C companies?
The shifting preference of investors towards B2B companies is also echoed in responses to our survey. When asked to cite the biggest challenges founders have faced as a company, securing access to capital was notably more likely to be cited by founders of consumer-oriented companies than by those with a B2B focus.
And this is particularly true for repeat, experienced, B2C founders
Moreover, this holds true from first-time founders through to experienced repeat founders.
Share of respondents indicating securing access to capital as a challenge for their company in the past 12 months - By company type and founder experience
- First-time founder
- Experienced repeat founder
- Notes
- Founder respondents only. Numbers do not add to 100 as respondents could choose multiple options.
Europe is in a strong position to shape the next wave of disruption in B2B, as Europe is home to many industrial market leaders built on legacy technology ready to be disrupted.
Reinventing the B2B IT stack is the here-and-now opportunity: Whether it's storage, compute, software architectures - they're all going to shift! There is no economic reason for any part of the value chain not to be digitized in the long run if there is potential to streamline and automate processes. From developer tools to vertical-specific applications, we expect software to power all areas of business.
Europe is also home to some of the global leading tech universities as sourcing ground to bring up new founders! Having a first wave of successful B2B founders such as the founders of Celonis, UiPath, Personio, arculus, etc. that go back to universities and share their story with tech students to inspire the next generation of potential founders to start a company helps!
Raising capital is still hard for most
In spite of the unprecedented increase in capital invested in the European tech ecosystem, the challenges of raising capital should not be underestimated. In fact, almost one-fifth of founders say it has become harder to raise capital in 2021, while a further 40% or so believe the environment remains unchanged from the past year, which itself was a year that saw a record number of founders responding that fundraising had become harder. Raising capital is never easy, no matter what is shared in the media or on social platforms.
In your opinion is it harder to raise venture capital in Europe than it was 12 months ago?