Most would agree that our key priority for the next decade is to achieve a better future for all, as outlined by the UN's 2030 Sustainable Development Goals (SDGs). Throughout the report, we use a number of terms to discuss this goal but we want to get aligned on their meaning. "Planet Positive" and "Purpose" both relate to tech companies' business model and industry, while "social and environmental impact" signifies companies' corporate responsibility initiatives. Since 2019, we have collaborated with Dealroom to quantify capital invested in purpose-driven companies. Dealroom manually tagged keywords to companies in its platform across all 17 SDGs, as well as if purpose is core or adjacent to the business model.
A better future for all
Building a responsible technology ecosystem that scales is critical to our future.
I know first hand at DeepMind both how challenging and rewarding this process can be - it’s about digging in and building technologies that benefit everyone. It’s about creating robust processes, building shared norms across the industry, and getting the right mix of people in the room. This is an evolving and complex process, and no one has all the answers. That’s why it’s so important that we come together as a community, continuously listening and learning from each other.
There's a large opportunity for Planet Positive companies
By mapping more than 6,900 publicly-listed European companies across 155 industry verticals to key thematic areas of entrepreneurship (the detailed methodology can be accessed in the appendix), we can start to get a picture of Europe's next act. This approach, while simplistic, is directionally useful to understand the scale of different opportunities even through the limited framing of European public equities. For example, the ‘Planet Positive' thematic segment, which encompasses tech and tech-enabled companies working towards a transition to sustainable environmental practices in fields such as energy, water and chemicals, can be compared against established or incumbent companies in industry sectors such as, oil & gas, coal and commodity chemicals. The Planet Positive segment is the fastest growing of all, with over $2T added to its public market cap.
The European Union's climate plans are not seen as aggressive enough
A growing focus on climate change within the European tech ecosystem is accompanied by disappointment with the European Union's approach to mitigation, which is largely seen as not robust enough. 68% of survey respondents indicated they do not perceive the European Union as sufficiently aggressive in combating climate change. Looking at the country-level responses, some interesting differences emerge. For example, there is a 20 percentage point gap between respondents from Germany and Finland, with Finnish respondents least likely to call out their government for not being aggressive enough in their approach.
Social entrepreneurship's biggest challenge is its current incentive structure.
In a way, I am all for creating a viable path for social entrepreneurship but equally against totally de-risking that path because in essence, that is not entrepreneurship, that is the redirecting of public goods to create social value on a micro-level of individual action (that is often not rewarded well).
Meeting social challenges - from climate change to energy efficiency to ending income inequality - is a collective effort that requires finding innovative solutions at all levels. It does however start at the macro systemic level with policy makers. Private investors can and are currently playing an important role in funding innovation to solve social problems but the onerous in doing so at scale is with policy makers and their ability to integrate social value into incentives mechanism for innovation.
VCs and LPs mostly align on the big themes
The likelihood of Planet Positive initiatives emerging as a defining theme over the next decade is echoed in responses to the survey. When asked which themes they are excited to invest in, LPs and angel investors were most likely to select Planet Positive companies, and this theme also ranked second highest among VC respondents. As a forward-looking indicator, these responses suggest that European tech will continue to see significant deployment of capital towards the goal of combating climate change and promoting environmental sustainability.
Planet Positive captures 11% of total funding in 2021
The expectation of continued investment in Planet Positive companies is a continuation of a longstanding trend. In just the first nine months of 2021, $10B was invested in European tech companies aligned to the Planet Positive theme. This level of investment has increased with significant scale and velocity, and is now at close to 6x the level seen in 2017. Looking at the allocation of capital to more broadly defined purpose-driven companies, investment has grown to more than $12B; an increase of 3.8x compared to 2017.
Capital invested ($B) by types of companies
- 2017
- 2018
- 2019
- 2020
- 2021
- Notes
- All Dealroom.co data excludes Israel and the following: biotech, secondary transactions, debt, lending capital, and grants. Companies are counted against each SDG they are targeting. 2021 figures show data up to September 2021.
Funding into purpose-driven tech has accelerated in recent years
It’s interesting to examine funding for purpose driven tech companies in a more granular fashion, looking at which causes are receiving most attention. Taking the theme of Planet Positive, for example, the greatest share of investment has flowed to companies addressing the challenges of affordable and clean energy (SDG 7) and climate action (SDG 13). By comparison, the level of investment into companies addressing clean water and sanitation (SDG 6) has been very low. Other SDGs that have attracted large-scale investment in recent years include sustainable cities and communities (SDG 11), industry, innovation and infrastructure (SDG 9), and good health and wellbeing (SDG 3).
Capital invested ($M) in purpose-driven European tech companies per SDG addressed, 2016 to 2018 versus 2019 to 2021
- 2016 to 2018
- 2019 to 2021
- Notes
- All Dealroom.co data excludes Israel and the following: biotech, secondary transactions, debt, lending capital, and grants. Companies are counted against each SDG they are targeting. 2021 is annualised based on data to September 2021.
Europe still has massive upside
Europe continues to chart its own path, while increasingly asserting itself on the global tech stage. It represents an opportunity set with significant upside. If you look at Europe’s economic scale in high-level terms, Europe is broadly on par with the United States, capturing 22% of the global GDP and a similar share of global non-tech-related public equity value (market capitalisation). By comparison, and focusing solely on global tech public equity value, Europe does not yet punch close to its weight, as the region’s technology companies represent just 7% of total global public tech market capitalisation. So how do we bridge the gap?
Europe's share of the global venture pie is expanding
Firstly, it’s likely this gap will take time to close. While the European tech flywheel is spinning faster than ever, accelerating progress and strengthening its foundations, there is no sign of the United States tech ecosystem slowing down. The US accounts for just 4% of the world’s population and 24% of global GDP, yet it accounts for 50% of all venture capital investment in 2021. Europe, meanwhile, represents around 10% of the global population and 22% of global GDP. While its share of global venture funding increased by five percentage points in the past 12 months, it still represents only 18% of the global market.
Share of global GDP, capital invested and population (%) by region in 2021
- Global GDP
- Capital invested (2021)
- Population
- 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 United Nations and GDP data from World Bank.
It feels like the rise of remote working culture has led to VCs and institutional investors casting a wider net and giving innovative and fast-growing companies headquartered outside of Silicon Valley a fresh look.
Infarm’s experience with our latest fundraisings (completed over Zoom!) demonstrates how the pandemic has, in some ways, broadened the horizons for European startups, by opening up the European tech scene to impact-focused investors from around the world.The crucible of the pandemic has shown the resilience of the European tech ecosystem, with an incredible number of milestones reached and records broken in the past year in terms of raises and valuations. We’ve seen that European startups and scaleups, some whom we’re happy to have partnered with, are able to deliver on ambitious expansion plans, despite the logistical challenges and continued uncertainty caused by macro-economic factors like Brexit, pandemic-related supply chain disruptions and lockdowns.
US investor participation in Europe hit a new peak
The continued interest and increased activity levels of foreign investors is important to elevating the overall strength of the European tech ecosystem. US investors are now participants in over one quarter of all investment rounds in Europe, up from just 16% in 2017. Their presence in the market is helping to fuel the growth of European tech, build bridges across continents, and level up the strength of the investor base by bringing different experiences , networks and support.
US investor interest picks up
An additional measure of US investor interest in European tech is the count of unique investors that have made at least one investment each calendar year. This serves as a helpful proxy to understand the trend in the volume of new investors active in the region. 2021 represented a step change in sentiment toward European tech among US investors, with the number of individual investors increasing by almost 50% – a significant leap compared to prior years.
The US is losing out to China in relative tech sentiment
The United States remains the dominant force on the global tech stage, accounting for 70% of total technology market cap of public equities, and 50% of global venture funding. This places the US significantly ahead of China on both measures; China accounts for 11% of global tech value in the public markets and 25% of VC investment globally. Interestingly, survey respondents were more bullish on Europe gaining ground on the US over the next decade compared to China, despite a turbulent year for tech in China in 2021. It is also of note that respondents based in the US shared the same overall sentiment as those based in Europe.
We need to find ways to compete with the US and China on making bigger investments in next generation technologies.
We are continuously improving our EU investment landscape, working alongside VCs and other investors, listening to the evolving needs of startups, and harvesting the incredible potential of Europe’s research base for example by partnering with the European Research Council. But with the EIC’s budget of 10 billion euro over seven years we cannot achieve everything. So we need to find ways to compete with the US and China on making bigger investments in next generation technologies.
The pool of investors continues to expand
The overall investor base in Europe continues to expand across the different stages of investment. In total, the number of unique institutions active in Europe in 2021 increased by more than 25% from 2020. The most significant changes were evident in the growth stages, where the number of unique institutions participating in rounds of $100M and up more than doubled in the last year, and increased by more than 6x since 2017.
Closing the gender funding gap
There is still a massive opportunity to unlock by increasing the flow of capital investment to women. The great gender funding divide remains a harsh reality for the European tech ecosystem. The distribution of capital to founding teams composed of women or teams of founders of mixed genders has stayed constant for the past five years, both in terms of share of total capital invested and overall deal count.
And closing the geographic funding gap
At the European level, the implied level of capital invested per capita has increased significantly in 2021, growing from an estimated $170 in 2020 to $269 this year. There is, however, a wide discrepancy in terms of capital invested by country relative to their respective population size. Unsurprisingly, the highest levels of per capita investment can be found in countries that are typically regarded as amongst the most well-developed local ecosystems in European tech; Sweden continues to hold on to the top position, followed by Estonia and the United Kingdom. The opportunity for Europe is to develop more local ecosystems to hit similar levels of investment.
Cumulative capital invested ($) per capita by country, 2017 to 2021
- Cumulative capital invested ($) per capita
- 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.
There is a high degree of certainty that as different opportunities such as Planet Positive or diverse investment play out over the next decade, European tech will add trillions worth of value. If we apply different growth scenarios, ranging from conservative to in line with current level of growth, we expect to see the value of the European tech ecosystem to double at the very least over the course of the next 10 years.
The path to $10 trillion of total European tech ecosystem value and beyond
VCs and founders have different views on macro risks
The future trajectory of investment into Europe is, of course, subject to the broader macro context. When asked to highlight the top three risks that could lead to a slowdown in VC activity in Europe over the next five years, VCs most frequently cited the interest rate and inflationary environment, as well as overall public market sentiment and performance. This aligned with the sentiment shared by LP respondents. Founders, on the other hand, were most worried about policy impacting their business and geopolitical factors.
In general, I am an optimist because I think pessimists never get anything done. This being said, I think what we see is that the conversation on technology is changing.
Not only in Europe but also outside, in the US, India, Australia… More and more countries have come to recognise the risks that large tech platforms can bring to our lives, our mental health, and our democracy. We see more and more alignment on the idea that platforms have power beyond anyone else, and with that come responsibilities. That’s why the EU-US Trade and Technology Council that we launched a few weeks ago is so important.
For the first time, minds have met on key issues like how to approach AI or how to address the shortage of semiconductors. It was a very successful meeting and promising for the future. Clearly the challenges are huge, but they’re not too big for our democracies, especially if we come together.