European Tech Ascendency

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VC Newsletter 2 - “European tech ascendency - lagging behind or well prosperous future?”

(1) Introduction:

In today’s newsletter, we’re exploring the state of Europe’s venture capital (VC) landscape. While

the region has made significant strides in recent years, questions remain about whether it can

sustain this growth and truly compete with global giants like Silicon Valley. We’ll examine

Europe’s foundational strengths, the challenges it faces, and whether Europe’s future in the VC

industry is as promising as it seems.

(2) The Emergence of Europe in VC In the past, Europe has been struggling to keep up with the United States and China in fostering

a vibrant startup culture and enabling small ventures to scale effectively. However, the past two

decades have shown a remarkable transformation, showcasing Europe’s potential to build up an

European environment leveraging the advantages of the European ecosystem.

Spotify, the Swedish audio streaming platform, serves as a flagship example of the growth of

Europe’s startup culture. Launched in 2006, Spotify not only revolutionized the music industry

but also demonstrated the scalability of European startups, reaching a market cap of nearly 100

billion USD by the end of 2024. This success reflects a broader trend seen over the past two

decades.

Europe’s share of global VC has surged from approximately 5% to about 20% in 2022, with the

region now raising a third of global Seed funding. This growth is largely driven by a dramatic

increase in VC investments, which have grown by the factor 100—from 1 billion USD two decades

ago to 92 billion USD in 2022. Over the same period, the capital raised by European VCs has seen

a similar rise, providing startups with enhanced growth opportunities.

The growth in VC has translated into a remarkable rise in unicorns. In 2009, Europe was home to

just 17 unicorns, whereas by 2023, 514 startups with valuations over 1 billion USD are spread

across 65 cities and 25 countries. This expansion has led to Europe achieving the highest density

of unicorn tech hubs in the world.

(3) The Foundations of Europe’s Rise and Future Prosperity

Europe’s rise as a global VC leader is driven by more than just historical progress. It is equally shaped by foundational strengths that have laid the foundation for future growth. In the past, Europe lacked category-defining tech leaders, but today, category leaders such as Spotify, Klarna, and Just Eat Takeaway are emerging as significant players, challenging the

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dominance of American giants in their respective fields. As a result, the startup mafia flywheel is now in full effect in Europe, with successful startups fueling a cycle of entrepreneurship that continuously nurtures new generations of talented founders. For example, Spotify and Delivery Hero exemplify the power of Europe’s second-generation startup ecosystem, with both companies spawning 32 new startups each. The flywheel effect is accelerating, as seen in the rising percentage of startups founded by former unicorn staff, increasing from just 9% in 2012 to 47% in the years since 2019. This shift reflects a growing momentum in Europe’s startup ecosystem, where experienced entrepreneurs are using their knowledge and network to launch the next wave of successful ventures. At the core of this growth are three pillars that underpin Europe’s strength. Firstly, when comparing global talent development, Europe surpasses the US by 40% in number of developers, with its focus on STEM education further fueling growth. More than half of the world’s top science clusters are based in Europe, driving significant innovation. Cities such as Oxford, Cambridge, Leuven, and Basel exemplify this diversity of scientific hubs, collectively creating a fertile ground for technological advancements. To illustrate this effect, research conducted at the CDTM, a joint institution between two leading universities in Germany, has played a pivotal role in advancing Europe's VC ecosystem, with its alumni founding 30% of Germany's unicorns and over 250 startups that collectively secured more than €7.9 billion in funding. Secondly, to compete with Silicon Valley, Europe is leveraging its strength as an unified and highdensity startup ecosystem, which can be considered as New Palo Alto (NPA). With unmatched ecosystem density in Europe, the NPA has risen to become the world’s second most valuable tech cluster, right behind the Bay Area. Its success is driven by proximity to major hubs like Oxbridge and the Northern Triangle, and its connectivity within a four-hour rail radius, including cities like Amsterdam and Leuven. This concentration has fueled Europe’s growth, with the continent’s tech ecosystem now valued at over $3 trillion. The NPA has produced 200 unicorns and 14 decacorns, while 3,500 new startups secure their first VC investment each year. As a result, Europe’s share of global early-stage VC reached a record 22% in 2023. Thirdly, Europe has firmly positioned itself as a global leader in sustainability and ESG, making significant steps in reducing emissions and decreasing reliance on fossil fuels. This commitment is reflected in Europe’s 22% share of global VC funding in climate tech in 2023, with investments growing from $7 billion in 2020 to $11 billion. Moreover, Europe excels in economic inclusion, achieving notable advancements in income equality and life expectancy, which underscores the region’s ability to align sustainability with economic growth. Similarly to the US leading the IT market in the early 2000s, Europe is poised to capitalize on its growing leadership in the ESG and sustainability sectors, positioning these areas as key pillars of its future strengths.

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(4) Strong Foundations, Weak Progress: Europe at a Crossroads Despite these strengths, Europe is overall not yet reaching its full potential. While Europe’s unmatched leadership in sustainability and inclusion sets a global standard, its economic growth tells a different story, with per capita GDP (at purchasing power parity/PPP) lagging 27% behind that of the United States. The continent’s labor market is adding to its growth challenges with job vacancies in the eurozone reaching a record 3% in 2023. This, combined with an aging population and declining birth rates, which are expected to decrease the working-age population from 64% to 58% of the total population by 2040, makes it even harder for Europe to catch up economically and thrive in the transformation. Additionally, Europe is steadily losing ground in global market share across key industries. Once dominant in manufacturing, its share has declined, while China is making significant gains in areas like AI, electrification, and advanced manufacturing. In semiconductors, Europe controls just 10% of the value chain, far behind the 35% held by the US. At the same time, the continent is under tightening pressure from escalating geopolitical tensions, environmental crises, and intensified global competition. The war in Ukraine has exposed the fragility of Europe’s energy security, with industrial power prices doubling between 2020 and 2022 and over half of its energy still reliant on imports. Meanwhile, the climate crisis is intensifying, bringing more frequent and severe heat waves and floods. Global competition is becoming increasingly driven by strong industrial policies, with the US and China directing significant funding towards disrupting technologies. In comparison, Europe’s initiatives, while notable, such as the EU Chips Act, still lag in scale and impact.

A closer look at the venture landscape reveals another dimension of Europe’s challenges. Since its peak in 2021, which was driven by low interest rates, liquidity in the markets and a surge in tech adoption during the pandemic, VC investment has experienced a significant decline. By Q1 2023, funding at the startup stage had decreased by 32%, while funding at the breakout-stage and scale-up-stage had decreased by 51% and 71%, respectively, from peak levels. There are early signs of recovery in the form of a 5% year-on-year rise in European VC investments in Q1 2024, but the overall momentum remains weak. If we take a closer look, we will see that a lot of this stagnation comes from problems in Europe's later-stage funding landscape. The region’s fundamental strength lies in Seed and Series A stages, but a striking gap emerges in later-stage funding. Compared to other regions, rounds exceeding $100 million remain significantly underinvested. The contrast in mega-round funding is striking: Between 2020 and 2023, the Bay Area alone accounted for approximately 30% of rounds exceeding $250 million, while the entire EMEA region combined covered just 12%. Notably, nearly half of the funding within EMEA came from NPA. This funding gap is also reflected in Europe’s deep tech landscape, where most VC's focus on early-stage funding with fund sizes under €100 million. Very few European funds exceed €200 million, leaving them with limited capacity to lead larger rounds at Series B and beyond. A

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disconnect between specialized deep tech investors and generalist VCs, such as Atomico and Northzone, further widens this gap, making it difficult for startups to transition from development to scaling.

(5) Future outlook As these pressures compound, it’s clear that Europe must develop more dynamic systems and technological leverage to thrive in this new era. VC firms are beginning to align their strategies around these challenges. General Catalyst (GC), for instance, which merged with German earlystage investor La Famiglia last year, has emphasized these sectors in its Global Resilience thesis, focusing on 3 critical areas: Climate & Energy, Industrials, Defense.

(6) Conclusion In conclusion, Europe must address its critical gaps in late-stage funding to support the next generation of unicorns and tech innovators. To thrive in this complex environment, Europe must focus on sectors where its current competitive advantage lies, namely, sustainability and climate tech. Furthermore, capitalizing on Europes’ strengths will require new VC models - ones that prioritize long-term horizons, larger investments and more profound collaborations to tackle these complex issues effectively. Finally, success will require a united approach - leveraging the agility of startups, the resources of established industries, and forward-thinking policies that empower growth at every stage of the venture lifecycle.