5 Things You Missed in Atomico’s 2021 Europe Report

Europe's Ascending Startup Scene

For a long time, Europe was considered a less active player compared to the U.S. in the startup world. However, recent quarters and years have demonstrated significant growth. Similar to other global startup hubs, Europe has experienced increases in venture capital funding, a growing number of unicorn companies, and several successful initial public offerings (IPOs).

The current momentum in the European startup market is considerable. TechCrunch recently reported that Flink secured $750 million in funding. This "Berlin-based company specializing in the rapid delivery of groceries and essential goods at competitive supermarket prices" is now valued at $2.85 billion. Its prominence may have gone unnoticed by those unfamiliar with the instant grocery delivery sector.

The European startup ecosystem has matured to a point where tracking its unicorn companies can be challenging due to its breadth and diversity.

The Exchange: Startup Insights

The Exchange provides analysis of startups, markets, and financial trends.

Access it daily on TechCrunch+ or subscribe to The Exchange newsletter for weekly updates.

For years, The Exchange has monitored the acceleration of Europe’s startup activity. Therefore, we were particularly interested when Atomico, a European venture capital firm, and Dealroom, a data analytics provider specializing in European data, released a comprehensive report on its performance this week.

We were occupied with publishing our book guides (available here and here) and are now reviewing the data. Instead of simply presenting topline figures, we are highlighting key insights that may have been overlooked. This analysis is intended for anyone interested in the current state and overall health of the European startup landscape.

Key Areas of Analysis

• We will examine exit volumes and their implications for 2022.
• The impact of talent acquisition challenges across different European countries will be assessed.
• Both positive and negative trends regarding gender diversity within European startups will be discussed.
• The level of investment from pension funds will be evaluated.
• We will identify which groups of former employees are most actively involved in founding new companies.

Are you ready to delve into these findings? Let's begin.

Positive Trends in European Tech Exits for 2022

The European technology Mergers and Acquisitions (M&A) landscape is demonstrating significant growth. According to a report compiled by Atomico and Dealroom, the cumulative value of tech M&A activity in Europe surpassed $100 billion during the first three quarters of 2021.

To provide context, this value stood at less than $10 billion in several previous periods, including Q2 2019, Q3 2019, Q4 2019, and Q2 2020.

However, not all technology exits align with the traditional venture capital framework. While venture-backed exits represent a smaller portion of the overall total, they are nonetheless experiencing an upward trajectory.

The same data indicates that VC-backed tech M&A transactions totaled $54.9 billion through the initial three quarters of 2021. This figure marginally exceeds the full-year total for 2020, which was $54.8 billion.

Considering the results from the fourth quarter, 2021 is projected to establish a new record for VC tech exits – excluding Initial Public Offerings (IPOs) – with a substantial lead over previous years.

Looking ahead, the data reveals an even more promising outlook. Atomico highlighted the following observation:

Should these trends continue, approximately 50% of the total European M&A activity recorded in 2020 could occur within Q4 2021 alone. This, combined with consistent quarter-over-quarter improvements, suggests that Europe is entering 2022 with its most robust position for non-IPO exits in its history. This is a decidedly optimistic sign!

The United Kingdom Faces Growing Talent Shortages

The repercussions of Brexit continue to be felt, particularly within the U.K.’s startup ecosystem. For those outside the U.K., the political and economic separation from mainland Europe may seem like a distant issue. However, U.K.-based startups are acutely aware of its ongoing effects.

Specifically, Brexit is demonstrably impacting the U.K.’s capacity to attract and retain skilled workers. According to a recent report by Atomico/Dealroom, the U.K. leads all European nations in the percentage of founders reporting a decline in the depth of the talent pool, with 37% noting a worsening situation compared to the previous year.

The Netherlands closely follows with 36%, while Germany experiences similar concerns, with 23% of founders acknowledging a shallower talent base. These figures highlight a growing trend across Europe, but the U.K. appears to be particularly affected.

In contrast, France presents a more optimistic outlook. A significant 54% of founders report an improvement in talent depth over the past year, with only 19% observing a decline. Italy is the sole other European country surveyed where a majority of founders perceive a positive shift in the availability of skilled personnel.

While Brexit isn't solely responsible for these trends, the shrinking talent market in the U.K. poses a potential risk to the long-term growth of its startup sector. This is a crucial consideration for investors and entrepreneurs alike.

Key Findings from the Report

• U.K. Leads in Talent Decline: 37% of U.K. founders report a worsening talent pool.
• Netherlands Close Behind: 36% of Dutch founders share similar concerns.
• France Shows Improvement: 54% of French founders report an improved talent landscape.
• Italy Also Positive: A majority of Italian founders see a better talent pool.

The data suggests a divergence in talent market trajectories across Europe, with the U.K. facing unique challenges in the post-Brexit environment. Addressing these challenges will be vital for sustaining the U.K.’s position as a leading hub for innovation and entrepreneurship.

Achieving Improved Gender Representation in Tech Leadership

The statistics concerning gender distribution among tech founders and leaders frequently reveal a concerning imbalance. Despite the clear presence of inequalities, a significant portion of the startup ecosystem remains predominantly male. This suggests that the processes of tech fundraising and value generation are not yet fully based on merit.

Consequently, potential financial gains are being overlooked, and promising companies may be hindered by a lack of necessary funding.

However, a recent report by Atomico/Dealroom offers a potentially encouraging insight. It indicates a notably higher percentage of women among emerging tech leaders, particularly within younger demographics.

A Look at the Data

This data can be interpreted in two ways. The increasing representation of women in younger leadership positions is a positive sign, suggesting a more diverse pool of future leaders is emerging.

Conversely, the consistent decrease in the proportion of women as tech leaders progress in their careers highlights a systemic issue with retention within the industry.

Europe currently possesses a valuable opportunity to reshape its tech leadership landscape towards greater diversity. This hinges on its ability to effectively retain the current generation of young women leaders.

Failure to do so will likely result in the continued dominance of men in tech leadership positions, and consequently, in the accumulation of wealth within the technology sector. Retaining female talent is crucial for a more equitable future.

A Significant Shortfall in Institutional Investment

Addressing the question of primary regulatory obstacles hindering the expansion of startups and scaleups in Europe relative to major markets like the U.S. and China, both venture capital firms and limited partners highlighted the insufficient investment from pension funds into Europe’s venture capital sector as a key concern.

Available data confirms this perceived underfunding: the report indicates that in 2020, European pension fund capital allocated to venture capital constituted merely 0.018% of their overall assets under management.

This represents a notably small percentage, yet it simultaneously suggests substantial potential for future growth. Given the extensive $3 trillion in assets under management and the current returns generated by venture capital, European pension funds may contemplate increasing their allocation in 2022.

Such a move would align them more closely with other markets, such as Canada, where Harry Briggs of OMERS VC observed that pension funds demonstrate a more forward-thinking approach – notably contributing to the nation’s advancements in artificial intelligence.

Moreover, European pension funds are falling behind their international counterparts even in terms of investing within Europe itself, with approximately 50% of the total funds raised by venture capital firms from pension funds originating from European pension funds.

Regional Disparities in Investment

The report also revealed variations in investment patterns across Europe, identifying the U.K., Ireland, and Central and Eastern Europe as lagging behind the Nordic countries, France, and the Benelux region.

Although not explicitly stated in the report, it is worth investigating the extent to which France’s strong performance is linked to its Tibi Initiative, designed to encourage insurers to invest in La French Tech. A review conducted by the Treasury in August indicated that “despite the challenges posed by the COVID-19 crisis, the Initiative was implemented swiftly, and participating investors have already committed over €3.5 billion.”

This commitment, combined with additional subscriptions from external investors, brings the total funds approved to over €18 billion, nearing the initial target of €20 billion.

While still a small fraction of total assets under management, this figure is significant for venture capital. As highlighted by Atomico and Dealroom, a rise in European pension fund allocation to just 1% would signify a “profound transformation.”

A Global Network of Former Employees

It's been widely observed that a significant number of new company founders previously held positions at a select group of technology firms. Within the United States, PayPal is arguably the most well-known example of this phenomenon. However, beyond the frequently discussed success stories of entrepreneurs originating from Rocket Internet across Europe and other regions, the source of these founders is broader than often assumed.

Consider the following data visualization:

The prominence of established technology organizations like Amadeus IT Group and Infineon Technologies, a semiconductor producer, at the top of this list was unexpected. This demonstrates that the process of talent redistribution extends further than previously understood.

Implications for the European Ecosystem

This trend is a positive indicator for the strength of Europe’s entrepreneurial environment. Founders aren't solely emerging from the ranks of startup alumni; they are also being cultivated within larger, more traditional tech companies.

The data suggests a robust cycle of experience and innovation. Individuals gain valuable skills and knowledge at established firms, then leverage those assets to launch their own ventures.

We maintain a positive outlook regarding Europe’s prospects for 2022. This particular data analysis has further reinforced that optimism.

Further insights and analysis will be shared in January.