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Executive Summary

For the past four years, we’ve produced an exhaustive deep dive into the European tech ecosystem by analysing the rich insights of our data partners. Every year the data busts another myth about our ecosystem: from pointing out that Europe actually has more developers than the US, to quantifying European advances in deep tech.

Another record breaking year for European tech

This year we’re at risk of sounding like a broken record about breaking records - but we can’t dispute the data. In another extraordinary year, investment in European tech reached a record $23 billion - up from $5 billion just five years ago. European founders created 17 billion-dollar companies. And in 2018, Europe produced three of the ten biggest venture backed public listings.

Technology has become a motor for growth in the European economy

At a macro-level, Europe’s technology sector is booming as the wider economy is stuck in the doldrums. As of Q3 2018, European growth was flatlining at 0.2%, the lowest rate for four years. Europe’s software industry is now growing at least five times faster than the rest of the European economy. This year’s report suggests that for a number of reasons, this motor will only become more powerful. The importance of the tech to the overall economy will only increase.

European tech achieving density

Last year we found that Europe was experiencing a ‘Battle Royale’ for talent. This year was the year Europe figured out how to effectively mobilise its deep pools of talent. The tech sector is attracting more participants - whether measured by the healthy increase in professional developers or the uptick in talented executives moving into tech from other sectors. The report shows dense areas of talent coalescing around universities, anchor tech companies, and innovation hubs, leading in turn to increases in investment, and growth in anchor tech companies. This all contributes to 'density' - which historically has been a crucial precondition for explosive growth. Europe is certainly achieving density, but it’s doing it its own way. What is interesting is that the developer pool is growing fastest outside those countries that have historically attracted the most investment: Turkey, Spain and Russia’s pool of developers have been deepening the most rapidly. All this will lead to a massive potential upside for the wider European economy as capital eventually flows into these new communities.

Europe is a research powerhouse

This year’s report also shows that we are only scratching the surface of the potential of Europe’s research community, and not fully harnessing our own cutting-edge science. An analysis by CERN, one of this community’s most influential members, demonstrates that as science and tech converge further, there is huge scope to strengthen the link between European STEM and startups. Europe has a research community larger than U.S. and China - we need to make sure this becomes the hugely powerful differentiator it should be.

Let Europe be Europe

A word to the naysayers: irrespective of the huge strides European tech has taken in the last few years, our tech sector will continue to be compared to the performance of Silicon Valley.

And as the ecosystem accelerates, we are increasingly cool with that! For a long time, US VC has outperformed European VC in terms of portfolio returns, but that is increasingly untrue. The latest historical performance data shows that European venture has been outperforming US venture in recent horizon periods. We believe this is a bellwether for a changing landscape. Let’s not forget that 95% of the value creation of today’s US tech sector is from companies founded 15 years ago or more, and that the early tech successes of ARM, Amadeus and Ocado were not venture-backed. Given that 21 European companies have been founded and scaled to billion-dollar-plus valuations with the support of venture capital since 2010 alone, we are confident that Europe has caught up on North America’s head start.

But we can still learn from the successes and failures of others

As Europe catches up, it is vital that we make the most of our second mover advantage - both in the companies we build, and in our approach to building them. European tech has escaped most of the backlash which has engulfed big US technology companies and characterised media coverage this last year. For this to continue, we’ll need to learn from past failures, and act ethically from day one. European technologists have already shown we can learn from the lessons of the past in terms of business strategy. Before he founded Skype, Atomico’s CEO Niklas Zennström founded a streaming company called Kazaa. Kazaa was a failure, but a group of Swedes led by Daniel Ek were paying close attention, and learned important lessons. Learning from the mistakes of the previous generation led to the creation of Spotify. Spotify has unequivocally proven that today, European founders can raise the right capital, hire the best talent, go the full distance, stave off ferocious competition and win on a global stage. Spotify will now become the spur and inspiration for other European breakout successes.

A big diversity and inclusion problem

This year’s report also unearths several figures which are extraordinary for all the wrong reasons. The State of European Tech has always highlighted the challenges Europe faces, but this year, we’ve identified a particularly serious problem: 46% of women told us they have experienced discrimination in the European tech industry. As our chapter on diversity and inclusion shows, this statistic is the tip of the iceberg. While most investment figures in this report spell good news, the fact that all-male founding teams received around 93% of the capital and 85% of the deals speaks for itself. Women and minorities are underrepresented at every level of the ecosystem. Corporate policy on diversity and inclusion is still way behind where it needs to be. This stark reminder of our shortcomings is timely, and it’s important that we draw the right conclusions.

Reporting this data is a first step in the right direction. Only by measuring the problem can you start to solve it. To take on this challenge, we’ve worked with Diversity VC to launch an industry-first resource: a practical and hands-on guide for technology entrepreneurs that will help them build companies that have diversity and inclusion at their core. It’s not a complete solution, but we hope it’s a contribution that founders will find useful nonetheless. You can find the toolkit at www.inclusionintech.com.

Another broken record: Bridge the funding gap, democratise European tech’s success

This report has consistently highlighted the need to close the institutional investor funding gap. Over the last five years, pension funds have invested just $1.7 billion in European VC, but have invested 45x more in European buyout funds, equivalent to more than $75B over that period. Meanwhile, family offices and high net worth individuals have spent the last five years investing $5 billion in venture capital. If pension funds can rebalance their allocations away from legacy industries towards gamechanging technology instead, they can democratise access to the spoils of European tech.

An ecosystem irreversibly changed

The European ecosystem has levelled up. Today, as Spotify has shown us, European founders have access to sophisticated investors, can hire the best talent, go the full distance, stave off ferocious competition, go public and win on the global stage. Europe is now reaping the early rewards from the transformation of its tech ecosystem- the seeds of success this year were planted a decade ago. That is why we should expect even greater success in the years to come. As long as we all continue to learn from both success and failure, will European tech reach the heights we know it to be absolutely capable of.

Thank you to all our partners

I'd like to dedicate my final words to thank all of our data partners and most importantly, Slush and Orrick. Without them this report would not have been possible.

Tom Wehmeier
Partner, Atomico

A Word from Slush

Scrolling through the figures of the State of European Tech 2018 report, it is easy to feel a nice sense of confirmation to what we’ve been seeing and hearing throughout the year in countless conversations with entrepreneurs: European tech is graduating. Record numbers of both raised funding and exits speak louder than words, and they have interesting consequences.

As the amount of successful scale-up companies continues to rise on the continent, so does the need for ever greater amounts of top tier talent.

As the access to venture capital is no longer the biggest bottleneck for European tech, our eyes are turning towards cultivating the next generation of world-class talent for the current and future tech companies that are set out to solve some of the biggest challenges on the planet.

For this we need a diverse talent pool to be part of building the European tech companies.

The problem of diversity that Europe, like the rest of the world, is having can be turned into an opportunity. By lifting up a more diverse set of role models will affect the decisions of to-be founders. Emphasizing the role that humanities and arts, in addition to STEM, will play in the future development of technological solutions should be done upfront if we want to gain an edge from the magnificent creative industry in Europe.

One more additional thing that Europe really stands to benefit from is our strong academia. Nailing the combination of bleeding-edge, hardcore research and practical, world-class company building should be one of our main targets for the upcoming years.

Almost all businesses that want to make it big in Europe have to think international or global from the beginning. This is a mindset that we should utilise also in the next generation of education for future entrepreneurs. Stay tuned!

Andreas Saari
CEO, Slush

A Word from Orrick

There has been a nearly five-fold growth in European venture capital investment in the last five years. There are five times the number of unicorns – with at least 17 new billion dollar plus companies added in the past year alone. The European tech sector has produced nearly four times the job growth rate of the general economy, resulting in a talent pool of programmers and STEM researchers surpassing that of the United States.

Tech and innovation is no longer on the sidelines in Europe – it is driving the economy. That’s the clear take-away from this year’s State of European Tech Report.

At Orrick, we see it in our practice every day as we have helped founders, investors and corporate venture clients raise or deploy more than $3.7 billion across Europe over the past year.

As a global tech law firm, we’re not surprised to see investors from around the world chasing strong returns from their European investments. While U.S. investment returned to 2016 levels after another record-breaking performance last year, investment from Asia continued to grow.

We’re encouraged by corporate venture investment growth, particularly from outside traditional tech industries. This affirms the strong demand for innovation – as companies in every sector recognize the need to adapt to the tech transformation.

Altogether these trends point to a robust future for European tech.

However, the Report’s purpose is to shine a light on all of "the issues that matter” in the European tech ecosystem. We applaud Atomico for highlighting some deeply troubling ones: 46% of women in tech report experiencing discrimination and only 7% of capital went to female founded companies or mixed gender founding teams. That’s not right – and it’s not sustainable if Europe truly wants to innovate. We also applaud Atomico’s collaboration with Diversity VC to provide guidance to founder teams on how to build a diverse and inclusive culture. Awareness and education are a key first step. Investors have an essential role to play. The good news is that there’s an incredible amount of unfunded talent out there. Let’s all participate in the conversation about how to dramatically improve next year’s results.

We’re grateful to Atomico for the opportunity once again to help provide this data to the tech community in Europe and globally. We hope you find it as useful as we do in seeing the patterns and opportunities in this rich and promising ecosystem.

Chris Grew
Partner, Technology Companies Group Orrick