News - June, 2023
It took European technology well over a decade to rise from the ashes of the internet bubble. Today, the ecosystem seems mature and resilient. What will it take to overcome new challenges and finally be able to narrow the gap with the US and China?
When the pandemic hit the world in early 2020 nobody knew what the impact on the world of technology companies might be. Very soon though, it became clear that two things were happening.
1) Covid was turbo charging every aspect of the of the ongoing transformation of the economy: video conferencing, cloud computing and the digitization of work. All of these trends accelerated.
2) Loose monetary policy drove interest rates to zero, even negative. The cost of capital became close to zero and valuations of technology companies went through the roof.
Obviously, it could not last. When the pandemic ended, excess liquidity and supply chain issues triggered inflation levels unseen for decades, forcing central banks to raise rates. In Q4 2021 tech valuation started to decline fast.
European Venture Capital investments have declined every quarter since Q4 2022. In Q1 2023 investments are down 78% against one year ago. Venture Capital fundraising is fairing equally poorly.
The down market is more comparable to 2001 than to the Global Financial Crisis. Rising interest rates not only push tech valuations down, but they also lead to capital flowing away from technology into other areas of the economy. Owners of technology assets are keen to sell, and yet again, demand for secondary transactions is rapidly rising.
It depends. It is entirely possibly that a replay of the old narrative of “European technology doesn’t work” will take hold. Limited partners would withdraw, government would reduce funding, technology firms would close and people would go back to the “old economy” – just as it happened 20 years ago.
However, we at Cipio Partners are optimists. We at Cipio believe this time it is different. We believe that European entrepreneurs and European investors have proven over the last 10 years that European technology does “work”. Europe has created some major entrepreneurial success stories such as Spotify, Adyen, Booking, King, and 150 other European Unicorns (1). European investors have made money. Just as nobody in the US lost faith in 2001, and nobody is losing faith today, there is no reason for anybody in Europe to lose faith in the ability of the technology industry to create value.
So, what’s the playbook for bouncing back?
Europe’s first incarnation of its own technology industry, the internet startups created in the late 1990s, was largely a failure. When a cyclical downturn hit the industry, people lost faith, funding dried up and few businesses of scale survived. European technology had to wait over ten years before it had its second chance.
Over the past ten years courageous entrepreneurs and investors rebuilt the European technology industry from scratch. It cannot quite rival the US, nor China, but it is a player. This achievement is at risk again in the downturn triggered by war and inflation. In the face of the current challenges, we need to build on our strengths, double down on the past achievements, take risks on new sectors, make dramatically more capital available for scale-ups and build more attractive capital markets for the European decacorns of tomorrow.
And again, just as 20 years ago, Cipio Partners will be there.
Image by Ina Zabel: Diana Meyel, Roland Dennert and Dr. Hans-Dieter Koch