European tech startups will see a 38% drop in investment in 2023 compared to 2022 levels, the latest report by Atomico. Specifically, startups are expected to raise $51 billion in funding — down from $83 billion in 2022 and $106 billion in 2021.

But Europe is not alone in a difficult year for technology. The US and China also look forward to a 49% drop in investment in 2023 compared to 2021. According to the report, this global withdrawal of funding has a knock-on effect on capital flows between regions. For Europe, this means a significant reduction in capital from US investors, which will mainly affect companies that raise larger rounds at a later stage.

While the funding slowdown is visible in all European countries, the largest decline between H2’22 and H1’23 is expected in the UK with a 57% fall in investment. This is followed by France at 55% and Germany at 44%.

As a result, founders are adapting to the new reality, which Atomico says means layoffs accelerated in the first quarter of 2023 while valuations fall and downturns ramp up.

Don’t worry, it’s not all doom and gloom

Despite the rough financing landscape, the total value of the European technology ecosystem is predicted to reach $1 trillion this year – back to (its highest level ever) in 2021.

The ecosystem also accounts for 29% of global funding going to start-ups – almost as much as the US (36%), having nearly halved the gap in the past five years. At the same time, Europe is catching up with the US in terms of startup creation, although the pace has slowed somewhat.

In addition, startups on the continent continue to lead the way in purpose-driven tech that meets the UN’s sustainability goals. In particular, investments in “climate and target” have reached an all-time high, representing 18% of total funding.

In particular, the capital flow in generative AI is also increasing. This year so far, companies developing the technology have secured 35% of all funding for AI/ML – the highest share ever – up from 5% in 2022.

“We should see this period as a return to first principles,” said Tom Wehmeier, Partner and Head of Insights at Atomico. “From this cycle, we have the opportunity to build an even healthier ecosystem, with a clearer focus on quality. Fewer companies will be created in the short term, but those that break through will be more likely to be winners, with a strong base of senior talent and a greater share of resources in the region.”