The tech sector is experiencing an unprecedented downturn, but analysts see tremendous opportunity for startups that weather the downturn.
According to a new study by Startup Genome and the Global Entrepreneurship Network (GEN), VC funding worldwide has plummeted 35% in 2022 from the year before. The Global Startup Ecosystem Report 2023 (GSER 2023) also observed a slowdown in the number of deals, exits and unicorns. But a deeper look gives reason for optimism.
After a year of sharp market declines, inflation is now slowing and economic growth seems to be holding up. Headwinds remain challenging, but the GSER 2023 notes that recessions are good times to invest in startups.
Historical trends support the theory. Startups funded during the Great Recession had higher exit multiples compared to startups funded during the economic boom. In down years, startups that achieved Series A funding could multiply the value of that round twentyfold by the time they exited.
“Economically lean times can produce powerful start-ups.
The tickets are officially sold out
However, there may still be some last minute spots available
Specific examples of successful startups born in a recession include Spotify, which picked up a Series A in 2008, Twitter, which did the same in 2007, and Flipkart in 2009. There were similar successes after the dot-com crash of 2001. When the bubble burst, pessimists sounded the death knell for the tech industry. Within a few years, their prediction proved completely wrong.
The wave of mass layoffs is also likely to trigger a new wave of start-ups. A huge pool of elite talent with technical know-how and industry knowledge is now looking for new ventures.
“Given that more than half of the companies on the Fortune 500 were founded during a recession or bear market in 2009, we know that tough economic times can produce powerful startups,” said Jonathan Ortmans, founder and president of GENE.
“Despite recent falls in investment, this report offers a glimpse of where the world’s most disruptive and solution-oriented companies could emerge in the years to come – and provides unprecedented insights policymakers and community leaders need to build resilient startup ecosystems.”
Additionally, the report notes that high interest rates can actually benefit startups. They are concentrating capital and talent in value-creating companies and crowding out the less competitive ones. In fact, fewer startups were funded in 2022, but they received larger sums. According to GSER, the average deal size increased by 2%.
Increasingly, these investments are aimed at artificial intelligence. AI and Big Data was the sub-sector with the highest number of VC deals overall in 2022, accounting for 28% of the global share.
The report highlights numerous positive aspects for European startups. Despite macroeconomic concerns and geopolitical tensions, 2022 was the second busiest year for European VC activity overall, after 2021, with deal numbers and volumes exceeding pre-2021 numbers.
The continent has also conquered more unicorn country. While the number of startups valued at over $1 billion has declined globally, the share of unicorns in Europe has increased from 14% to 20% in 2022.
Of the seven ecosystems that spawned their first tech unicorn in 2022, three were located in Europe: Sofia-based Payhawk, Zagreb-based Rimac, and Prague-based Rohlik Group.
Europe is also the most represented region in the GSER’s “Emerging Ecosystems”, composed of startup communities in earlier stages of growth. The continent has increased its share from 37% to 41% since last year and is home to the number one ecosystem: Copenhagen.
The five best ecosystems in Europe in each category. Photo credit: Startup Genomes
Europe’s performance was even better in the Strong Starters category, which includes the 25 emerging ecosystems where early-stage funding activity is strongest. More than half of the class are Europeans, including the top four: Istanbul, Barcelona, Estonia and Madrid.
Among the leading ecosystems, London remains number one in Europe and second in the world.
The UK capital is home to the largest number of companies valued at over $1 billion. The city’s 83 exits valued at over $50 million include Wise, valued at $12.2 billion, and Deliveroo, at $10.5 billion. Revolut, one of Europe’s biggest fintech unicorns, is valued at $33 billion.
In second place is Berlin. The German capital minted five new unicorns in 2022, raising its total from 14 to 19. Exits over $50 million are up 40% since the GSER 2022, with AUTO1-Group the highest in an IPO in value of $9.2 billion.
Amsterdam retained third place thanks to an increase in exits over $50 million, the number of early-stage deals and unicorns. Banking platform Backbase is the latest addition, valued at $2.7 billion.
“This important mission cannot be put on hold.
Another ecosystem that deserves special attention is Zurich. The city rose 10 spots to 36th globally, marking the biggest year-over-year improvement in Europe. Exits above $50 million are up a whopping 300%, with Healthtech Pharvaris exiting at a valuation of $636 million. The number of unicorns has since grown from two to six, including blockchain company Dfinity, which is valued at $9.5 billion.
Zurich provides further evidence that startups can thrive even in a downturn. JF Gauthier, founder and CEO of startup Genome, expects more success stories.
“Despite the current economic challenges, we are confident that with the right knowledge, entrepreneurs, policymakers and community leaders everywhere can seize the opportunity to come together and show how innovative technologies can not only continue to drive growth and job creation, but also help at the same time .” “Save the planet and ensure a better future for all,” he said. “This important mission cannot be put on hold while we wait for difficult economic times.”