Europe's tech sector is set to haul in record funding this year despite the pandemic

Key Points
  • European start-ups are on track to raise a record $41 billion in 2020, according to venture capital firm Atomico's State of European Tech report.
  • Covid lockdowns slowed investment in Europe's tech sector earlier this year, but it's since rebounded and smashed monthly records in September.
  • It's been a relatively quiet year for European tech IPOs, but that's expected to change next year with several companies close to going public.
Buy now, pay later products like Klarna's became wildly popular in the Covid pandemic.
Noam Galai | Getty Images

LONDON — European tech start-ups are projected to raise a record $41 billion of funding in 2020, despite the devastating economic impacts of the coronavirus pandemic.

Investment in the continent's tech industry has been boosted by mega-funding rounds of $100 million or more this year, according to London-based venture capital firm Atomico.

In its latest State of European Tech report, Atomico said 2020 would mark a marginal improvement on 2019 when it came to investment growth. European start-ups raised $40.6 billion last year, up 52% from 2018.

Tom Wehmeier, partner at Atomico and co-author of the report, said there was a "real slowdown" in the second quarter of the year and through the summer, as coronavirus lockdowns started to take hold.

But investment activity has recovered since, with a record $5 billion flowing into Europe's tech sector in September alone.

"What we've seen is a post-summer resurgence," Wehmeier told CNBC. "September was the strongest month in European tech ever."

"We're continuing to see that, through October and November, investment … is really getting up to all-time high levels or above."

Transatlantic investment in European tech has also continued to grow, according to Atomico, with 19% of rounds being backed by at least one U.S. investor in 2020, up from 16% a year ago.

Challenges remain

Europe's tech industry is often seen as lagging the U.S. and China, which are home to some of the largest internet companies globally. But it has grown rapidly over the years.

This year, payments firm Adyen and music streaming service Spotify both surpassed a market value of $50 billion for the first time.

Europe also produced two so-called "decacorns" — tech companies with valuations of $10 billion or more — in the form of automation software company UiPath and financial technology firm Klarna.

Remote work shift has leveled playing field for European software firms, VC says
Remote work shift has leveled playing field for European software firms, VC says

Some investors say remote working has leveled the playing field for European start-ups, as location has become less relevant when it comes to finding and backing new entrepreneurs.

Nevertheless, challenges remain for European tech. According to Atomico, companies raising their second major round of funding — typically around $20 million to $50 million — found it more difficult to attract investment as Covid-19 hit their growth.

And different sectors within European tech have been affected in different ways. Digital health firms, for instance, raised a record $3.2 billion by September, while online travel was hit hard by the pandemic.

Hopin, a virtual events platform, was the fastest European company to reach unicorn status, notching a $2.1 billion valuation 17 months after it was founded.

Strong IPO pipeline

It's also been a relatively quiet year for European tech IPOs, even as the U.S. has seen major software unicorns like Palantir, Snowflake and Unity come to market.

Europe racked up 36 tech IPOs by the end of October, only three of which were valued at more than $1 billion, including e-commerce firm The Hut Group and e-commerce marketplace Allegro.

That was down from a high of 50 IPOs in 2017, Atomico said, adding Europe's tech IPOs were "overshadowed" by a rise in alternative listing methods like direct listings and SPACs (special purpose acquisition companies) in the U.S.

Nevertheless, Wehmeier struck a positive tone on the European tech IPO market going into 2021.

"I think we have the strongest cohort of private category-leading, venture-backed tech companies that we've ever seen," he said.

"I think in many cases those companies have been biding their time for the right moment to go public."

There are several companies in Europe that look further on the path toward a public market listing than ever, including TransferWise, Darktrace and Klarna.