Generative AI is fuelling European software-as-a-service (SaaS) and cloud services startups, according to the latest report published by VC firm Accel.
The 2023 Euroscape report says that although investment into the sectors has returned to levels similar to 2019 (prior to the pandemic), there are signs of recovery from the downturn.
“Following the global tech reset of the past 12 months, it’s reassuring to see the cloud ecosystem’s resilience and early signs of a new normal settling in,” says Philippe Botteri, partner at Accel.
“Valuations, investment levels and unicorn creation are now back in line with 2019 levels.”
The new normal
Funding in cloud services in Europe and Israel was $11bn in 2023, down from $31bn in 2021, but Botteri says that the 2021 figure was a “huge distortion” due to inflated valuations and the Covid tech boom.
The report also sees reasons for optimism, including the strengthening Nasdaq, which has returned to 80% of an all-time high in 2023. After the 2000 financial crisis, it took the exchange 14 years to hit the same milestone.
It said that GenAI is fuelling innovation, funding and new unicorn creation in Europe.
The GenAI effect
GenAI is the trend to watch in 2023 — and in the next couple of years — as it transforms the software paradigm and creates new opportunities.
Although Europe is on par with the US when it comes to the largest rounds in non-GenAI companies in SaaS or Cloud, it is doing a lot worse when it comes to GenAI investments.
The seven largest AI investments in the US add up to $14.1bn, while in Europe and Israel that same number adds up to $900m.
However, the report is still positive about European GenAI, citing Europe’s large talent pool and the presence of 50% more AI journal publications than in the US.
“GenAI is redefining the potential of software, bringing the opportunities for enterprise automation and productivity improvement to a new level. As our data shows, Europe and Israel are well positioned to take advantage of the rise of AI, with multiple research and talent hubs across the region and exciting AI startups emerging across multiple categories,” Botteri says.
Out of the $7.6bn invested in a selection of 100 companies Euroscape looked at, GenAI, Security and SaaS companies focused on a specific industry (vertical Saas) were the only three categories that increased their funding from last year.
Six downrounds in the last year
In the face of macroeconomic headwinds, companies are putting profitability ahead of growth, the report reveals.
The fastest-growing quartile of Euroscape companies listed in the report saw their growth decline from 68% in Q1 2021 to 23% in Q2 2023, while free cashflow increased from -9% in Q1 2021 to +5% in Q2 2023.
While companies are now more focused on profitability, the shift has not been as fast as expected, according to the report.
A large majority of SaaS unicorns in Europe and Israel — 102 out of 122, in fact — have not raised funding in the last year. When it comes to downrounds for the 20 that raised equity, only six did so to a lower valuation.