July 14, 2023

Five H1 European tech myths debunked

Gen AI is all-conquering, French tech has taken over, hardware can’t catch a break: Sifted Intelligence busts some of the persistent narratives in startup circles

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Forget the UK, France is the new home of tech! Hardware is a VC desert! Gen AI will save us all! 

We’re all guilty of making occasional sweeping claims about what’s happening in European tech. But what are the numbers really telling us? 

As part of our mythbusting series, Sifted Intelligence has examined some of the narratives we’ve heard again and again this year to see if they bear out in the numbers. 

Myth 1: France is having the best year again of Europe’s major players

Last year, France was the only major European ecosystem to receive more funding than the year prior.


However, things haven't been so rosy on French soil since the beginning of 2023, with startup investment in H1 falling to its lowest since the second half of 2020 — and less than half of the total raised in the first half of 2022. That’s despite state-backed Bpifrance being the most active investor in Europe, according to our analysis. Only 44 raises over $25m were announced, compared to 86 in H1 last year. The only French tech company to go public in 2023 so far is online driving school Lepermislibre (though that's not a unique problem — the global IPO market is in the gutter). 

Meanwhile, Germany is quietly drawing level with France, as the see-saw battle rages on for Europe’s number two ecosystem behind the UK.

Myth 2: Generative AI is getting all the funding

Market pullback isn't something the AI industry has to worry about in 2023. Investors are wowed by ChatGPT and its imitators, which have captured the zeitgeist in a way that new tech rarely does. 

The frenzy around Gen AI has some believing the sector is taking the lion’s share of funding, when in fact the European market remains fairly small. Gen AI companies have pulled in 35% of all funding going to European AI/machine learning in 2023 — the highest share ever, having previously expanded from 1% in 2019 to 5% in 2022, according to VC firm Atomico. 

But while the total amount of capital deployed to Gen AI companies has increased — there’s been $668m worth of deals so far — this has been driven by a couple of late-stage deals across Series C+ stages. Among the mega-raises was a chunky $90m deal which produced Europe’s third unicorn this year, London-based AI startup Synthesia.

The “pipeline” of Gen AI startups is also limited: the total number of funding rounds for pre-seed to Series A Gen AI companies was 57 in 2022, and 17 in H1 2023. 

Myth 3: Hardware still isn’t getting funded

The old chestnut: investors love SaaS and don’t have the patience for tricky hardware startups. 

But comparing the two sectors, we see evidence of some shifting ground: hardware accounted for 24.4% of the combined total of both SaaS and hardware funding in H1 2023, its highest share since 2016. 

It’s important to add that hardware funding has fallen by 28.5% on H2 of last year, but relatively speaking, this is better than SaaS’s 38% slide in a market where few sectors are moving in an upwards direction. 

Europe saw 38 megarounds (equity deals of $100m or more) in the first half of this year; 12 of which were for companies developing hardware. Eight of these megarounds were for climate tech: solar startups 1KOMMA5 (€215m Series B) and Enpal (€215m Series D) both raised big in June, while energy storage and electric vehicle enablers DRIVECO, EVC, Octopus Electric Vehicles, Jolt Storage, Ingrid Capacity and Girasole Energies all went home with heavier pockets.

What’s clear is there’s a reallocation of money and priorities from investors underway — which leaves room for optimism for capital-intensive sectors like climate tech, deeptech and healthtech.


Myth 4: We’re over the worst layoff pain

We’re 18 months into the tech decline, and layoffs — while already exceeding the total number witnessed in 2022 — have come down steadily since the start of the year, suggesting we’re reaching a floor. The number of job cuts globally have fallen month-on-month in 2023, confirms tracker

So is the cold fog that's been rolling across European tech beginning to clear? 

It’s too early to say — and some investors fear a bigger reckoning is coming. “Startups will see noticeable layoffs from Q3 2023 onwards until late 2024,” Christian Meermann, founding partner at Cherry Ventures, predicted in a much-read analysis from earlier this year. His reasoning: a lot of companies raised two to four years' worth of cash in 2021 at unnaturally high valuations; most of these companies won’t grow into their prior valuations, and so will need to find an exit — or shut down — in the next 18 months. 

Myth 5: Some tech is downturn resilient

Some investors have pegged certain sectors as “downturn resilient” — predicting that they will still draw capital when other sectors struggle.  

Climate tech — an investing bright spot since 2021 in an otherwise gloomy market — was for a while a great bucker of market-wide trends, leading some to point to its downturn resilience. But before climate founders party like it’s 1999, the latest numbers in fact tell us that funding for European climate tech companies dropped 43% in H1 2023 compared to the same period last year. 

There’s more evidence for stages — not sectors — being downturn resilient. Late-stage megarounds tend to fade when cash is scarce and yes, both the number of deals and average deal sizes have been in the red for Series B+ stages in 2023 (though recovering slightly of late). Smaller cheques are preferred in hard times and early-stage funding — the backbone of European tech — has held strong throughout the downturn, at times performing better than in H1 2022.

Additional data research by Daria Dmytrenko, startup analyst, and Éanna Kelly, contributing editor

For the latest analysis and market intelligence on European tech in Q2, check out our Briefing — exclusive to Sifted Pro subscribers.

Federico Scolari

Federico Scolari is a junior intelligence analyst at Sifted. Find him on LinkedIn

Jonathan Sinclair

Jonathan Sinclair is intelligence research manager at Sifted. Find him on LinkedIn

Shubham Jaipuria

Shubham is a data analyst intern with Sifted Intelligence, and can be contacted on LinkedIn