The European startup ecosystem just experienced the most extraordinary year in its history. Years of wondering when the region’s entrepreneurs would get global respect were washed away by a tidal wave of investment driven by international investors.
According to CB Insights, European startups raised $93.3 billion in 2021, up from $38.5 billion in 2020. Those soaring figures are the result of megarounds that often approach $1 billion. Europe had 117 unicorns at the end of 2021, up from 69 the previous year. That’s an average of one new unicorn every week.
This is happening against the backdrop of a global investment boom. There were 517 new unicorns in 2021. There are now 44 decacorns.
Europe deserves to celebrate the fact that it’s sharing in this bounty. But it’s also essential that European founders and investors recognize the underlying trends that are reshaping the ecosystem. Bigger rounds, more money, and increased attention bring greater responsibility and expectations.
Raising money is never the end goal. It should be a springboard for success. But these large rounds also increase the risk for founders that are not properly prepared to meet the new scaleup challenges.
To that end, here are 7 predictions for 2022 intended to offer some insight into the road ahead so founders can attain those lofty valuations that are currently making so many headlines:
1. Asset Crossover:
Venture capitalists no longer have the startup party to themselves. Venture capital financing is increasingly the domain of non-VCs: hedge funds, mutual funds, private equity. Worldwide, the share of startup funding coming from traditional VCs has been decreasing over the past few years. Globally, the share of VC startup funding has dropped from 36% in Q1 2015 to 30% in Q4 2021.
Prediction: This trend will continue in 2022 as these alternative asset classes increase their investment share, mostly at the later stages but also increasingly at the earlier stages. Why? They have found a sweet spot at the pre-IPO stage where they can bank returns of 10% to 15% with little risk. That’s a great financial placement and it will pull even more of these assets into the mix.
2. Foreign Investors:
Payment leader Checkout recently raised a $1 billion round at a $40 billion valuation. But this big news carried a red flag. As Sifted.eu noted, Checkout only has 2 European investors in its cap table. By the time the founders started raising outside money, the valuation was too high for most existing European funds. Checkout is an extreme example, but it highlights the way non-European investors are dominating EU late-stage financing. As these valuations rise, it’s increasingly difficult for European funds to participate in a meaningful way.
Prediction: U.S. investors will dominate late-stage funding in 2022 for European startups. That doesn’t mean European funds won’t find their way into those rounds. But in the coming year, they won’t have the resources to lead them.
3. Valuation Stress:
Startups have experienced a couple of frothy years as the pandemic accelerated digitization and those big investors wrote massive checks. No one is calling this a bubble, but there are growing whispers that the macro-economic environment — rising inflation, tightening of monetary policy by central banks, and stalling stock markets — is going to put a chill on an overheated investment environment.
Prediction: Startup valuations are going to hit a peak for all but the very best. Investors are going to be even more scrupulous in examining financials and business models. They will be looking for companies that can demonstrate resilience and efficient growth. Over the past couple of years, it has felt like the right pitch deck could land a 9-figure investment round. As stock markets reset and public tech valuations soften, private startups will have to raise the bar to persuade late-stage investors. I don’t think the growth in valuations will stop. It will continue for the very best companies, just not all of them.
4. Unicorn Creation:
Even as investors sort the strongest companies from weaker ones, the unicorn parade will continue. Across 2021, Europe saw the unicorn creation pace increase, with 10 per quarter through September and then 15 in the December quarter.
Prediction: Europe will sustain that Q4 momentum and see 60 new unicorns in 2022. Indeed, France alone has seen 4 new unicorns in the first half of January.
5. 2010 Economy:
The startup world is buzzing about web3, crypto, the creators’ economy, and the metaverse. This is the economy of 2030. Europe has made some noise here thanks to companies like Sorare. But the real opportunity remains in sectors we’ve been talking about since 2010: cloud, Saas, fintech, and enterprise. For all the talk of digitization, there is still a huge amount of runway for these technologies to transform the economy of today.
Prediction: The technologies of 2010 will continue to dominate the European investing landscape in 2022.
6. Fintech Future:
Even within those 2010 technologies, fintech stands out. Companies like Klarna, Revolut, and now Checkout, rank among Europe’s most valuable. In 2021, fintech accounted for $132 billion or 21% of all venture capital raised globally, according to CB Insights. That’s up 169% from 2020. Last year, Europe attracted between 20% to 25% of fintech funding. A large proportion of that money was raised by early-stage startups, hinting at the underlying potential.
Prediction: Fintech will remain Europe’s single hottest sector in terms of fundraising, unicorn creation, and transformational impact in 2022.
7. Growth Metrics:
As all the above trends converge, entrepreneurs will have to be more mature, better prepared, and more strategic in their approach to scaling their companies. Having product-market fit, or steady customer adoption will no longer be enough to satisfy their investors and justify their valuations. These investors won’t tolerate any dips in growth. Founders need a new playbook for growth.
Prediction: European entrepreneurs will embrace more sophisticated growth metrics in 2022. These are precise metrics to measure “growth resilience” month-to-month rather than general growth over several years. This includes identifying a North Star Metric, the measuring stick that defines a company’s relationship to its customers. Maybe that’s monthly average users or annual recurring revenue.
Having the right growth playbook is imperative to ensure that European companies are on track to continue the growth. A crash is not inevitable as economic conditions shift and investors evolve. Growth metrics are the foundation of any playbook that will guides founders toward successfully scaling their company and emerging as one of the coming crop of $100 billion startups.