Record $19 Billion of Investment Suggests Europe Tech Is Doing Fine

But Brexit worries are significant in Atomico’s annual report on the state of the European tech industry
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Traffic passes around the Old Street roundabout, also referred to as 'Silicon Roundabout,' in the area known as 'Tech City' at dusk in London.

Photographer: Chris Ratcliffe/Bloomberg

European startups are on pace to collect a record $19 billion from investors this year, despite concerns the U.K.'s departure from the European Union will weigh on the region's technology industry, according to an annual report by the London-based venture capital firm Atomico.

The U.K. remains the largest destination for capital invested in Europe, with $5.4 billion year to date, according to the report. Germany follows with $2.5 billion and then France at $2.1 billion. The U.K. also held on to its spot as No. 1 destination for skilled tech workers to migrate to within Europe, but ceded some of its share to France and Germany compared with previous years.

Since Britain’s vote to leave the European Union and Prime Minister Theresa May’s formal request to begin divorce proceedings, significant attention has been paid to the future of local investment and access to talent. Atomico said it was clear the separation was weighing on investors.

The U.K. was the most pessimistic about the future of the European technology industry, with 18 percent of respondents — which included thousands of founders and investors — saying they were less optimistic than they were a year earlier. Over the last 12 months it’s also become harder for British startups to raise new funding, according to 32 percent of founders questioned.

The U.K. government responded in part by announcing plans to double the number of Tier 1 visas it issues to people of "exceptional talent,’’ to 2,000 as it attempts to maintain the nation’s attractiveness as a place to work.

While the value of investments across Europe in 2017 is expected to hit $19 billion, it will achieve that with fewer deals — 3,449 for 2017 compared with the 3,720 deals that totaled $14.4 billion in 2016, according to Atomico’s research. France is challenging the U.K. for the most number of deals closed per year. 

“This is something we've seen on a global basis overall,” Tom Wehmeier, the author of the report and head of research at Atomico, said in an interview. “You've seen larger average round sizes this year versus last year,” he said, adding that the drop in a number of investments was due to fewer being made at the very smallest sizes below $2 million.

“It's important to focus on the big picture rather than smaller fluctuations,” Wehmeier said. “We’d have to look a few years out to know whether it's a sign of a long-term trend.”

Russ Shaw, founder of industry body Tech London Advocates, said the report provided further reasons to be vigilant around the threat of Brexit. “Over two thirds of those surveyed were negatively affected by the referendum result, with one in three losing out on a hire or an investor, mirroring TLA’s research on the topic,” Shaw said via email.

“The findings also point to a crippling lack of gender diversity in the sector, with just 9 percent of C-suite positions held by women,” he said. “More worrying is the lack of awareness of this problem, with 59 percent of founders under the impression that gender diversity is fairly reflected in their companies.”

Deep Tech

In Atomico’s 2016 report, investments into U.K. startups that focus on deep technology — work grounded in scientific research, such as artificial intelligence or robotics — had declined to $935 million compared with the record $1.3 billion total for 2015. For 2017, this sector has bounced back to hit a new record total of $1.8 billion investment in British companies, such as Graphcore. The deep tech industry is on track for a total of $3.5 billion across Europe as a whole, up from $2.5 billion in 2016.

Among the U.K. government’s other plans to prepare for the impact of Brexit on this growing market, it has already launched a 20 million-pound ($26.9 million) fund for public services to invest in artificial intelligence.

It’s an area Britain has been successful in already: DeepMind sold to Alphabet Inc.-owned Google in 2014 for a reported 400 million pounds, Twitter paid about $150 million for Magic Pony Technology, a London-based artificial intelligence startup, and SoftBank Group Corp. paid $32 billion for Cambridge-based ARM Holdings Plc. More recently, SoftBank invested $502 million in virtual-reality startup Improbable.

Wehmeier said the growth of investments into deep tech, and subsequent exits, was because artificial intelligence is being embedded at the core of many companies.

“If I was to roll the clock forward a couple of years, we'd expect to see AI at the heart of all companies,” he said. “Like now if you were to see a consumer company that didn't have mobile at their core, you'd be really surprised.”

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