Europe’s Digital Startups are Closing the Gap with Tech Companies in the U.S.

May 1, 2021

Europe’s tech entrepreneurs have arrived. The ecosystem of digital companies has grown twice as fast as in the U.S. during the past seven years, and funding in Europe’s private companies eclipsed $100 billion for the first time in 2021.

We spoke with Clif Marriott, co-head of the technology, media and telecom group in EMEA at Goldman Sachs, about the growth in European startups following our Disruptive Technology Symposium last week. The event hosted nearly quarter of the region’s 220 unicorns — a metric that highlights how much the sector has grown: Europe had fewer than 20 private tech companies backed by venture capital that were valued at $1 billion or more when the symposium first took place in 2016.

Marriott says one of the biggest topics of discussion at this year’s conference was the differential between valuations in public and private markets. While financing has slowed for now, he says Europe’s unicorns have raised immense amounts of capital that will eventually result in large, well-funded companies going public.

The growth in European tech has been a major topic at Goldman Sachs events in recent weeks. What is your outlook for that sector?

In 2021, we executed more than $150 billion of M&A and financing transactions for tech and tech-enabled companies in Europe, which is an absolute record in terms of activity. This year, and especially the first half, we would expect to be much slower in terms of the activity levels and that’s really driven by volatility in the markets and lower overall valuations. That has slowed IPO activity to basically zero during the first half of this year.

That said, one of the key metrics, that $100 billion of capital that has gone into European companies in 2021, means two things. First, companies are getting bigger and they’re very well funded. Many of these private companies took capital last year when the market was really good. They’re using that capital to grow their business and to invest. So that’s a positive thing.

Has the market turmoil impacted private markets differently than the way it impacted public markets?

This is probably the biggest theme that came out of the conference and also some of the networking activities that we held. The dislocation between the private and public is definitely here. I had one very large tech investor who said he’s never in his career seen private and public valuations be so unlocked or separated.

I think there’s three things driving that. The public investors, and let’s say hedge funds in particular, but institutional investors generally have become much more negative around the impact of inflation, and therefore the impact on asset values that have a long duration — meaning the more the valuation of a company is dictated by its terminal value a long time out, the more that higher rates impede that valuation.

The second thing is that volatility has meant that there has been a lot of forced selling within technology, which means valuation levels have been impacted by that volatility.

The third thing is that private markets haven’t adjusted as much. Very few if any of the tech companies are seeing any impact to their business from inflation, nor from the geopolitical situation, yet, and a lot of them have raised capital in the last two years and they don’t see why their valuation should be impacted as much as the valuations have been impacted in the public markets.