European startups are making strides towards developing AI platforms that aim to compete with US-based companies, such as Open AI, in addition to building in areas such as quantum computing, chip design and semiconductors.
This was the broader theme that unfolded at ‘Slush 2023’, an annual startup and technology ecosystem event organised in Helsinki, Finland, this year and featuring founders and investors from the world over.
Slush, named after the partially melted snow that streets of Helsinki experience at this time of the year, saw more than 13,000 participants, including 5,000 startup founders and operators, in addition to some 3,000 investors managing a combined total of $3 trillion in assets.
These included executives from technology companies such as Open AI, Doordash, Stripe, Duolingo, Mistral AI, Monzo, and leading venture capital firms such as Sequoia Capital, Lightspeed Venture Partners, Accel, Thrive Capital, Spark Capital and Atomico, among others.
Over the two days of the event–November 30 to December 1–ET spoke with more than a dozen executives and investors to understand how the startup and technology community in Europe has shaken things up in the ongoing winter–both in terms of weather as well as funding.
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According to early-stage venture capital firm Atomico, which has backed startups such as Stripe, Klarna and Skype, total capital invested into European tech startups is estimated to plummet to $45 billion in 2023, down by 55% from 2021 when investment volumes topped $100 billion for the first time in the region. It is also lower than the $82 billion in investments that the region saw in 2022.
“The reality for startup founders looks drastically different from what it did a few years ago,” said Slush CEO Eerika Savolainen, who started as one of the many volunteers at the event, and is looking to launch her own startup soon. “Suddenly, building enduring companies is more important than explosive growth. Now, perhaps more than ever, startups need to be built on first principles, and founders should prepare themselves for the long-haul.”
The race for AI
“What you’re seeing in terms of the fall in funding is caused by the inflated valuations that later-stage companies got during the cheap money scenario…and that’s not something specific to Europe, but has been seen across the world,” said a Munich-based investment banker who was participating in Slush.
“To set some context here, investors have also moved focus away from high-cash-guzzling, hyper-growth-generating consumer companies to those that are really building frontier technologies in deeptech areas such as quantum computing, chip design, semiconductors, and new energy and sustainability spaces…something that Europe has a proven track record of building,” he said.
Atomico partner Tom Wehmeier said the focus on climate, healthcare and sustainability is also evident from funding patterns.
“European talent wants to solve humanity’s toughest challenges…sustainability, climate, health are the top themes for job movers this year…,” Wehmeier said. “We also see capital following talent in the same direction. This year, startups operating in the carbon and energy sector captured 27% of all capital invested. This made it the single-largest sector in absolute funding levels, overtaking usual suspects like fintech and software.”
Artificial intelligence, though, was the top theme for early-stage investors, he said.
In June this year, Paris-based Mistral AI raised around $113 million in seed funding – making it the largest capital raise at that stage. The round was led by Lightspeed Venture Partners, and saw participation from investors based in France, Germany, Italy, Belgium and the UK. These include Redpoint, Index Ventures, JCDecaux Holding, Rodolphe Saadé, Motier Ventures, La Famiglia, Headline, Exor Ventures, Sofina, First Minute Capital and LocalGlobe.
Even in larger rounds, AI-focused companies picked pace–accounting for almost a fourth of megarounds, or funding deals over $100 million, in Europe.
Talent hunt
A Finland-based venture investor backing companies in the advanced technology and AI spaces said that what sets Europe apart is the availability of talent.
“There’s a large pool of engineers across Europe, including in Nordic countries like Finland and Estonia, who are currently working for US-based companies on the ground in Europe. It is inevitable that as capital starts flowing in…and the larger companies take mentorship roles, these people will start spinning out into forming new companies,” she said.
Peter Sarlin, founder and CEO of Silo AI, a Helsinki-based private AI lab training large language models for low-resource languages, said Europe’s play needs to be different, considering its funding environment is different than that in the US.
“In the very capital intensive play (of AI), where you’re either a big tech company or a very well-funded startup like Open AI, it’s very difficult to compete in Europe, given the fact that the funding environment is very different. But that just means that the play in Europe needs to be different,” he said.
“I think we haven’t seen it all yet when it comes to what is actually success and how the market is going to evolve,” Sarlin said. “We’ve been driven by value creation and trying to assess where value accrues in the market. For European companies to be successful in areas like generative AI or AI at large, we need talent, and talent is usually attracted to ambitious projects.”
(The correspondent was in Helsinki at the invitation of Business Finland)
