WSJ News Exclusive | Europe Tops China in Spawning $1 Billion Tech Startups

While China still has far more large tech companies than Europe, and a larger internal market for them, trends have shifted over the past year according to research by Atomico, a London-based venture-capital firm that produces an annual analysis, the State of European Tech.

This year, China has added 26 tech companies with valuations above $1 billion, known as unicorns, bringing its total to 300, according to Atomico and data from analysts Dealroom.co. Europe has 98 new unicorns this year, bringing its total to 321, according to Atomico. It defines Europe as all 27 European Union countries and 18 others, including the U.K., Norway and Switzerland.

The U.S. still leads Europe and China with 1,178 unicorns, of which 384 were added this year, according to Atomico.

Europe has also leapfrogged China on venture capital investment this year, according to Atomico. In the first nine months of 2021, China drew $45 billion in venture funding compared with $52 billion for all of 2020, while Europe has already surpassed last year’s total, Atomico said. Through September, venture capital funds invested $77 billion in Europe, up from $48 billion for the whole of last year.

Both Europe’s number of unicorns and venture capital inflows are records, according to Atomico partner Tom Wehmeier, who leads the preparation of the report.

Europe’s venture funding total is near that of Asia overall, which saw venture capital investments of $110 billion through September, versus $87 billion in all of last year, Atomico said.

Investors, particularly from the U.S., have been drawn to Europe by an expanding number of tech startups launched by a growing population of entrepreneurs, many of whom have already worked in other tech companies. Over recent years, European governments and the EU have tried to encourage people to start businesses and embrace a degree of risk, particularly as the continent’s traditional social safety nets have strained under economic pressure and demographic shifts.

European universities’ strong science and engineering programs have long fed into large industrial enterprises but increasingly send graduates to the tech industry.

Tech-sector ties across the Atlantic have deepened recently, particularly as China and other parts of the world have become less welcoming. U.S. tech companies including

Amazon.com Inc.,

Alphabet Inc.

and

Facebook

parent Meta Platforms Inc. have established research centers in Europe or partnerships with universities to tap into the continent’s talent pool. Specialists can be less expensive to employ in Europe than in U.S. high-tech centers such as around San Francisco or Seattle.

European startups also generally carry lower valuations than their U.S. counterparts, attracting deal-hungry American investors. Europe this year has accounted for 33% of early-stage investments of less than $5 million, compared with 35% in the U.S. and 17% in Asia, according to Atomico. Europe’s share falls and the U.S. share grows with the size of funding rounds, Atomico says, offering a reminder that more money is chasing bigger deals in the U.S. than Europe.

China, meanwhile, has pushed to bring greater state control over its private sector. President

Xi Jinping

has said companies should do more to serve the Communist Party’s economic, social and national-security concerns. Along the way, the government has launched probes, derailed public offerings and clipped the wings of recently highflying tech entrepreneurs, erasing hundreds of billions of dollars in market value in the process.

Atomico’s Mr. Wehmeier said Europe’s relative predictability—which many people criticize as inertia or stodginess—has become an advantage relative to the situation in China now and to the unpredictability in the U.S. in recent years.

“Investors struggle with uncertainty,” Mr. Wehmeier said. “Europe’s stability is a great foundation for building a healthy tech ecosystem, and that has become more apparent recently.”

Write to Daniel Michaels at [email protected]