Europe stands on the brink of a new technological renaissance
In the US today, the public markets are brimming with venture-backed high growth technology companies. Indeed, of the top 10 US companies by market cap, no fewer than half of them – Apple, Alphabet (Google), Microsoft, Amazon and Facebook – have raised venture capital to fuel their journey.
The contrast with Europe, meanwhile, is stark. None of the top 10 listed companies in London, Paris or Frankfurt has taken on VC investment, which is a clear sign of the troubling gulf between the US and European tech ecosystems, and as producers of tech giants in particular. Right now, Europe is roughly where the US was a decade ago.
Yet let me be clear: that’s no bad thing. In the years since the launch of the iphone in 2007 – the year I myself arrived in Silicon Valley from Europe – the valuations of America’s most successful tech companies have accelerated over an ever more compressed time frame. The fact that much of this surge occurred over a few short years is evidence of so-called escape velocity.
When Instagram was snapped up by Facebook in 2012, the price tag was $1bn (£769m). Less than two years later, the social networking platform paid $19bn for Whatsapp. Other tech giants have followed similar patterns, either in terms of M&A activity or their own market cap. Dropbox launched in 2007 and is valued at up to $10bn today. Uber, which began two years after Dropbox, is now worth an estimated $68bn. And so on.
Today all the indications are that Europe’s best new companies stand on the cusp of similar escape velocity. I call it “digital Darwinism”: the inevitability that as Europe’s tech ecosystem continues to deepen and expand, it will evolve to produce Silicon Valley-style global giants.
Everywhere we look, there’s convincing data on how Europe’s tech sector is igniting. The analogy I like to use is of a flywheel with seven spokes.
The first spoke is angel investors, many of whom have already successfully exited companies or cashed out stock options. They range from high net worth, sometimes high profile, individuals – backing dozens of start-ups, through seed funds or directly – to entrepreneurs cutting cheques for $10-$20,000 to support the next generation. I include Valley veterans such as myself, who returned from the West Coast to found or back companies in Europe, in this category, as well as crowdfunding sites such as Kickstarter, Indiegogo and Crowdcube.
Angel investment in Europe increased to €6.1bn (£5.5bn) in 2015, up 8.3pc from 2013, according to the European Early Stage Market Statistics. The community of investors has grown to 303,650 who, between them, closed 32,940 deals in 2015.
Second comes the record number of start-ups and entrepreneurs in European tech and, no less significantly, the corresponding failure rate. There are more entrepreneurs and technologists in European tech than ever before. A way of gauging this is the ever-increasing prevalence of interactions via Meetup.com, the leading software development platform. In 2011, there were 1.3m tech Meetup attendees in London. That number had risen to 6m by 2016.
However a growing tech community means that by definition there will be more failures. The European Investment Fund released a report on the success rates of its Vc-backed investments in the period between 1996-2015. Of a sample of 3,592 investments, 709 were writeoffs, and 829 were unprofitable sales, meaning that 42.8pc of all investments didn’t work out as hoped. Yet this is no cause for alarm; as in the US, “failure” should be a badge of honour, not least because failed first or second time
‘Failure should be a badge of honour, because failed first-timers are more likely to make a success next time’
entrepreneurs are much more likely to make a success next time.
Third, it’s boom time for start-up incubators and accelerators. According to the European Accelerator Report by Gust, in 2015 a total of €37.5m was invested in Europe in 2,574 start-ups by 113 accelerators, leading to 33 exits.
And, alongside angel and seed-stage investment, European venture capital is thriving. In 2016, 116 European VC funds had raised €6.4bn, the highest level since 2008. With more money to invest, more deals are being done: €16.2bn of venture capital money was raised by European tech companies in 2016, up from €4.2bn in 2012.
Fifth, in parallel, with increased investment and logistical support available, growth stage tech companies are finally flourishing across Europe. There are at least 25 privately held $1bn-plus companies in Europe today (although one list put the number of these “unicorns” as high as 47), compared with just two in 2010. Waiting in the wings are another wave of such unicorns-in-the-making including companies like Deliveroo, izettle, Worldremit and our own investment, the Hut Group.
These Vc-backed businesses are themselves spinning out companies, founded by exited executives or early employees – a sign of a deepening ecosystem. The most celebrated example of this in the US is the so-called “Paypal mafia”, who went on to found a range of unicorns and become serial investors. This is now increasingly happening in Europe, too, whether it’s Spotify’s enterprise-facing spin-off Stockholm-based Soundtrack Your Brand (a Balderton investment), or the gaming industry in Finland and beyond. A knock-on effect is to create deep reservoirs of expertise across Europe, including AI and fintech in London, mobile in Scandinavia, ad-tech in Paris, and e-commerce and marketplaces in Berlin.
All of which brings us to the flywheel’s seventh and final spoke: exits. Since 2010, the number of tech exits has grown substantially. While there were only 20 tech M&AS in 2010, this number had grown six-fold to 126 by 2014. And the increasing number of exits brings us back, full circle, to a new wave of angel investors, with chequebooks at the ready.
Of course, Europe still has bugs to fix. The inability of start-ups to coax and reward talent with stock options – commonplace in the US – due to local tax regimes is a growth inhibitor. As is the persistently large VC funding gap with the US, which hampers the development of later stage companies.
However, I’d rather be an entrepreneur starting out in Europe today, than in 2008 in the Valley. From Da Vinci’s prototypes to the creation of the internet itself, Europe has for centuries exported ideas which have gone on to change the world. Today, the continent stands on the brink of yet another renaissance, with technology at its heart.
Lars Fjeldsøe-nielsen is general partner of Balderton Capital