On one hand, European tech firms haven’t done so badly –an influential study last year from GP Bloudhouse reported that between 2003-2013, Europe founded 30 unicorns (firms that raised at a $1 billion valuation in either public or private markets) compared to 39 in the US. Yes, European firms were slightly smaller and slightly older, but not so bad.
However, one has to look at the recent wall of money in the US; according to PItchBook, US late stage venture capital received ~$42 billion last year with a record 62 firms raising money at more than $ 1 billion dollar valuations. Some have argued that that there is a valuation bubble, similar to the dot-com era of the 2000s. Leaving aside the specifics of the valuation issue (is UBER really worth $40 billion) it does allow later stage US companies the ability to raise large amounts of cash to execute on their business plans.
Which brings us back to the original question, where are the European unicorns? Firstly, they do exist –as I write this, Spotify (UK based) is reportedly seeking new financing at an $8.4 billion valuation. However, European start-ups may want to lower their sights for some of the following reasons:
Lack of serial entrepreneurs
A number of studies has shown that 80% of billion dollar companies come from serial entrepreneurs. Europe’s start-up eco system is still young. We are creating them, look at Nikkals Zennstrom of Skype as an example of a serial entrepreneur but it will take time to nurture and develop them.
Europe’s pool of capital is more limited and more risk averse
The European venture capital market is quite simply, more shallow and less diverse than the US. We simply don’t have the myriad of firms (sector, stage, etc.) that the US system (which is in turn is supported by a very large base of public & private pension plans alongside with foundations and endowments) has; this leads not only to less overall capital but less competition for deals (which in part drives those unicorn valuations). In addition, Europe does not yet have the peripheral actors such as conventional mutual funds and hedge funds providing late stage capital.
Lack of support from European corporations
We don´t have as many tech giants in Europe, with some prominent ones such as Nokia having fallen by the wayside. Particularly on the enterprise front, most of the really big players remain in the US, and thus most often, so does their check book.
Europe has a tendency to copy the best ideas that are being funded in the US and create localized clones. The investment strategy is not necessarily unsound, however, Europe is not nearly as homogenous of a market as the US, which results in firms that have much smaller markets and therefore much smaller potential. That in turn makes it much harder to justify big valuations.
Ambition vs risk
At the risk of sounding like a broken record, there seems to be a European tendency for risk aversion. European entrepreneurs (and their backers) seem happier for a nice pay-out and a decent return. For European unicorns to truly develop we will need more people –founders, CTO’s, investors, aiming to be the next Mark Zuceknberg, Sergey Brin or Peter Thiel.
Author: Ashok Parekh, Director, Investment Services