Postcards from Europe — “European digital tsunami”
It took a pandemic and a divorce — Brexit — for Europe to come into its own.
Cut off from much of the world for over 18 months and now “offshore” from the UK post Brexit, Europe is blossoming. As I have traveled across Europe over the last few months, my meetings with company management, entrepreneurs, and investors in Germany, France, Switzerland, and the UK paint a clear-cut picture: I believe that we are in the very early stages of a “European Digital Tsunami”, creating a new breed of European champions in e-commerce, internet and fintech across both public and private markets.
The reasons why Europe’s internet companies have historically been sub-scale are changing:
Europe’s digital ecosystem has historically lagged the US and Asia, with a sub-scale ecosystem of national champions and few pan-European powerhouses. The reasons for this fragmentation were simple: dozens of languages, a spaghetti bowl of EU and national regulatory requirements across 27 countries, and — most importantly — a dearth of VC and growth equity funding.
Although Aragon has been investing in Europe for over two decades, the universe of investable internet public companies in Europe was fairly limited until recently: on the menu, mostly adjacent technology plays in semiconductors and enterprise software, and for the internet pure-plays, semi-liquid market capitalizations.
We are now witnessing both an explosion of start-ups and a marked ramp-up in the number of companies going pan-European very quickly. As thematic investors, we strive to identify tipping points where growth goes from linear to exponential, the proverbial “S-curve”. We believe we are entering that tipping point in the “S-curve” in Europe now, leading to higher structural growth and an accelerated path to digital penetration for companies and consumers over the years to come. With a gush of IPOs and listed companies that have gained massive scale over the past 18 months, we estimate that the universe of investable companies across consumer internet, enterprise software and digital enablers now comprises well over 150 public companies, or nearly twice as many versus the beginning of the pandemic.
We believe there are four drivers of the “European digital tsunami”.
1/ The Covid-19 acceleration in digitalization has been even steeper in Europe than in the US.
Like everywhere else, Covid-19 provided a tipping point to propel less mature digital categories into the future, while more mature ones received three years of growth in one — if not more. Some estimate that 10 years’ worth of penetration growth took place in more immature B2C categories (fashion, groceries, …) and 3–5 years for more mature technologies such as e-commerce, gaming, streaming and online food delivery. Like in the US, the mass adoption of these new behaviors is not reversing as we emerge out of the worst of the pandemic.
Yet Europe remains behind the US and some parts of Asia, and the opportunity for a catch-up effect remains rich.
2/ The proliferation of new technology stacks are lowering barriers of entry, reducing startup risk, and speeding up scale-up across Europe.
Elastic cloud infrastructure, pay-as-you-go software as a service (SaaS), robotic logistic networks and the rollout of 5G wireless are all turbo-charging growth.
Over the past two decades, we have built a library of blueprints for what works and what doesn’t work when scaling a business model. Our portfolio of US software stocks has enabled us to witness firsthand the winning business models that are transforming operations across company verticals, such as product design, communications, marketing, and payments. Altogether, these have lowered the barriers of entry for small businesses.
With a unified cloud stack, you can roll out your product to a global user base seamlessly and rapidly without costly infrastructure or a staircase pattern of capital expenditures. Once data is stored on the cloud and can move seamlessly back and forth from cloud to on-premise, it’s shareable across applications and data lakes. This means you can automate tasks, lower costs (especially important in Europe where hiring can be costly but firing even more so) and focus on selling and business building.
As an example, if you are German company and your operations have traditionally been in German speaking countries, expanding into the rest of Europe could signify costly investments in on-the-ground infrastructure and in-country marketing resources. Today, you can build a pan-European business with a much faster payback — and a smaller budget — by leveraging a unified cloud technology stack. To use the words of a CEO I saw recently, “we are building the Europe of small businesses.”
At Aragon, we believe that “themes travel”- across time, across sectors, and across geographies. To me, the analog is not unlike the advent of the euro in the 1990s: companies went from national to regional very quickly after the paperwork, risks and complications of foreign currencies disappeared in one fell swoop. The mass adoption of a unified technology stack will do the same.
3/ VC and growth equity funding is scaling up rapidly, accelerating innovation and rollout.
Europe is rapidly narrowing the funding gap with the US and Asia. There has been more VC/growth equity capital raised in continental Europe year-to-date than in the two years prior. While $100m+ funding rounds were a rare thing only a few years ago, they are now commonplace. To wit, last month saw not one but four French companies raise more than $100m (Sorare, Sundayapp, Vestiaire Collective and our very own, Mirakl). As the French digital minister (yes, there is one!) said: “In 48 hours we raised more than in 2015.”
Founders are playing their part as well. Taking a page from their American counterparts, they are starting family offices and seeding the next generation of entrepreneurs.
And thus, a virtuous circle is emerging: bigger deals lead to faster scale ups, which lead to faster exits, which themselves lead to an accelerated path to IPO. More IPOs attract more capital, which feeds more entrepreneurs. And the flywheel continues.
4/ Political will to accelerate digitalization, both at EU and national levels.
It took the UK to repudiate Europe for the EU to deepen its integration. Last year, the EU made the historic decision to, for the first time, federate the sovereign credit risk of 27 countries to issue so-called “coronabonds” on behalf of the EU to fund a Covid stimulus package — an initiative long opposed by the Germans but brought about by the impetus to have a pan-European solution to the Covid crisis. At least 20% of the 675 billion euro EU Recovery and Resilience Plan is carved out to support broadband and digital initiatives across Europe. These will accelerate the rollout of broadband and 5G infrastructure across Europe, especially in Spain, Italy, and France.
But the willpower to create a single “digital market” already pre-dated Covid. The Digital Services Act is spearheading the harmonization of internet regulations about consumer privacy protection across Europe and the European Payments Initiative will reduce the complexity of payments and increase digital adoption. It won’t happen overnight and it’s not a magic wand, but it’s significant enough that it will provide an additional impetus for growth through deregulation and regulatory harmonization.
With all of these structural tailwinds, it’s a wonder why Europe is so cheap relative to the US.
Oddly, the valuation gap of European companies relative to the US has even grown over the last few quarters.
Given these structural tailwinds, how do we find the winners?
We believe there will be three types of winners surfing the “European digital tsunami”:
- “Technology enablers”: companies that are providing a unified solution for infrastructure in cloud, payments, marketplaces, and DevOps to serve not just European companies, but a truly global end market.
2. “Technology transporters”: companies replicating a successful US or Asian blueprint and rolling it out across Europe to become the European champion in their sector.
3. “Non-tech tech”: companies that are bricks and mortar or even old economy companies that are digitizing and transforming their business models with cloud, AI and fintech to accelerate revenue growth and improve structural profitability.
Some of these winners have been public companies for many decades, others for merely a few months. Some are not even public yet, others may never be.
In the early days of Aragon, I there was an artificial demarcation between public investing and private investing, with investors looking at different benchmarks, different valuation metrics, different KPIs and even different management assessment tools depending on whether the company was public or private.
Today, there is much more of a continuum between public and private investing, especially in Europe where many of the emerging winners of the “European digital tsunami” are early in their growth curves. When we investigate a sector megatrend, we study and talk to all members of the ecosystem, be they public or private.
We believe European digital companies are ready for primetime and over the years to come we will see the emergence of European champions in ecommerce, internet infrastructure and fintech. Let the games begin.
Anne Dias is the Founder and Managing Partner of Aragon
Jonathan Klein is a Partner at Aragon based in Paris and runs Aragon’s European office
Aragon is an investment fund which invests in TMT, Consumer and Fintech, with offices in New York and Paris.
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