In the U.S. 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. Across the top 10 companies on the UK’s FTSE100, the CAC40 in Paris and Germany’s DAX, none have taken on VC investment — a clear sign of the persistently troubling gulf between the US and European tech ecosystems, and as producers of tech giants in particular. In fact, I’d go as far as to say that, 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. Of course soaring valuations among Valley firms are hardly, in themselves, a hot scoop. However, the fact that much of this surge occurred over a matter of 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 and it reportedly had just 12 employees. Less than two years later, the social networking platform paid $19bn for WhatsApp, which had 50 employees at the time. A month after that it acquired Oculus VR, a virtual reality startup — incredibly less than two years old — for $2bn in cash and stock.
Other tech giants have followed similar patterns, either in terms of M&A activity or their own market cap. Twitch, for example, was born in 2011 and acquired by Amazon for $970m in 2014. Dropbox launched in 2007 and is valued at up to $10bn today — and widely speculated to be preparing for an IPO. Despite recent controversies, 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. A range of factors are converging to create an unprecedented era of opportunity. 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.
Not so long ago, articles like this would be peppered with phrases like “it’s my conviction” or “we feel that…”. But hunches and crystal ball-gazing are no longer necessary; 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 — an industrial revolving wheel — comprising of seven spokes.
The first spoke is angel investors, many of whom have already successfully exited companies or cashed out stock options. They represent a broad range from high net worth, sometimes high profile, individuals — backing dozens of startups, through seed funds or directly — to entrepreneurs cutting cheques for $10-$20,000 to support the next generation. I also 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 crowd-funding sites such as Kickstarter, Indiegogo and Crowdcube — an increasingly important flow of pre-seed finance.
Angel investment in Europe increased to €6.1bn in 2015, a rise of 8.3 per cent from 2013, according to the European Early Stage Market Statistics, a report published in 2016. The community of investors has grown to 303,650 individuals who, between them, closed 32,940 deals in 2015.
Second comes the record number of startups 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 just over 1.3m tech Meetup attendees in London. That number had risen to 6m by 2016. There was a similar trajectory in Berlin, with only 56k attendees in 2011, which soared to 2.8m within five years.
However a growing tech community means that by definition there will be more failures. The European Investment Fund (EIF) released a report on the success rates of their VC-backed investments in the period between 1996–2015. Of a sample of 3,592 investments, 709 were write offs, and 829 were unprofitable sales, meaning that 42.8% of all investments didn’t work out as they had hoped. Yet this data is no cause for alarm; as in the US, ‘failure’ should be a badge of honour, not least because failed first or second time entrepreneurs are much more likely to make a success next time.
Third, it’s boom time for startup incubators and accelerators, too. Although it can be argued that a surfeit of accelerators leads to startups being accepted onto programmes at ever-earlier stages, there’s no denying the frenzy of activity in this sector. According to the European Accelerator Report published by Gust last year, in 2015 a total of €37.5m was invested in Europe in 2,574 startups by 113 accelerators, leading to 33 exits.
In 2007, just one new accelerator launched in Europe (Seedcamp, which was viewed at the time as Europe’s answer to the Valley’s Y Combinator); in 2015, 26 new accelerators joined the fray. Seedcamp, itself, like Y Combinator, is now a seed fund. In 2007, its first year of operation, just seven new companies joined its programme. By 2015, that number had risen to 60.
And, alongside angel and seed-stage investment, European venture capital is thriving too. 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+ companies in Europe today (although one list put the number as high as 47), compared with just two in 2010. Waiting in the wings are another wave of 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 truly 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 happening in Europe, too, with increasing regularity, 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 of this is to create deep reservoirs of expertise across Europe, including AI and fin-tech 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 exists 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, some of them daunting. The inability of startups 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 in particular.
However, I’d go as far as to say that I’d rather be an entrepreneur starting out in Europe today, than wind the clock back to 2008 in the Valley. Not only is the technological infrastructure underpinning the entire sector by orders of magnitude better today, but the availability of skilled talent across the board, venture support and the market opportunity are out of sight too.
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.
An edited version of this article was published in The Daily Telegraph on 11th Aug 2017.