5 Reasons Why the Golden Age for European Tech is NOW
The European Tech ecosystem has grown up. With 64 active/unrealized unicorns, the number has more than doubled within the last 3 years. Notably, our ecosystem has, for the first time, produced two decacorns with UiPath from Romania and Klarna from Sweden. Looking into other metrics like VC-money invested, total enterprise value or jobs created, the picture is the same: Europe has hit an inflection point. But why now?
Tl;dr:
- It took decades for all components of the European ecosystem to mature but now the united whole has the potential to become greater than the sum of its parts – creating opportunities to dominate at a global scale
- Talent: Europe has a high quantity of globally-leading tech talent with lower turnover rates compared to other startup ecosystems
- Mindset: Mindset of European entrepreneurs has shifted from conservative “over-engineering” and a tendency to sell companies too early without capturing the full potential to more aggressive “hyper-growth” and an ambition to build globally leading companies
- Community: Communities have matured and successful founders/experts leverage an increasing variety of platforms to share their experiences and support the next generation of entrepreneurs
- Funding: Europe is highly capital efficient with increasing survival rates and lower valuations compared to other startup ecosystems; unsurprisingly, capital inflow continues to rise
- Established companies: Corporates got rid of their “not-invented-here”-mindset and became more open to buy from, or partner with, startups and eventually acquire them
Yes, it’s true that when looking at our peers in the US, we still see about 5x more unicorns and decacorns there, and it may take some time to be on par across metrics, but the momentum in Europe is unmatched. Unsurprisingly, this has not been a secret, as evidenced by recent office openings in Europe by top US VC firms like Sequoia, Lightspeed or Bessemer.
The purpose of this article is not to provide another set of analyses to quantify the positive historic development (just see existing comprehensive reports like Atomico’s “State of European Tech” or Dealroom’s Report on European Deep Tech). Rather, I seek to connect the startup ecosystem theory (see diagram below) with existing but also novel analyses (some of which were recently published by Handelsblatt) to explain why now is the time to shift gears and double down on European tech. Dissecting the components of Europe’s tech ecosystem and projecting the recent momentum into the future, I’m convinced that the Golden Age for European Tech is now and that we will see an increasing number of globally-dominating companies emerging out of Europe.
Let’s start with a simple analogy. Startup ecosystems are like trees. Both take time and a variety of ingredients to grow and ultimately bear fruit. Every tree starts out as a small seedling and requires a balanced interaction among different elements, such as energy from sunlight, carbon dioxide from the air, water and soil. Similarly, startup ecosystems start with talented entrepreneurs but require a vibrant community, access to capital across growth stages, big companies as customers (and as potential acquirers later), and importantly, the right mindset. While startup ecosystem theory explores a wide range of interconnected factors as displayed above, I’d like to limit this article to the 5 most important components:
1) 👩🏽💻TALENT
To better understand the talent component, I’d further dissect it into 3 sub-components: quantity, quality, and stickiness/turnover. Keep in mind that this is mainly about tech talent.
Quantity. About 56 million devs were registered at GitHub as of September 2020. Diving into the geographic distribution, we find that 27% of them are based in Europe, 35% in the US and 31% in Asia. What is more interesting though is the change over time. While Europe made up for 20% of the registered devs in 2015, 40% were based in the US and 30% based in Asia. By September 2020, Asian devs kept their relative share whereas the share of European developers grew relatively by 35% (from 20% in 2015 to 27% in 2020), and the US share shrunk by 15%( from 40% in 2015 to 34% in 2020) (from my own research + Octoverse). An activity-based analysis leads to similar results.
Looking into more formal qualifications, and according to the latest-available OECD data from 2014, the number of Science, Tech, Engineering and Math (STEM) PhDs in Europe was 59k while only 28k in the US. Besides these absolute numbers, Unesco provides evidence that the relative percentage of STEM graduates in the most important European startup hub countries is higher than in the US. For example, 35.6% of graduates in Germany come from STEM programs whereas in the US it is only 17.9%.
Quality. Most rankings agree that Europe produces best-in-class tech talent. According to Coursera’s 2020 skill level report, 14 out of the top 15 countries who achieved the maximum skill levels in tech (top quartile; including skills within AI, Java, C or other coding languages) are based in Europe (source). Similarly, on a more formal level, the Times Higher Education Ranking 2020 states that 3 out of the 5 top and 7 out of the top 20 computer science programs are based in Europe (source).
Stickiness/turnover. Clearly, the war for talent began years ago. This is probably most obvious in Silicon Valley. A 2018 analysis by LinkedIn shows that the average tenure for employees at Google, Amazon, Facebook, Apple (GAFA) was less than 2 years (source, source). On a US national level, this seems better with an average turnover rate of 20%, meaning that on average an employee leaves after 5 years in a US company. On a global scale, this is as bad as it gets. In contrast, Europe’s average of 13% is in line with the global average, meaning that European employees leave on average after a bit less than 8 years. In other words, they stick on average 50% longer to their employers compared to their US peers (source, source). Speaking to CEOs of hyper-growth companies about their biggest challenges, hiring is always among them. Clearly, this makes a strong argument for Europe, though it’s unclear how turnover might develop with work-from-anywhere and increasing competition.
In terms of tech talent, Europe is better equipped than most other regions in the world. We have many highly-qualified tech talents who come from diverse backgrounds and who tend to stick to their teams longer than in other ecosystems.
We have many highly-qualified tech talents who come from diverse backgrounds and who tend to stick to their teams longer than in other ecosystems.
2) 🧘🏼♀️MINDSET
“Made in Germany.” The story of this almost 150-year-old quality seal is a great representation of the German mindset. Everything needs to be 100% perfect, high quality, with no failures allowed. Although, today, most people agree that oftentimes the 80% solution is sufficient, European entrepreneurs, and German ones specifically, historically tended to wait to finish a product before jumping into sales, marketing and huge fundraising rounds. Compared to their US peers, they were way too conservative. Unlike Europeans, US entrepreneurs accept failure and encourage risk taking which is like the lifeblood of a startup. As a result, European entrepreneurs historically tended to think too small, to sell their companies too early, and were unable to capture the full potential to win at a global scale.
Now that Tesla is worth more than VW, Daimler and BMW combined, really everyone should have noticed that the age of incremental over-engineering and perfectionist “Made in Germany” mentality is over; at least for the majority of software businesses (and yes, automotive has become software-centric too.) Luckily, there has been a generation who noticed this before it was as obvious. Equipped with a global mindset and huge ambitions, a new breed of European entrepreneurs has entered the stage and achieved unseen successes. Companies like Earlybird’s UiPath from Romania, Klarna from Sweden, or Unity from Denmark have built category-leading companies where nobody would have expected their arrival.
Equipped with a global mindset and huge ambitions, a new breed of European entrepreneurs has entered the stage and achieved unseen successes.
While most of these exceptional entrepreneurs started from scratch without a proper community, without access to capital, and without great mentors, they dominate on a global scale because they deeply wanted to succeed. With their underdog mentality and their relentless drive, we see them inspiring their peers and friends. They’ve shown that great companies can come from everywhere and don’t need to be started in Silicon Valley. Having spoken to thousands of European entrepreneurs throughout the years, we can confirm that recently the levels of ambition and visions of the founders have become greater than ever before.
While most of these exceptional entrepreneurs started from scratch without a proper community, without access to capital, and without great mentors, they dominate on a global scale because they deeply wanted to succeed.
Now that an increasing number of startup employees has experienced the hyper-growth mindset first-hand, we see more and more of them leaving to create their own companies. To stick to my initial analogy: these successful entrepreneurs are the growing trees which drops fruits/seeds to eventually grow a new tree. For example, our portfolio company N26 became the most valuable German startup in 2019. Within a year after achieving their unicorn status, the first employees left to start their own startups including Amie, Feather, and Plantclub. Similarly to Earlybird’s N26, their visions are huge and they want to build the next breed of category-leading companies. While it’s certainly tough for the mother company to let go of her kids, it’s great for the ecosystem as they will hopefully build huge businesses on their own and inspire others to do the same.
3) 🤝 COMMUNITY
Closely related to the mindset of the entrepreneurs is the community surrounding them. To showcase the value of a community, I’d like to start with another analogy: entrepreneurship is like a journey. Bringing a map and knowing your way will save you precious time and resources. While explorers like Christopher Columbus had no confirmed route to rely on, every kid nowadays knows where to find India and America. Why? Because Columbus explored it and shared his knowledge. Building a company is very similar: you shouldn’t make all mistakes on your own but rather learn from others. To stand on the shoulders of giants, however, requires the right people who are able and willing to share their experiences, their knowledge and their networks, and the right environments to facilitate this exchange.
People. Not everyone is able to experience hyper-growth first hand. It requires insider input to help those who do not have access to such knowledge. Supportive people within a community can be clustered into peers, mentors and advisors. I will come to the investor group in a dedicated paragraph later. Peers include fellow entrepreneurs who face similar challenges or work on similar topics. Mentors include people who previously mastered similar challenges to the ones entrepreneurs currently face. Mentors might be successful entrepreneurs themselves or experts within a specific topic, such as pricing or go-to-market strategy. They could even be matchmakers who leverage their network to support entrepreneurs by connecting them with valuable contacts. In a nutshell, they might be helpful to a wide range of people. Advisors provide mentor-like guidance but in a more formal setting, i.e., they might ask for a formal advisory position or a compensation.
Analyzing the European tech ecosystem through the “community & people” lens, it’s clear that together with the mindset issue as described above, the lack of experienced hyper-growth entrepreneurs was probably the other missing piece which prevented our ecosystem from scaling. Remember, few people in Europe had built category-leading companies. As a result, the ecosystem lacked not only the hyper-growth mindset but also the mentors and advisors who could equip the entrepreneurs with a map, preventing them from costly mistakes. Luckily, the first generation of successful entrepreneurs made it and is now in the position to mentor and advise the next one. Being an investor and matchmaker myself, I know from many of the entrepreneurs I’ve connected with those who’ve walked in their shoes before, how valuable these exchanges are. For both of them. Reaching a point where valuable advice on hyper-growth companies becomes increasingly available in Europe, I’m convinced that this is a game changer as it will certainly accelerate company growth in the future.
Luckily, the first generation of successful entrepreneurs made it and is now in the position to mentor and advise the next one.
Environments. Just as diversity of people, experiences, and knowledge shared within the community is beneficial, diversity in types of environments facilitate exchanges. Formats range from 1-to-1, 1-to-few, 1-to-many, few-to-few, few-to-many, many-to-many and other combinations. Screening the European ecosystem through the “community & environment” lens, I find 3 critical components.
Just as diversity of people, experiences, and knowledge shared within the community is beneficial, diversity in types of environments facilitate exchanges.
a) Technology-transfer-offices (TTO). Europe is home to the most successful research institutions in the world. But there has been an issue: We are equally good at creating academic theories and innovative IP, as most institutions in the past were bad about materializing these efforts and translating them into practice. To facilitate this exchange and unlock the great research potential, TTOs have become an important part of the leading research institutes. Over time, both the quantity and quality of TTOs has drastically improved, as evidenced by the European TTO Circle.
b) Incubators and accelerators. These programs are quintessential startup community catalysts as they streamline mentoring and provide a perfect environment for exchange. Besides structured mentoring, these programs provide a great platform for peer-networks (oftentimes across cohorts), access to capital, and a wide network of experts or industry contacts. Analyzing the number of European accelerators and incubators on a matched dataset based on Crunchbase, Pitchbook and CB-Insights reveals that within the last 10 years, the number grew 8x, from 118 in Jan 2011 to 947 as of Jan 2021. While the quality has improved overall , I’ve noticed first-hand great variance.
c) Events. While a few years ago, Europe was mainly known for conferences like IAA (a major automotive conference) or the Hannover Messe (a famous industrial conference), times have changed and dedicated startup conferences emerged. The number of startup events with more than 1000 attendees (according to the event websites) grew by 8x, from 4 events in 2010 to 31 in 2019. Today, we see large conferences like WebSummit, Slush, Bits&Pretzels or NOAH but also more regional events like Hackathons or meetups (see a great pre-Covid list here). These events provide a platform for entrepreneurs to meet their peers and exchange with experts in their field as well as gain access to customers and capital. From small to big events, the number is constantly increasing and we see a strong specialization which increases quality. Surely, COVID has forced communities and events to move online with platforms like Hopin or Clubhouse, but I assume that once we can move back to physical meetings, it will balance somewhere between online and offline.
Overall, it seems that the community component explains a chunk of the recent momentum. Now that the first generation of entrepreneurs has built and exited billion dollar companies, the cycle tightens up, and experience flows back into the system. Moreover, both the number and quality of startup-focused organizations and events have significantly grown and improved.
Now that the first generation of entrepreneurs has built and exited billion dollar companies, the cycle tightens up, and experience flows back into the system.
4) 💰FUNDING
As rockets need fuel to fly, (most) startups need cash to grow. Historic data shows that capital was one of the major constraints for European startups. As a result of less fuel (cash), European rockets (startups) were less likely to take off. For example, the average US exit between 2012 and 2016 was about $ 200 million, versus $ 70 million for Europe. Moreover, the number of $ 250 million exits within the same period of time was 22 across Europe, versus 166 in the US (source). Despite the historic lack of European outlier startups, the amount of VC money invested within the last five years into European startups has more than doubled from $ 16.5 billion in 2016 to $ 41 billion in 2020. Why? Well, let’s dive right in.
Capital efficiency. I analyzed the capital efficiency across a sample of 264 exits above a valuation of $ 1 billion. Note that I only considered larger exits as data for smaller ones is limited. (See here if you’re interested in startup data coverage and quality.) My analysis shows that European startups are more efficient when it comes to exit valuations beyond the unicorn mark. In the last 5 years, European unicorns returned on average about 11.9x the invested capital whereas their Asian and US counterparts returned 9.1x and 9.9x respectively. The historic capital constraints in Europe certainly forced entrepreneurs to become more efficient and achieve more with less.
The historic capital constraints in Europe certainly forced entrepreneurs to become more efficient and achieve more with less.
Considering that the same company would be valued about twice as much in the US as it would be valued in Europe (source), the difference becomes even more pronounced. This fact is a great indicator for competition among investors. Economic market theory states that the price is a result of supply (startups) and demand (VC money.) Looking at the US, the National Venture Capital Association (NVCA) provides data on the growing amounts of capital that need to be deployed by the VCs (source). On the other hand, the amount of suitable investment targets/startups is approximately constant (source).
While the increasing amount of capital to be deployed together with a constant number of startups leads to ever increasing valuations (supply-side constraint market) in the US, the problem is even worse. Most VCs know that their returns are distributed based on a power-law meaning that few outliers account for the majority of their returns (source). This distribution, together with a herding effect (meaning that VCs across firms tend to follow each others investment decisions based on brand perception etc., source) leads to a concentration of capital at a small number of companies which — for whatever reasons — seems to have the greatest likelihood of success. As a result, the most promising companies tend to be valued even higher than others within a specific ecosystem. While the same logic applied in Europe, the historic lack of capital together with a relatively higher number of startups led to significantly lower valuations.
Taken together, my results not only show that European startups are more capital efficient but that they are also more attractive in terms of valuation, i.e. investors would be able to get a larger shareholding for the same amount of capital in Europe versus in the US.
Circling back to the exit capital efficiency, I find that on a global level it has significantly improved across geographies. Several academic papers explain this phenomenon with decreasing costs of experimentation (source). In the words of the authors: “The introduction of cloud computing services in the mid 2000s was a fundamental technological shift that has also had an impact on the financing landscape for Internet and web-based startups. A key benefit of cloud computing for such startups is the ability to “rent” hardware space in small increments and scale up as demand grows, instead of making large upfront investments when the outcome of the venture is still uncertain. Entrepreneurs and investors can therefore learn about the viability of startups with substantially less funding, lowering the cost of financing initial “experiments” that can help investors learn about the potential of new ventures before committing further capital.” (source)
Survival rates. I analyzed startup survival rates from Seed to Series A and from Series A to Series B and compared them across geographies. My sample comprises more than 55,000 startups between 2011 and 2020. The results show that while European survival rates improved across both stages, their US peers got worse. These findings are in line with analyses by Mattermark and Dealroom. Various explanations exist, but neither one can be backed with a statistically significant analysis. In a nutshell, our analysis provides evidence that European Seed startups are as likely to raise a Series A as their US peers. Similarly, European Series A startups are as likely to raise a Series B as their US peers. As a result, the risk of losing/writing off a company in Europe is similar to the risk in the US.
To conclude, European startups have lower valuations than their US peers while at the same time being more capital efficient and providing a comparable risk of losing the invested money. Unsurprisingly this has not been a secret. Analyzing the portfolios of the top 30 US VC firms (according to a mix of rankings such as MIDAS, Dealroom, etc.), I find that they more than doubled the average fraction of European based investments from 4% in 2011 to 9% in 2020. In absolute terms, the average number of European investments increased from 8 in 2011 to 25 in 2020.
Recent announcements from US VC firms such as Sequoia, Bessemer or Lightspeed to open up offices in London are just the logical consequence. In order to capture more value and deliver exceptional returns to their LPs, these VCs want to join the party earlier and more frequently than before (I will write a dedicated piece on the potential consequences #braindrain soon.) From a startup perspective, this has thankfully led to an increasing capital availability across stages and slowly rising valuations. From now onwards, capital does not seem to be a constraint for the European tech ecosystem anymore.
5) 🏭 ESTABLISHED COMPANIES
Established companies are a key component of a startup ecosystem as they can be a customer, a partner or a potential acquirer down the road (or all together.)
Customers & Partners. The importance of established companies as customers for startups depends on the startup’s business model. B2C startups care less about established companies as they typically sell to consumers. B2B startups, on the other hand, care a lot about established companies as they are, besides SMEs, the most important source of revenues. Independent of the business model, established companies might be valuable partners to both B2C and B2B companies.
Historically, however, it was very challenging for startups as local corporations oftentimes hesitated to buy from or partner with them. While this has gradually started to change, there has also been an inflow of global companies with a different mindset. The Munich ecosystem, for example, consisted mainly of German automotive brands such as BMW and industrial giants such as Siemens about 15 years ago. Today, however, companies like Facebook, Amazon, Google, Apple, Palantir and many more, have opened offices with hundreds and thousands of employees. Coming mainly from the US, these companies are used to working with startups and thus they have certainly improved the overall openness to buy from, and work with, startups in Europe.
Acquirers. Besides their function as a customer or partner, established corporates are an important exit channel for startups. Local acquirers are important to keep innovation and talent within our ecosystem. Acquisition provides liquidity to the entrepreneurs and early employees which then allows them to reinvest their returns and help the next generation of entrepreneurs grow. Unfortunately, European corporates tended to buy significantly less startups than their US peers. According to an analysis by Dealroom, US companies buy twice as many startups as European companies (see chart below.) One might assume that Europe has fewer large companies than the US but in fact OECD data shows that Europe has about 3 times as many companies with more than 250 employees than the US. The difference seems to be mainly in mindset. See here for more details based on a comprehensive summary from Sifted.
When trying to find the root cause for the hesitancy of European companies to acquire startups, I spoke to a range of corporate M&A teams and analyzed the stock market reactions after startup acquisitions were announced. In summary, it seems like European shareholders are less willing to accept failure in M&A than their US peers. As a result, they tend to acquire less companies and limit their activities to more conservative targets.
Are things changing? Hopefully. Looking at the activities of next-gen “established companies” such as Spotify (17 acquisitions since 2013), or Delivery Hero (23 acquisitions since 2012), it seems like they are more open to startup acquisitions than the previous generations. Looking at the activities of recent unicorns like Earlybird-portfolio company Sennder (2 acquisitions in 2020 ), or Celonis (1 acquisition in 2020), the trend seems to trickle down.
Obviously, there would be more components to describe such as regulations, tax incentives, ESOP programs, state money flowing in from EIF, kfw and more but to keep this post as concise as possible, I focused on the most important aspects above.
🏁 CONCLUSION
To sum up, I’ve collected a range of qualitative and quantitative data points and put them in context of the startup ecosystem theory to explain why the European tech ecosystem is at an inflection point.
We have all ingredients: exceptional tech talent (quantity, quality and stickiness), an ambitious mindset to build category leading companies, the community to facilitate exchange (the right people and environments), access to capital across stages and big companies as customers, partners and potential acquirers down the road.
When these 5 components are combined, a virtuous cycle begins wherein new entrepreneurs have the right mindset and find the training, help, and funding required to get started. They in turn, help their peers and the next generations of entrepreneurs, who continue the cycle forward. Yes, the uniqueness and diversity of our ecosystem with its different languages, cultures, regulations and many other barriers prevented it from achieving this inflection point earlier but now that we hit it, I’m convinced it will become one of a kind. Onwards and upwards 🚀🚀
Kindly note, that if not indicated otherwise, all results are based on my own primary research. This article summarizes selective analyses that are supposed to represent a wider spectrum. Do you have different data or get to other conclusions? Feel free to reach out via andre@earlybird.com!
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