Europe’s tech center is now home to over 128.000 companies. The last decade has seen unprecedented growth in funding, jobs, and valuations. So why exactly are startups and established giants coming to Europe?
- The US Is still where most deals happen for startups but that might change as Europe’s tech center gains momentum.
- The European startup ecosystem has seen an unprecedented inflow of capital in the past years. Cash and talent are now more widely available than ever before.
- Portugal, in particular, is regarded as a case study in developing startups from an early stage but also in attracting large corporations.
In 2018, the US took the lion’s share of the number of VC deals happening around the world: 58%. And when it came to large tech exits (valued over $100M), in the period between 2012–2018 the US took home 74% of those deals. But change is brewing in Europe.
The rise of the European tech center
With its growing ecosystem, European-based startups now have the talent and capital to stand out from the shadows of Silicon Valley. Home to a young tech scene with some 128k startups, +5.000 VCs, +1.3 million startups jobs, 164 unicorns the EU is closing the gap.
In 2019 alone, Europe saw a record $34 B being invested in their startup ecosystem, a notable growth of 16% YoY, while investment into Asian startups has halved in 2019 to $63bn and US venture investment has fallen 1% to $117bn compared to 2018.
The last decade has been unprecedented for Europe as a startup hub
In 2019, the total amount of funds raised by European private equity and venture capital managers climbed to €109 billion, up 6% from 2018, with Venture funds reaching a record figure of €15bn.
With more capital available, more startups, more mega-rounds and more exits, 2019 has seen a breakthrough in European VC activity and tech startups funding.
European tech hubs have been more than capable of holding their own against their more established counterparts in the US and Asia. When it comes to startup funding growth, hubs such as Amsterdam, Paris and Stockholm stand out.
In the meantime, deals in heavyweight US tech hubs have plateaued. The number of equity deals has remained steady from 2012 onwards, in traditional tech hubs.
In Q1’20 alone, European VC-backed companies raised $B 8.8, even with the exit of the UK from the European Union and the sudden uncertainty created by the rapid spread of COVID-19.
Since 2014, Europe has seen more tech IPOs than the U.S.
Many will be surprised to know that Europe has produced more tech IPOs than the US for six consecutive years. For instance, in 2018, Europe produced 87 tech IPOs, twice the number coming out of the US.
While the number of US tech IPOs with a market cap of less than $1B has been in decline for several years, Europe has seen the opposite trend as a result of the greater diversity in types of companies that can access the region’s public markets. With IPO activity growing exponentially, the EU has experienced a decrease in 2019, probably due to Brexit, whose long term consequences on the IPO landscape won’t be clear for some time.
Investors are pouring from outside of Europe
In 2019, more than 45% of the private equity capital raised came from non-European investors. France, in particular, is leading by VC investment growth so far this year.
As France (and Sweden) gain momentum and see investment soar, the US is going the opposite way, with a 15% reduction.
France and Sweden are not alone. Startups are now being created all over Europe. Upcoming hubs, including Copenhagen, Barcelona, Dublin, Lisbon, Oslo, and Tallinn, are all growing rapidly and starting to attract investment, with plenty of room to grow.
In Europe, the Top 5 investment rounds are spread across the same number of countries, showcasing a vibrant community stretched across the continent.
Why Europe is taking tech’s center stage
Europe’s growth as a tech center is due to a number of reasons: investment policies have changed to welcome more diverse sources of funding; the European society has come to a broad acceptance of entrepreneurism as a valid career choice; lawmakers have made it easier to create new companies and welcome foreign talent; and startups are tapping into the EU’s human capital to help drive the ecosystem forward. The 2008 crisis has also taught European companies important lessons on resilience which might come in handy as the coronavirus-fueled downturns kick in.
This is why companies of all sizes are establishing a presence in Europe:
#1 EUROPEAN STARTUPS HAVE BECOME LESS DEPENDENT ON GOVERNMENT FUNDING
The last few years have seen steady detachment from traditional government backing of startups. More and more, the government’s contribution to total startup funding is decreasing. In 2010, government funding accounted for nearly 33% of total startup funding. In 2019 that number had gone down to 20%, as total VC funding reached a new landmark figure of $12 B — with funding from private individuals and institutions accounting for 80% of that total.
A further drill down into sources of funding highlights a diverse ecosystem, with pension funds, asset managers (fund of funds), insurance companies and sovereign health funds playing a key role.
#2 STARTUPS IN EUROPE HAVE LEARNED THEIR LESSONS FROM THE 2008 CRISIS
In a recent study amongst 140 European startups, 35% of respondents saw their March and April revenues decline by more than 25%. However, businesses remained optimistic about the impact on full-year plans and only a minority of respondents committed to lay-offs.
In fact, a recent survey reports that just 17% of startups had committed to layoffs, with sales and marketing positions most impacted. Also, while many European startups have turned to government-backed loans and freezing hiring to combat the effects of the coronavirus, the majority (70%) report having over a year’s worth of money in the bank. In another show of confidence, more than half of the companies surveyed were yet to renegotiate their workspace rent, despite most startups’ planning to increase their remote working efforts.
This is partly due to a rise in digital adoption, due to coronavirus: consumers have become accustomed to their use, a process that might have been more difficult to achieve under normal circumstances.
Also, despite Europe’s slow recovery from the 2008 crisis, analysts point to the fact that this time around the EU might be best poised to recover from the coronavirus crisis than the US.
In the US, stock markets provide the bulk of companies’ capital requirements while in Europe banks have traditionally accounted for roughly 80% of the capital.
In the US, companies need to report profits on a quarterly basis: any shortfall might translate into disproportionate stock losses, which in turn raises the cost of capital. Europe is less exposed to the volatility of financial markets and might thus be better suited to plan for long-term recovery.
#3 THE EU IS AN ECONOMIC AND HUMAN POWERHOUSE
European startups do have access to the world’s largest economy: 500 million people and a GDP per capita of €25,000. The EU is also the top trading partner for 80 countries. By comparison, the US is the top trading partner for a little over 20 countries.
Great universities abound and produce a steady stream of engineers, data scientists and programmers. Europe now trumps the US when it comes to the sheer number of professional developers — 6.1 M people, to be exact, compared to 4.3 M in the US a gap that is widening as the US workforce has actually been shrinking compared with steady growth in Europe. The recent suspension of the H-1B visa by the Trump administration will only aggravate the issue.
#4 EUROPEAN COUNTRIES SUCH AS PORTUGAL HAVE ADOPTED A ‘STARTUP-FRIENDLY’ ATTITUDE
Portugal is a case in point for the European startup ecosystem. Today, homegrown startups such as Feedzai, Veniam, Unbabel, DefinedCrowd, Talkdesk, Uniplaces, Farfetch and Outsystems have international operations supported by tech hubs in Portugal — just a couple of examples of startups brewed in this vibrant atmosphere but far from the only ones.
Several international startups and scale-ups also chose Portugal to have a tech hub. Cloudflare, Pipedrive, Dashlane, Salsify, Revolut, and several others from all sizes are now counting with Portuguese talent to foster their growth.
And it’s not just startups who are attracted to Portugal. Established industry giants are also investing — Siemens and Google have both opened centers here, with a healthy supply of new jobs being created. BNP Paribas, Natixis, BOSE, Cisco, OVO Energy, Mercedes and Volkswagen are other multinational companies that have been drawn to the Portuguese market.
Investors too are taking note of the Portuguese tech hub. Even during the pandemic, Portugal-based Kitch closed a €1 million pre-seed financing round from investors who believed in the founding team’s vision of delivery-first kitchens. Also in the last 2 months, Replai (which uses AI-driven short-videos to engage sports fans) raised €1.2 million in seed funding, iLoF raised 870K€ to help find Alzheimer’s cure, and Barkyn raised a €5 million round.
Founders, tech giants and investors are excited about the Portuguese tech center. But why?
- Access to a skilled talent pool. The country is ranked #27 in the world by INSEAD’s Global Talent Competitiveness Index. With 6 tech universities in the world top 500, a Government that ranks #5 on expenditure on education and very high proficiency in English, Portuguese tech talent is one of the most attractive worldwide.
- Quality of life at a reasonable price. A secure country with wonderful weather, great food, rich cultural heritage, a wide range of leisure activities including world-class surfing spots and golf resorts, friendly people and a thriving liberal democracy. Portugal is the country with the highest quality of life in the world.
- Government support. Portugal’s ever-growing presence as an international tech hub is aided by popular government incentives. The StartUp Portugal platform, for instance, offers a variety of support plans to help tech startups to attract investment and scale, from Tech Visas and Startup Visas, to a €200M Co-Investment Fund
- Deals are on the rise. Since 2016, funding deals have soared, both in number and value. According to Crunchbase, the past 12 months saw over 553 funding rounds, equivalent to more than $400 M in funding, an all-time high.
- Strategic Atlantic bridge. In 2016, Web Summit, the annual global tech conference, moved from Dublin to Lisbon. Just last year, Web Summit hosted events and talks for over 70,000 visitors from all over the world. This is just one example of how Portugal, and Lisbon, has positioned itself as a key networking capital in Europe, which might just be what companies looking to grow in Europe are looking for. Portugal also shares London’s time zone, which facilitates teamwork for multi-site teams, and it is the closest European country to the US with direct connections to American tech hubs such as San Francisco, Boston and New York.
Should startups consider Europe for their next ‘move’?
With the uncertainties brought on by the coronavirus, founders might be skeptical of further changes. Still, attracting, hiring and retaining top talent might depend on the company’s ability to outpace its competitors in accessing top talent, all over the world.
For some, the answer might lie in relocating their HQ altogether to a place that best embodies the company’s vision, and that provides a higher quality of living for their staff. Others, wary of the need to be close to their talent pools but who can’t or won’t relocate fully, might consider establishing multi-site hubs, in talent-rich markets, where the company can continue to scale.
Whatever the form chosen, establishing a presence in Europe is a way to access the ‘old continent’ pool of capital and human talent. Acting sooner rather than later will determine the ease of the transition to a post-covid world.
When it’s time to expand internationally, Europe remains the first and best choice for most companies. The maturity of Europe’s economies, the similarity of its consumers and businesses to the U.S., the stability of its legal systems, and its respect for intellectual property rights all combine to make it the top option, being Portugal an excellent candidate as a first hub host Country. With its professional network or lawyers, accountants, coworks and other company incorporation services, BRIDGE IN can help you set-up your business in Portugal and Europe.
Originally published at https://www.bridgein.pt on July 22, 2020.