Europe Is Building World-Class Tech Companies – But Can It Close The Gap With The US?

Investments 27.05.2022

Europe Is Building World-Class Tech Companies – But Can It Close The Gap With The US?

Kjartan Rist For Forbes Magazine

Photo by Leonard Cotte on unsplash

Given its size and economic might, Europe’s story around technology continues to be one of unrealized potential. We have always had the talent, but we haven’t always done a good job of retaining the talent or monetizing our innovations.

However, with startup valuations skyrocketing, record numbers of unicorns, and ever-increasing volumes of capital flowing into the European tech ecosystem, Europe is finally making its presence felt on the world stage.

The question is, against the current backdrop of tumultuous economic conditions and investor uncertainty, can Europe show sufficient resilience and continue to close the gap with Silicon Valley and the mature US venture industry?

Moving on from failures past

The improved health of the European tech ecosystem marks a welcome shift from the previous narrative of false dawns and the failure to commercialize.

While there is a rich history of encouraging innovation within Europe’s world-leading academic institutions, we’ve struggled to provide a clear pathway out of academia into the commercial realm. Our innovation efforts have been mainly out of sync with the biggest technological cycles of the past 50 years – the development of the PC; the evolution of software; the growth of mobile and Web 2.0.

Entrepreneurship has never been whole-heartedly championed as a profession, meaning that we’ve consistently lost our best entrepreneurs to the US. And our VC industry’s reliance on State support to compensate for the lack of institutional backing has created a risk-averse mindset amongst investors, preventing compelling startups from fulfilling their initial promise.

“In the EU, our investment culture is far more conservative, and investments are made in smaller steps,” explains Risto Rossar, CEO and Founder of insurance software company Insly. “In the US, there’s more optimism and a willingness to let founders just go for it. This creates more opportunities for the startups that succeed, while the founders who fail do so faster, learn from their experiences, and go back around again.”

So what exactly has changed in Europe?

Well, the pandemic has seemingly driven acceptance of the venture model and acted as a catalyst for startup investing on a scale we’ve never seen before. Disruptive software companies in eCommerce, financial services and food delivery have made huge inroads since the start of Covid-19, accelerating the pace of digital adoption and bringing different demographics online for the first time.

Last year saw $93 billion invested in European startups, a three-fold increase on 2020. Overall investment levels may lag behind the US and APAC, but Europe is starting to close the gap as global investors take advantage of lower valuations (albeit these are also rising quickly).

Scale does not come easily

Although it is home to the world’s largest single market, Europe is still a fragmented trading environment comprising multiple jurisdictions, languages, cultures and business norms. It takes tremendous effort to build and scale pan-European tech companies.

As Patrick Borre, Co-Founder of ticketing platform Billetto, explains, “The gift and the curse in Europe are often the same. It’s a great place to start a technology company, but achieving initial scale is much more difficult than in the US. If you’re based in Denmark, for example, your entire local market is only half the size of London, so you quickly hit a ceiling. And every European country has its own distinct environment you must learn about and navigate.”

VCs play a vital role in supporting founders on this journey by sharing local market insights and surfacing pan-European growth opportunities. According to Andrew Lynch, Co-Founder and COO of Huckletree, which builds workspaces for innovative startups, the best VCs embed themselves within local ecosystems and use their position to help forge connections across the wider market.

“Most founders look to their VCs to provide network access that will ease their pathway to sales growth, identify potential future fundraising partners or M&A opportunities,” he says. “If you’re an early-stage business in Dublin, you probably have limited knowledge of what’s happening on the ground in Lisbon or Stockholm. That’s where VCs with a European-wide presence can really add value.”

Achieving pan-European success does not come easily, but startups that are able to conquer the continent will be well-placed to secure further international growth.

“It can be incredibly challenging, but by the same token, if you can make it in Europe, you can make it anywhere, “adds Borre.

Emerging hubs are strengthening the ecosystem

Not only is the European tech ecosystem producing startups purpose-built for internationalization, but the depth of its talent pool is increasingly coming to the fore.

While historically world-leading tech expertise has congregated in core hubs such as London, Berlin and Paris, we’re now seeing a flywheel effect across the wider ecosystem, with new unicorns emerging across the continent – from Bulgaria to Estonia.

As Rossar explains, “As an Estonian tech company starting out in 2014, it was much easier to raise money by registering as a UK holding company and operating from there. Today, however, Estonia has an exciting story to tell. We’re becoming well known for our resilience, fighting spirit and, of course, innovation. For investors, this story often triggers more interesting conversations than being just another one of the 1,000s of early-stage companies registered in the UK.”

Unicorns provide vital proof cases, encouraging investors to pay closer attention to overlooked European markets. They also enable talent to flow back into the ecosystem and help transform founder expectations about what is possible.

“Whenever you have unicorns, there’s a flood of high net worth individuals spawned out who go on to generate new ventures,” adds Borre. “These individuals have higher risk appetites than the founders and investors who came before them. Success breeds success, and in Europe, there are signs that this is positively affecting the risk curve.”

Retaining European talent in the age of remote working

Another reason for Europe’s recent strong performance is talent affordability. The salaries demanded by the best tech developers and software engineers are around 2x lower than in the US. And despite perpetual reports citing a shortage of tech talent, 43% of repeat founders believe the depth of European talent is continuing to improve.

However, the ecosystem faces a growing challenge in attracting and retaining talent in an increasingly global operating environment.

According to Aljaz Ceru, Founder of lightning network tooling provider, “More founders are becoming location-agnostic, citizens of the world, and more technology categories are becoming global in nature. These founders want to take full advantage of the possibilities enabled by fully-remote working and build global teams. Unfortunately, across Europe we have stringent employment laws and rules regarding contracting that all vary from country to country, which can limit the opportunities for founders to hire from these countries.

“At a time when more people want to be digital nomads and move around opportunities seamlessly, Europe is going in the opposite direction. Policymakers need to recognise that founders don’t want to have to become employment experts on day one. We need simpler and more flexible ways of paying people for their work as the workforce moves from being domestically-oriented to global.”

Despite forcing founders to adhere to complex local employment laws, few European countries offer meaningful incentives for attracting overseas talent. In fact, some countries actively disincentivize early involvement in startups by making it extremely difficult for founders to issue equity and stock options to senior talent.

“Employees who are creating the IP of future companies are taxed too heavily across Europe, and there’s a danger that the ecosystem may lose its competitive advantage now that the brightest people can work from anywhere,” adds Rossar.

However, while Europe needs to do better at incentivising digital innovation, Lynch believes that quality of life can still play an important role in helping Europe win the battle for talent.

“We can prevent talent moving to the US by boasting a better standard of living and the promise of a less stressful life,” he suggests. “To that end, European policymakers must address the growing cost of housing and childcare. Both are pivotal issues to founders who have to dedicate huge amounts of time and energy to their enterprises. Neither should be so stressful that they force founders to reassess their work situation or contemplate relocation.”

Growing maturity

Despite the tough economic and geopolitical environment, 28 European tech companies reached unicorn status in the first quarter of 2022 – evidence that our ecosystem is no longer just proficient at developing world-leading technology, but is capable of building world-leading technology companies.

As ever with Europe, there are fears that over-zealous EU regulations could force US tech giants to withdraw from Europe, stifle innovation across the tech community and lead to a talent exodus. But in truth, such fears have been around for decades, and regulators are yet to make a fatal misstep.

More importantly, the depth and maturity of the European tech ecosystem is greater than it has ever been. Unicorns are emerging from all over the continent. Emerging hubs such as Norway and Estonia are well on their way to creating ‘assembly lines’ of successful tech startups. Even if the predicted global recession comes to pass, we know from history that innovation cycles are driven by the problems facing society, and downturns tend to provoke a flurry of startup activity.

Getting our priorities right

While Europe lacks a ‘supercharger’ fund such as Tiger, a16z, or Softbank, the volume and quality of European VC continues to improve, fuelled by a new wave of investors that understand the ‘think big’ mentality and the necessity of risk-taking. Family offices also look set to play an important role in strengthening the ecosystem as the wealthier European offices go beyond testing the water and commit to VC investment strategies that serve their generational time horizon.

As I’ve written about previously, VCs need to place more emphasis on early-stage funding – which has been declining as investors have bought into the hype surrounding highly competitive later-stage deals. The current turbulence in this market should help rebalance investor priorities towards early stage opportunities, but in view of the wider economic storm clouds, VCs also need to get much better at assessing companies during their chaotic inception rather than waiting for the classic patterns and structures to emerge.

Finally, rather than pushing for greater risk appetite across the entire ecosystem, there’s something to be said for playing to Europe’s strengths, prioritising areas such as deeptech or climatetech, where time, perseverance and patient capital will all be needed to solve some of the world’s most complex problems.

As Borre concludes, “I’d love to see Europe further close the investment gap and create an ecosystem that’s as competitive or better than the US or APAC. It’s not about who wins. It’s about every region striving to create more efficient human societies using technology.”

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