Europe’s tech start-ups need to scale faster

Friday January 13, 2017 15:07

Europe’s tech start-ups need to scale faster

Posted by Eroniwe Eugene Ebonka

Clusters of enterprises abound but too few expand enough to become the next Facebook. John Gapper

Whenever US and European policymakers and technology executives gather, as for the World Economic Forum in Davos this week, they eventually lay into Europe’s deficit of entrepreneurship. Americans flagellate Europeans for their weak start-up culture and Europeans scourge themselves. They did so at the Digital-Life-Design conference in Munich, a staging post for tech types en route to Davos. “It is so European to start the discussion of technology with worry rather than opportunity,” tweeted Jeff Jarvis, a US media professor, as Margrethe Vestager, EU competition commissioner, discussed privacy and her inquiry into the tax affairs of Apple and Amazon. The European Commission has jumped into the act itself, declaring in a “2020 action plan” that “would-be entrepreneurs in Europe find themselves in a tough environment” and that “Europe needs a thorough, far-reaching cultural change” to match US enthusiasm for creating companies. This lament is outdated and misleading.

One need only wander around London, Berlin, Paris or Amsterdam to observe the enthusiasm of under-30s for launching a start-up or working in one, rather than taking a predictable and supposedly safe job in a corporation. Whatever transatlantic divide there was between attitudes to risk-taking and enterprise has faded. The problem is the opposite: Europe’s economies lack big companies not little ones. The deficit is not in start-ups but scale-ups: small companies that grow rapidly. Europe has many clusters of enterprises but too few expand enough to be the next Facebook, founded by Mark Zuckerberg in 2004. That is, in its way, good news. Solving the problem does not require European countries to reform their cultures, a vague and tricky project, but their financial and business practices. Perhaps Americans are by inclination more super-ambitious than Europeans but most of the barriers holding back Europe’s potential Zuckerbergs are structural and thus soluble. It still requires wrenching change. I was surprised this week, listening to debates at DLD, and to Italian entrepreneurs and financiers at a gathering in Venice, by how openly some admired London. That was the place, several said, to which European start-ups must transfer if they want to get from A to B, C and D, from early funding rounds to larger capital raisings. Italy has a proud tradition of entrepreneurship. Along with Germany, its manufacturing sector is filled with small and medium-sized companies. It is capable of financing them, given its high domestic savings rate. In practice, most of these companies remain small. Italian savers place their money in banks and savings banks, and the ambitious seek growth elsewhere.

The average British citizen, irritated by having had to bail out banks in the 2008 crisis and observing investment bankers being paid large bonuses for what appears to be gambling, does not like the City of London. Unlike the “real economy” outside the capital, finance and its accompanying professional services, law, consultancy and the like, look facile at best. You might say the same of Silicon Valley, a cluster of financial and business skills wrapped around an entrepreneurial sector. It is willing to risk venture capital at scale, not just put seed and angel funding into a cute start-up that a relative has founded. It eagerly — perhaps too eagerly — invests hundreds of millions in later-stage rounds for scale-ups such as Uber. Like Silicon Valley, the City offers more than finance. It is home to executives with the expertise in business and product development to take a promising start-up and help it grow. Some of them are entrepreneurs — Atomico, the venture capital group founded by Niklas Zennström, a co-founder of Skype, has just partnered with a group of entrepreneurs to encourage this. Growing to a certain size and then slowing is not sufficient. The laggards face being dominated by scaled-up US giants It is hard to credit that Britons are more enterprising than Germans or Italians given the postwar record. Yet London has an edge over Berlin, and especially over Milan, in scale.

In the past five years 19 UK technology companies have raised capital of at least $100m, compared with nine in Germany and none in Italy, according to the Startup Europe Partnership. Growing to a certain size and then slowing, retaining family control of the company rather than taking outside capital to expand rapidly, used to satisfy many Italian and German companies. But it is not sufficient in global technology — the laggards face being dominated by scaled-up US giants. Germany is responding. Rocket Internet, the German investment group, has raised a $420m fund — the size needed for later-stage funding rounds. Berlin has a strong start-up scene and has fostered ecommerce scale-ups such as Zalando and Delivery Hero, which has gained $1.4bn in capital. The UK also needs to change. A far lower proportion of its companies scale from start-ups than in the US and many are hampered by skill shortages, as Sherry Coutu, a UK angel investor, found in a report in 2014. The US has 14 times more capital available to companies with $1bn valuations than Europe, according to Atomico. London, however, shows what is possible with deep capital markets and broad expertise. Europe has plenty to fix but it has made a start.