Venture capitalists are shifting their focus to Europe in hopes of investing early in technology startups that could be tomorrow’s global tech giants.
Boyden's perspectives on the news and trends that are transforming industries
For centuries business empires emerged from Europe. The early 20th century saw the creation of giants such as L’Oréal and AP Moller Maersk, along with most of Germany’s powerhouse Mittelstand firms. But as the century progressed, the continent would endure two world wars. The number of new companies being founded and going on to reach epic scale dwindled, and the impetus to create them never fully returned. Now this is changing, and venture capitalists have high hopes for European startups.
Only 10 years ago, less than 10% of all venture capital (VC) money invested globally went to European firms. Data provider Dealroom estimates that portion has nearly doubled, to about 18%. With so much new capital available, European entrepreneurs who might once have headed to Silicon Valley are staying home. Startups are proliferating and thriving. Currently 65 European cities, called “unicorn cities”, have produced startups worth more than $1 billion. Some are valued in excess of $10 billion.
A growing number of American VC firms have been setting up shop in Europe themselves in recent years. Sequoia Capital, which backed the likes of Apple and Google early on, marked its official arrival in Europe when it leased an office in London earlier this year. “We felt that being on the ground would make a material difference in our ability to find opportunities earlier,” said Sequoia partner Matt Miller.
Much of the focus is on startups that could replicate the achievements of firms like Skype, Spotify and SAP, which started tech firms in Europe and scaled them quickly. Along with a blueprint, these firms created a local talent pool with experience in high-growth companies. “The combination of seasoned executives and access to experienced talent has fuelled the growth of a cluster of European firms founded after the ructions of the financial crisis that are now reaching maturity,” The Economist reports.
Notably, according to Hussein Kanji of venture capital firm Hoxton Ventures, some of these companies are coming to lead their industries. “Now Spotify is the winner in music streaming, Klarna is the winner in buy-now-pay-later and UiPath is the winner in robotic process automation—they’re all European,” he says. This is reflected in their returns, a fact that is not lost on global investors.
Investors are tracking patterns beyond this cluster of large companies as well. Xavier Niel, founder of France’s second-largest ISP, points to “repeat founders.” Rachel Delacour, for example, sold her first company, business intelligence firm BIME Analytics, for $45 million in 2015. She has since founded another, Sweep, which captures enterprise-level carbon emissions data. “Now that I’m starting this second business, I know right from the off that it can be a global story,” she says.
More Europeans who work for startups are becoming owners, and more employees are willing to be remunerated partly with stock options. This makes it easier for startups to compete with bigger firms for talent, says Danny Rimer of VC firm Index Ventures. Plus, technology itself has dramatically cut the costs of starting and growing a firm, enabling the aspiring founder to realise their vision without a relocation.