Blog Post

AEIdeas

Microsoft has announced plans to write down almost the entire value of its Nokia acquisition and cut more than 2000 jobs in Finland. Whatever this says about Microsoft strategy, it sure seems like a mark against the European tech sector: Leonid Bershidsky in Bberg:

Nokia’s troubles and its resounding defeat at the hands of American companies in a market that it had wrested from them and dominated for a decade appear to have destroyed the European tech industry’s confidence. Of course, if you tell people familiar with the scene that European tech hasn’t produced much over the years apart from Skype and perhaps Spotify (one owned by Microsoft and the other now greatly threatened by Apple), you’ll likely get an angry retort complete with dozens of company names, some well-known and others obscure but important in their niches. (Did you know the world’s second-most-popular web server, Nginx, was Russian-made?) But none of these is another Nokia, a global leader in a highly visible consumer-oriented market. At one point Nokia was the biggest European company by market cap. One could say that’s how the market works, and the U.S. simply has the best entrepreneurs and the best support network for them. “The confluence of a large pool of capital, world-class talent, vibrant support infrastructure and a risk-loving culture has bred a self-fulfilling cycle of innovation and entrepreneurship,” is how Frenchman Nicolas Brusson, co-founder of BlaBlaCar, the global leader in long-distance car sharing, put it in a recent column.

Now a recent FT piece featured a study showing that Europe is improving in this regard, producing more billion-dollar tech startups, or unicorns, than it used to. According to UK investment bank GP Bullhound, it’s 13 unicorns for Europe over the past year vs. 22 for the US, with American firms, “tending to be significantly larger than those produced on the continent.” Some eye-popping stats here:

The study shows the cumulative value of all European unicorns created since 2000 is around $120bn. By comparison, Facebook currently has a market capitalisation of $275bn, while Uber has achieved a valuation of $40bn from investors while remaining a private company. The study suggests that since 2000, the UK has produced the most unicorns in Europe, with 17 groups becoming billion-dollar companies. British tech companies to join the elite club in the past 12 months include: Skrill, the web payments company acquired by London-listed Optimal Payments for €1.1bn, and Farfetch, the online luxury fashion store, valued by investors at $1bn in March. Sweden has produced six billion-dollar tech companies, including music-streaming service Spotify and payments group Klarna, while Germany and Russia are home to four unicorns each.

The comments to the FT piece are pretty interesting as readers tried to explain America’s entrepreneurial edge. I think the Brusson explanation — “The confluence of a large pool of capital, world-class talent, vibrant support infrastructure and a risk-loving culture has bred a self-fulfilling cycle of innovation and entrepreneurship” — is an awfully good start. But here are some other thoughts from comments:

— I’ve always found it amazing how Europe completely missed out on the tech boom (other than SAP there are no large-cap tech companies in Europe I believe. Not counting telco’s- these are not “tech”). Amazed this isn’t studied and written on more- its’ a real failure where given the education levels Europe should be widely competitive with the US in the technology arena. Odd thing is Europe in general offers more generous tax breaks for high tech industries- France I think has 100% r&d credits (correct me if I’m wrong) where in US there’s nothing even close to that.”

— I’d suggest regulatory differences between the US + Europe do matter.

1. California is the only place in the Western world that does not enforce non-compete clauses. In a fluid ecosystem of talent, start-ups benefit from being able to hire the best

2. General labour market rules: as volatile entities, start-ups need to be able to hire and fire at will. This is easier in the States

3. The Clinton administration was particularly kind to Internet companies and one particular law was that providers, hosts and companies would not take on legal liability for comments posted by users. Imagine trying to start your social media company without this law. This is why all social media behemoths are American, not European. I think Europe needs a more sophisticated regulatory framework. We have started to act, but there is a way to go.

— Startups need customers. My experiences is American businesses are generally(*) more likely to take a chance on a new company’s product if they think it will be advantageous, even if that company might not be exactly stable. I say generally, because it is certainly not universal. I was in the past deeply involved with another startup in the U,S. that generated most of its revenue from the UK for its first several years because for this particular market the major players in the UK were more change-seeking than their counterparts in the US. Ironically, this was largely because we addressed some pain points related to labor and energy that were not as painful for similar companies in the U.S.

— In addition to those items noted by @max2020, the fairly efficient and non-punitive corporate bankruptcy regime in the U.S., as well as a generally greater acceptance of corporate failures in the U.S. (i.e. the founders are not viewed as morally deficient in any way for creating a failed startup – provided it wasn’t a fraud of course) both contribute to a willingness to take risks. Also, the a lesser safety net encourages entrepreneurship at some level also encourage risk taking. Large corporate layoffs often spawn related-field startups. And startups beget startups – people who work in them learn enough to give it ago and get addicted to the experience. If they come from a successful startup they may have their own seed capital.