A WIDER ANGLE. Europe’s playing catch-up

The Americans and the Chinese dominate the tech world with companies like Google and Tencent, but Europe’s looking to create its own stars It’s a tiny, two-year-old startup with high-flying ambitions that’s hoping to turn the dream of a flying car into reality. Munich-based Lilium has already conducted a test flight of its five-seater, electrically powered vertical take-off plane that can travel 300km on one charge. Yes, that sure beats taking the Metro to work.

European unicorns

When it comes to turning out high-technology stars, Europe’s playing catch-up with America’s fast-moving whizkids and the Chinese who’ve emerged as world-beaters. But now young entrepreneurs in Europe are looking to create their own unicorns with valuations of over a billion dollars. Lilium has a star backer in the form of Niklas Zennstrom, who runs Atomico, a London-based tech investment firm. Atomico has scored home runs with companies like Supercell, a Helsinki-based gaming company that was valued at $10 billion and snapped up in 2016 by China’s octopus-like giant Tencent. Supercell recently reported pre-tax profits of $1 billion.

The name Zennstrom should ring a bell with most Indians. He’s the Swedish founder of Skype, which we’ve all used at some time. Music buffs know him for Kazaa, which hit the high notes with peer-to-peer file sharing, and he also attempted a home run with Joost, which used similar technology for TV programmes. Zennstrom’s Atomico is one of the companies behind the rise of European tech stars like Klarna, a Swedish online payments firm now worth $2.5 billion, and Angry Birds maker Rovio.

Emerging stars

Across Europe, new players are emerging and hoping to make a mark globally. Leading the way are, of course, the Nordic countries, which make up in talent what they lack in numbers. Sweden was the original home of Skype and other global giants like Spotify. Nearby Finland was home-base of Rovio and Supercell. There are scores of other promising startups across Scandinavia from Denmark to Norway. Amazingly, the small size of these countries has worked in their favour: with a tiny home market, they’ve been forced to have global-scale ambitions from the moment they launch.

A string of other factors have also worked in their favour. Says Vivek Wadhwa, Distinguished Fellow, Carnegie Mellon University Engineering at Silicon Valley: “The reason Scandinavia, and Sweden in particular, is so successful in creating highly successful technology startups is a combination of having a highly educated workforce, less regulation and high government support plus a safety net for entrepreneurs and ample seed financing.”

Europe’s always had an abundance of talent but this is an era when size matters and investors look favourably on the biggest markets. The biggest of them all has always been the US with its large population and buying clout. In the last decade, China has also turned its vast population to its advantage and by closing its markets to companies like Google and Facebook, it’s been able to create tech heavyweights like Tencent, Baidu and Alibaba. Even India, with its billion-plus population, has become a money manager hot favourite. But investors now are also zeroing in on Europe. Softbank, which has invested heavily in India, has its $100-billion Vision Fund scouring Europe and the world for promising tech ventures. Zennstrom notes in 2007, Europe had only one startup accelerator. Today there are over 100. That means there’s cash available for promising startups.

The reason why Europe’s coming late to the tech party is that its markets are fragmented. But innovation abounds. You have a company like France's BlaBlaCar, which has an unusual transportation model and matches people who want to travel inter-city with people driving between cities. BlaBlaCar has raised over $300 million from investors, has a $1.5 billion valuation and expanded to 22 countries — though it has now pulled out of India. There’s also interest in Europe in the “deep tech” arena — AI, virtual reality, robotics and flying cars .

When it comes to startups, the UK, even with its Brexit woes, is still far in front of other European countries. The UK’s Europe’s tech start-up capital, home to 22 of the 57 European start-up businesses with valuations of over $1 billion. One UK-based star is fashion site Asos, valued at $4 billion and stretching across the world. In the year ending August 31, Asos’s revenues rose by 33 per cent to POUNDS 1.9 billion while pre-tax profits totalled POUNDS 80 million.

Fragmented market

Move to Germany, and the scene’s emerging slowly with Berlin developing as a tech startup hub. One growth star is second-hand car-sales portal Auto1 valued at $2.8 billion. Still, there aren’t too many billion-dollar startup companies in Europe and the reason, says Wadhwa, “is because the market’s fragmented. Each country has its own language and culture and market”. Wadhwa also blames tight government controls in some key countries: “The reason France has been held back is because it’s over-regulated and has a culture toxic to entrepreneurs.”

Some European companies end up shifting base to the US after they’ve attained certain mass. A co-founder of one French company which went to California explained the move saying: “The Bay Area is the most condensed ecosystem for what we do. You’re always one email away from meeting with anyone.” The UK does have areas like Silicon Fen around Cambridge, but many companies there are research-focused and slower at bringing products to market. Also many successful European companies like Supercell have been snapped up by cash-rich Chinese companies.

Are there lessons for India in the European story? Here’s Wadhwa’s take: “The Government should remove the barriers that hold entrepreneurs back — everything from paperwork and bureaucracy to bankruptcy laws. Startups should be provided seed funding and mentorship/support from experienced entrepreneurs.”

One super-bull who’s convinced Europe is creating great multi-billion-dollar companies is London-based Manish Madhvani, managing partner and co-founder of British investment bank GP Bullhound. Madhvani says: “Chasing the likes of Apple, Google and Facebook and building companies of genuine scale is no longer a pipedream. London will be home to a decacorn (a $10-billion company) soon, and in the next five years Europe will create a $100-billion technology company to rival Silicon Valley.”

Is Madhvani on the money? Access to capital in Europe remains much more constrained than in the US, But certainly, the investment appetite of US technology firms and traditional corporations for European startups is on the upswing. As for whether Europe can create world-changing technologies and take on companies like Google and Tencent, it may just be a question of time.

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