Is Europe really that far behind Silicon Valley?

By Amit Pau - Venture & Partner and Executive Director Ariadne Capital

Silicon Valley has unquestionably been the natural hub for high-tech entrepreneurs for decades and is home to many of the world’s most ground-breaking businesses. Whether it’s the sunny weather, the Californian attitude, or the closeness to some of the most established tech companies of our digital era that attracts entrepreneurs, this relatively small geographical area is fostering one of the most successful entrepreneurial ecosystems on the planet.

It is home to start-ups in different verticals, large tech corporates, venture capitalists and angel investors, who reinvest their money into this trusted, successful ecosystem. There is a sentiment held by many that to succeed as a tech entrepreneur, you need to be in Silicon Valley. And by successful, I am thinking especially of the unicorns – those start-ups with current valuations of $1 billion or more.

On the other hand, there is not a week that goes by without someone praising a new and upcoming hub for innovative techies. This has been particularly common recently in Europe. Amsterdam, London or Stockholm – all advocating why their city is the ideal choice to start a business. But are these beliefs correct?

There is supportive evidence. Europe has fostered several of the world’s most innovative companies over the years. For example, Swedish/Estonian company Skype, UK’s Zoopla and Adyen from Amsterdam. And these companies are just a few amongst many others who have built flourishing businesses and successfully disrupted their industries. Considering the enormous number of start-ups who will soon be riding the “Sharing Economy wave” – we might start seeing some major advances in the European unicorn community.

30 companies with a valuation of over $1 billion have been founded in Europe since 2000. This is compared to 39 US unicorns founded over the same period. However, it’s important to note that the US still dominates this space. A quick research of publicly traded IT companies seems to confirm this. There are a total of 674 companies globally with a market capitalisation of over £1 billion, of which 236 companies are US based and only 65 of them are European based.

So why is Europe still behind the US?

Money follows money. The European investor landscape is still in early development, and the scarcity of venture capital has influenced the scenery for entrepreneurs seeking funding. This is in comparison with our neighbours across the Atlantic, where money has backed even the wildest ideas. I would argue however that the European venture capital ecosystem has finally matured; and I predict an upcoming increase in entrepreneurial funding.

Europe is a small and highly clustered market. Even though developments in communication technologies have improved communications between countries, there are still borders to overcome which divides the continent into multiple economies and markets. Aside from the geographical limits, there are also difficulties in terms of cultural barriers and language – issues that are largely absent from the US market.

European cultural attitudes. Ever heard of the Jante Law? This is predominantly cited in Scandinavian countries and roughly describes a cultural norm which negatively portrays and criticises individual success as unworthy and inappropriate. Obviously this extreme view is not prevalent in all European countries, but the idea that failure is something to be ashamed of still lingers, in contrast to Silicon Valley’s “fail fast, fail often” attitude.

Complying with regulations. Normally, the regulations of the home country apply to the company, but there could be slight deviations moving between countries which could make scaling that little bit trickier.

Although Europe is seemingly a few steps behind, it has still managed to produce its own fair share of unicorns. Our strengths lie in our ability to co-operate; and to find the right partnerships to help us scale. To facilitate this process, I firmly believe we should encourage larger corporations and start-ups to recognise their common objectives and their interdependency, as explained by our Ecosystem Economics™ model. There is much both parties can learn from each other, which will not only help themselves but also the European landscape in general. If entrepreneurs and corporates believe in principles like these, it’s more likely that Silicon Valley’s current advantage will decrease over time.

by Amit Pau, Venture Partner & Executive Director, Ariadne Capital

These views are the views of Ariadne Capital and do not necessarily represent the views of Low Associates.