The Strategist

New competitors to Silicon Valley


04/18/2017 - 14:30



The European startup market remains the third in the world after the US and China in terms of the volume of investments attracted by start-ups. In 2016, the region’s companies received around $ 12 billion, according to the annual report of French investment bank Clipperton and WhoGotFunded, quoted by TechCrunch. Total investment remained at the same level as in 2015.



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In total, European start-ups closed 943 deals worth $ 1 to $ 10 million each in 2016, which is more than 50% higher than in the previous year. The total volume amounted to $ 3.6 billion. "Our data show a decline in major rounds in 2016 despite the activity of private equity funds and corporations. Potentially, this is a healthy pause for the phenomenon of European unicorns", the researchers note.

The UK continues to dominate the European market. British start-ups attracted $ 4.1 billion, yet this figure soon may change in the Brexit process. Before the vote on leaving the EU in the first half of 2016, the amount of investment in technology projects increased by 24%, and showed a slight decline after the referendum. "This dynamic requires close monitoring and the real impact of Brexit is still ahead", the analysts said.

The second largest start-up economy is France. Its companies received $ 2.7 billion, which is 22% more than last year. The volume of investments in start-ups of Nordic countries experienced a 24% drop to $ 1.1 billion. Projects from Germany, Austria and Switzerland, in contrast, showed a significant increase and attracted $ 2.6 billion.

Gone are the days when the European "techno sector" consisted mainly of consumer-oriented Internet trading enterprises, which were often a blatant copy of successful American companies. Nowadays, Europe has become a home of real, innovative innovations. Among them are projects that Atomico calls "deep technologies", similar to artificial intelligence, on which DeepMind, owned by Google, works. In 2015, the share of the deep technologies sector accounted for $ 1.3 billion of European venture investments, which were provided by 82 tranches. This is much more than $ 289 million provided by 55 tranches in 2011.
 
New techno-hubs of Europe appear in unexpected places, far beyond the original technology centers such as London, Berlin and Stockholm. Atomico suggest closely monitoring Paris, Munich, Zurich and Copenhagen in the coming years. The French capital, as emphasized by Atomico, has already begun to compete with London and Berlin in the number and size of ventures financed by venture capital.

Even the traditional industry of Europe began to pay attention to the techno sector. Two thirds of the largest corporations in Europe (in terms of market capitalization) have directly invested in at least one technology company. Since 2015, a third of these corporations have acquired at least one techno-company.
 
Foreign companies are also in a hurry to take advantage of the European technological talents. Google, Facebook and Amazon have announced a significant expansion of their technology hubs in Europe. Last year, M&A deals in the sector totaled more than $ 88 billion (this amount was just $ 3.3 billion in 2014).
 
According to Boston Consulting Group’s study, positions of small, export-oriented EU countries, namely the Benelux countries, the Baltic states and Scandinavia, are much higher in the so-called "Internet intensity" rating than the US. The rating assesses quality of IT infrastructure and Internet access , as well as the extent to which business, consumers and the government participate in activities related to the Internet. 
 
These "digital leaders" generate about 8% of their GDP thanks to the Internet, compared to 5% for the "Big Five" of Europe (Germany, France, Italy, Spain and the United Kingdom). According to forecasts, during the period of 2015-2020, the process of digitalization in these countries will create 1.6-2.3 million more jobs than the same process will destroy them.
 
Of course, the European technology sector still has certain weaknesses, in particular, it is still unable to create technological giants capable of competing with the Silicon Valley monsters. Now it’s rather easy for European techno-entrepreneurs are to find funds for start-ups, but US companies have 14 times more capital available at later stages of business development. This funding gap could be eliminated if the European pension funds channeled additional 0.6% of the capital under their management to venture capital investments.

Another weakness is lack of a real single digital market in Europe. Techno-entrepreneurs get immediate access to a huge market when entering the US or China. On the contrary, they still have to deal with 28 different consumer markets and regulatory regimes in Europe.

Instead of liberalization, the EU wants to regulate. For example, the watchdogs are currently looking for a way to prohibit companies from refusing to sell online (except for cases with copyright protection), and to establish different prices for goods and services depending on a client’s country of residence. Besides, there are other dangers, for example, the desire to begin to regulate intellectual property, internet access and so on.
 
Despite all these risks, the overall trend in the European technology sector remains positive. It seems that the continent felt a fresh appetite for risks. Atomico says that more than 85% of European start-ups founders believe that creating their own business is "culturally acceptable". Given excellent research talents (five out of the top 10 computer science faculties in the world are located in the EU), and the boom of European start-ups seems to be quite stable.

source: techcrunch.com, ‘Europe’s Surprising Tech Success’ by William Echikson (project-syndicate.org)




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