In Europe’s digital race, the winner is the United States

In Europe’s digital race, the winner is the United States

LONDON — When it comes to tech, Europe likes to compare itself to the United States and China — a continent-sized digital giant ready to roar.

Scratch below the surface, and the region’s claims ring hollow. Europe’s tech community is Balkanized along national borders, with few of the longstanding connections between the local venture capitalists and startup founders across the Continent that will be needed if the Europe ever wants to play in the big leagues.

Consider these stats.

At first glance, roughly one in four tech entrepreneurs in Europe create their companies outside of their home country, according to a survey by Startup Heatmap Europe, a project that tracks such data. That’s a higher figure compared to many other industries, suggesting Europeans are bouncing between countries in their quest to become the region’s answer to Mark Zuckerberg or Jeff Bezos.

But those numbers are deceiving.

Almost all of the founders who left home to build their fledgling tech companies abroad — 85 percent of them, to be exact — moved just a short distance within Europe (say, from Estonia to Finland), undermining the idea that the Continent is a borderless digital economy where anyone can start a company anywhere at any time.

This ongoing reliance on U.S. investors whenever European tech companies want to go global also reinforces the long-standing view that Europe is the poor man’s version of Silicon Valley.

Despite what European officials would like to hear, the likes of Taavet Hinrikus — the London-based Estonian behind Transferwise, an online money exchange service — or Ijad Madisch — a German who returned to Berlin from Boston to start ResearchGate, a social network for scientists — remain the exception, not the rule.

The same goes for Europe’s tech investors, the necessary financial oil required to keep the region’s tech engine running smoothly.

Some of a new generation of the region’s tech money men and women now realize that all of Europe must be their investment playground if they want to succeed. But the region’s venture capitalists, for the most part, still prefer to spend their money at home, reaffirming the underlying problem — when it comes to tech, Europe remains stubbornly divided along national borders.

So far this year, for example, British-based investors pumped in roughly half of all money into the local tech scene, according to Dealroom, a data provider. The same goes for Germany. In France, three-quarters of all venture capital for the country’s startups has come from domestic backers. In short, few EU investors, like startup founders, branch out to neighboring countries when looking for deals.

That may not sound too surprising. If you’re handing over hundreds of thousands — or millions — of euros to a 20-something entrepreneur, you probably want to keep a close eye on how the money is spent. But by keeping close to home, the Continent’s venture capitalists are likely to miss out on the next big thing popping up elsewhere in Europe. Investors are also reducing the amount of capital that European startups can draw upon when looking to keep up with international rivals.

US takes advantage

Europe’s national myopia when it comes to tech has not gone unnoticed. Investors from the United States have been quick off the mark to take advantage of the reluctance among the region’s techies to look beyond country borders.

About a quarter of the cash pouring into EU tech startups so far in 2017 has come from across the Atlantic, according to Dealroom statistics. That makes the U.S. the largest pool of funding, collectively, for European tech companies, while Asian investors also have more than doubled their spending on European tech startups compared to last year.

To be fair, much of this international money shows up when EU companies are well-established and heading toward an initial public offering when larger investments are required.

But by showering cash on startups from Dublin to Barcelona, American (and, increasingly, Asian) investors have figured out something that their EU counterparts are only starting to wake up to. Europe may still be divided along national, linguistic and cultural boundaries, but collectively, the region can be a treasure trove for tech investment, as long as you’re willing to look beyond what’s right in front of you.

This ongoing reliance on U.S. investors whenever European tech companies want to go global also reinforces the long-standing view that Europe is the poor man’s version of Silicon Valley. Why stay in Europe, many founders and American venture kingpins ask, when you’ll eventually have to make the pilgrimage to the West Coast, cap in hand?

Looking closer to home

If the region is ever going to meet its as-yet-unfulfilled promise as a global digital player, European entrepreneurs, venture capitalists and policymakers should cast their gaze closer to home and begin to forge stronger ties between startup founders, investors and the wider tech community. That has yet to happen, despite politicians’ muddled efforts to create a digital single market.

Europe’s venture and startup elite might regularly glad-hand at tech events in Lisbon or Krakow. But for the average developer or city policymaker, there are still scant ties between the Continent’s often competing hubs. As a result, cities or countries reinvent the wheel for problems that have long been solved by their neighbors.

The Danish CEO of Kubo Tommy S.L. Otzen wins the 2016 Web Summit pitch competition in Lisbon

There’s no reason why the Continent should limit itself to Balkanized silos. There’s lots of knowledge to be gained — or granted — by reaching across national borders. Many of the headaches that have plagued Paris’ recent growth as a significant European tech hotspot, for instance, have also troubled Amsterdam, Prague or other European cities looking to make their mark on the wider tech world.

Creating such links will not happen overnight. Nor will they be built by top-down projects from the European Commission that go mostly unnoticed by venture capitalists and tech founders.

Instead, European lawmakers should focus on what they do best: making it easier for companies to operate across the region by reducing the time required to obtain, for instance, an EU-wide banking license or by eliminating constraints on how digital services can be bought and sold across the region.

It comes down to getting the most bang for your buck.

Europe’s tech industry, particularly its venture capital sector, also should take a page from the U.S. playbook. Viewing Europe as a whole, and not just one’s home country, as the first port of call for either backing fledgling startups or finding new engineers would go along way to make the region more than the sum of its parts.

It comes down to getting the most bang for your buck. There’s cold-hard cash to be made by turning the region’s melting pot of cultures, languages and economies into an advantage when exporting digital wares to all four corners of the planet. That’s particularly true as America’s digital hegemony comes under threat, and the likes of India, South Africa and other countries also look to stamp their national brands on the online world.

By turning Europe’s diversity into a strength, and not a weakness, the region could forge a distinctly European take on all things digital, rather than merely mimicking (often badly) the U.S. hoodie-turned-millionaire vibe.

Mark Scott is chief technology correspondent at POLITICO.

Source: Politico

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