The number of European startups is growing. They have the best chance of being globally successful if they rely on their own business models.
With ten billion dollars and a joint fund, Germany and France want to promote the European startup scene. That’s what the two countries announced in Paris a few days ago. More European money is to flow into European startups, and that’s because they don’t want to be leaving the biggest piece of the pie to American investors. It’s a step in the right direction, but it’s still too hesitant when compared to what is currently being discussed in venture capitalist circles in the US.
As a consequence of the new fund, Europe has a good chance of becoming the new shooting star in AI heaven. The Continent still has far fewer startup unicorns than the US or China, but the curve is pointing upward. Five years ago, there were no five companies that managed to exceed the symbolic valuation threshold of one billion euros; now there are 49. It’s impossible to imagine the global market without some of these companies.
Sweden’s Spotify is the global market leader in music streaming (despite or even because of Joe Rogan). Klarna, also Swedish, is the leader in installment payment services, and the Dutch company ASML is the global leader in lithography systems for the semiconductor industry. These successes can be built upon given that US$115 billion in capital flowed into European startups last year, significantly more than the just over US$43 billion in 2020.
Sequoia Capital, one of the main financiers of venture capital for tech startups based in Silicon Valley, has caught a whiff of morning air. Europe could soon go from spectator to aggressor when it comes to the startup boom, according to a memo circulating in venture capital circles. It’s not only the financiers who are optimistic that Europe’s unicorns are mutating from solitary to herd animals.
But a few resources are still urgently needed on the Continent. And it’s not about money. Venture capitalists are currently chasing even dubious startups like toddlers after colorful soap bubbles glistening in the sun. It’s time for more substance.
Knowledge capital and diversity are the European advantage
Europe has a lot of what everyone is currently looking for. The first is knowledge capital, with three of the world’s top five computer science programs offered in Cambridge, Oxford, and Zurich. Second is its human capital. With nearly six million developers available, Europe has a larger talent pool than the US. And third, the Continent offers the diversity that other regions lack. Since when have venture capitalists been interested in diversity? When it promises economic success.
US sociologist and economist Mark Granovetter described what this might look like as early as 1973. In his analysis of successful networks, Granovetter focused not on the strong connections, but on the weak ones. It is not necessarily the large overlaps and intense relationships in ecosystems that contribute to success. Often, it is the very connections that people tend to disregard as insignificant. They make a significant difference in the flow of information and the power of innovation.
There could have been other regions of the US where the tech industry could have flourished, around Boston on the East Coast, for example. But while large, vertically integrated companies there steadily pursued a single-track strategy and allowed new ideas to sink as if into a layer of clay, Silicon Valley seethed toward the boiling point with a growing number of small, agile startups. In the meantime, the small ones in the Valley have grown up and suffer from the same problems that afflict other industries on a saturation course.
The signs for Europe are therefore good. Due to Europe’s impressive industrial tradition, startups in future-oriented fields of technology, such as AI, robotics, and quantum computing, have an excellent chance of becoming globally successful. That’s if they dare to do more than copy the same business model for the umpteenth time.
What is being sought is not the already known delivery heroes, the exploiters of the economy of convenience, who are heading for the next bubble with exaggerated evaluations. Rather, it’s the heroic startups of a real disruption that are sought after.
They could make future history by combining innovative strength and sustainability, therefore working almost organically to diversify the tech industry. The best alternative to the Big Tech of Silicon Valley is Europe’s thriving Small Tech scene. That’s why more European venture capital is needed. It’ll pay its rewards.