David Galbraith, a partner at venture investment firm Anthemis, has a statistic he likes to quote.
“The combined value of the top three internet companies in the Americas – so, basically, in America – is around $0.75tn (£0.5tn). In Asia, it’s around $0.5tn. In Africa, it’s $50bn. And in Europe, it’s just $25bn.”
When I first heard the figure from him, on the hottest day of the year at a conference in the City of London, I was shocked. Galbraith, who helped create both net standard RSS and listings site Yelp in the early 2000s, is not known for exaggeration.
When I press him a few months later, he admits with a shrug that it’s slightly artificial. The figure for Africa includes Naspers, the South African conglomerate which owns 35% of China’s massive net firm Tencent, for instance. And the figures only take into account “pure play” internet firms, so that Apple doesn’t count (because it makes watches, phones and computers) but Google and Facebook do.
“Really, it’s engineered to make a point,” he says. And the point is worth making: when you look at the top of the tech market, the very top, Europe is lagging a long way behind.
The continent has plenty of perfectly decent technology startups: in May this year, technology investment bank GP Bullhound counted 40 founded since 2000 with a valuation of over $1bn, 17 of which come from Britain. But the combined market value of all those companies together was just $120bn – less than half that of Facebook’s $273bn market cap alone.
The problem Galbraith is highlighting isn’t one of financial returns, though: it’s an issue of power. “If you look at Europe now, we’re in the equivalent stage of being in, let’s say, 1920, with no car companies. No Citröen, no BMW, no Rolls Royce, no Fiat, nothing.
“This is as big a deal as the industrial revolution. You’re moving from the agrarian to the industrial to the digital age, and you’re seeing the digitisation of everything. Industries which weren’t considered to be digital are being transformed by some of the methodologies and the processes of the digital age. Take Tesla – we think of Tesla as being a ‘startup’, but it’s the same size as Audi.” Both companies are valued at around $30bn.
For all that the technological revolution is often framed as a ground-up burst of innovation from a thousand startups, actual power is concentrated in just a few hands.
Facebook is one of those with such power. The social network is so large that a tweak in its newsfeed algorithm in October 2013 single-handedly led to the proliferation of “curiosity gap” headlines (“An Auto Executive Talks Up Gas. The Guy Next To Him Who Builds Space Rockets Puts Him In His Place”).
Apple is another. Its influence over software development is such that a small change in the rules about what can be allowed on its app store is enough to create a whole new class of apps, launching mobile adblockers to the top of the charts overnight.
A third, Google, can kill a profitable business by tweaking its search results: just ask the founders of Metafilter, who lost 40% of their visitors overnight in mid-November 2012.
The heady mixture of near-infinite scalability, a market that lacks geographic borders, and strong network effects means that once a company becomes a de facto platform, it’s hard to control and even harder to dislodge. “We could be creating companies that are bigger than Standard Oil,” Galbraith says. “We don’t know yet, but it’s possible. And these giant platform companies create ecosystems around them.”
It’s these mega-platforms, the three above all from the US, which Europe is lacking. And the absence of any such behemoths has a serious impact on the ability of the continent to influence its own destiny.
The valley on top of the world
Take Google. The ubiquitous search engine is currently in the midst of multiple uncomfortable squabbles with European regulators.
It’s being investigated on antitrust grounds by the EU’s competition commission, to see if it unfairly promotes its own shopping search service and whether it artificially limits the rights of handset manufacturers to make their own “forked” versions of its Android operating system.
At the same time, it’s dealing with the fallout of the ECJ’s ruling that Europeans have a “right to be forgotten” and can request the removal of “inadequate, irrelevant or no longer relevant” information from search results. That right has been applied on a country-by-country basis, but in July this year, France tried to push it further, requiring the company to remove offending entries on all its domains.
Google said “non”. “As a matter of principle, we respectfully disagree with the idea that a national data protection authority can assert global authority to control the content that people can access around the world,” said a spokesperson. “We believe that no single country should have the authority to control what content someone in a second country can access,” added the company’s global privacy counsel, Peter Fleischer.
Except, of course, if that country is the US. Google’s global index is policed using US copyright law, and receives a thousand times as many requests under those laws as it does under the right to be forgotten – and grants more than 95% of them, compared to the 41% it has granted for privacy requests. The world’s biggest search engine is based in the US, and that gives the US the power to dictate copyright law to the world.
At the other end of the spectrum is China. The state has managed to build its own web firms at a scale that rivals that of Google and Facebook. For all the West hears about firms such as “China’s Google”, Baidu, and “China’s WhatsApp”, WeChat”, the comparisons underplay the dominance of those groups domestically.
But it is tricky to pinpoint lessons for Europe from Baidu, Tencent and Sina. The firms achieved astronomical success in a short period of time, but did so in a pocket of the internet walled off from the wider world. The Great Firewall has been terrible for Chinese netizens seeking an uncensored internet, but very good for a few domestic entrepreneurs freed from international competition.
“Europe’s sort of semi-open market has created the scenario where it doesn’t have any of its own platforms,” Galbraith concludes with a sigh. And where the EU tried to create its own platforms directly, “it was spectacularly bad. It tried to create its own version of Google, called Quaero. It was laughably bad.” Created with a €99m grant at the request of the French government, Quaero was eventually put to bed in December 2013. Two years into its creation, engineer Nick Tredennick wrote in IEEE Spectrum magazine that: “Going head-to-head with Google with a project involving well-funded, energetic entrepreneurs would be foolish. Attempting the same with a multigovernment collaboration is beyond description.”
Europe: new land of opportunity?
Not everyone agrees with Galbraith’s fear. Ophelia Brown, a principal at Index Ventures, argues that: “Europe has produced many unicorns [billion-dollar companies]. Not Facebooks, to be sure, but I think it’s glib to say that Europe can’t produce another Facebook.”
Facebook, she points out, didn’t come from Silicon Valley: it was born in Harvard University, to a founder who was as much an outsider as European entrepreneurs may feel today. And in the decade since the social network was formed, Europe too has evolved. “There’s no reason why the same can’t happen at UCL, Imperial, Oxford, Cambridge. The crucial point is how Europe has evolved from when Zuckerberg was coding Facebook. Today, there is very much an ecosystem in place to support the growth of such a company.”
Brown argues that Europe even has an advantage for young startups over San Francisco. “It’s actually easier to start building a company today because of low-cost easy access to engineers, especially if you take London, Berlin, Stockholm, versus fighting for engineers in the valley when you’re a no-name startup.”
In the valley, “cost is prohibitively expensive, people don’t have any allegiance, people are leaving after a year, stock options don’t mean anything to anyone”. Brown says the valley is seeing the disadvantages of being a mature ecosystem. “Yes, Europe is some way behind, but we’ve always been some way behind. That doesn’t mean to say that we can’t ever catch up.”
Tom Valentine, the co-founder and chief operating officer of London-based travel company Secret Escapes, says a company that can say “we grew up in Europe” has a strong selling point. Being forced to rapidly support multiple languages, currencies and locations makes the first few years of growth tricky, but puts the company in a position of advantage compared to American startups for going worldwide.
It’s a story that Barry Smith, flight search-engine SkyScanner’s co-founder, backs up. At a time when the firm was already supporting a number of European languages, and had built tools letting it add a new one for just £1,500: “Our main competitor in America had only one language. They had 220 employees covering the US, and just four for ‘Europe’, as though it were one giant country.”
Brexit could be a disaster for UK tech
The other major advantage Europe has, which comes up time and again, is its relative openness to immigration. “If you want to get great engineers from India or other parts of the world it’s quite difficult to get the appropriate US visas,” says Brown. “It’s slightly easier in the UK, with some of the tier two visas that you can get, but it’s still a challenge for both countries.”
It’s a sentiment echoed by Toby Coppel of Mosaic Ventures. In the past, he says, “world-class founders” would have to go to the US to get the funding they needed, and stay there once their company hit success. But the next generation of founders “don’t have to go to the US” – and, given the difficulty of obtaining a visa, “probably can’t”.
But if it is an advantage, it’s one which Europe – and Britain in particular – is only tenuously clinging to. Alarmed by the sharp rise in anti-immigration rhetoric, a number of British startups have begun to speak out. In October they penned an open letter to the government warning that “changes to immigration policy will make it more difficult to attract and recruit the talent high-growth companies need to compete and succeed in a global marketplace”.
A few days later, at an exclusive dinner arranged by London-based fintech firm Transferwise, a peer-to-peer foreign exchange service, where founders from companies including fashion retailer Farfetch and peer-to-peer lender Funding Circle grilled representatives from Number 10 and the government’s Tech City over immigration. “For us, definitely the biggest constriction to growth is hiring people,” said Taavet Hinrikus, Transferwise’s co-founder (he also the co-founded Skype).
And there are times when Britain’s pool of talent simply won’t do. Nilan Peiris, Transferwise’s vice president of growth, says that product managers in particular are almost impossible to hire domestically. The role, which involves taking charge of a particular feature internally, “is like being an entrepreneur inside the company,” he explains. As a result, the company likes people with experience of running their own company – and there just aren’t enough of those in Britain.
But when they hire from overseas, they face wild amounts of pressure. One new product manager, poached from eBay in April, had to spend her first two months of work in the company’s Estonian office while Transferwise fought for her UK visa. And Secret Escape’s Valentine described overbearing inspections from the Home Office, being forced to answer questions which make sense for an employer of migrant farmhands, but are a category error for a highly skilled tech company. “They were asking how I was certain all my employees had come to work that day. I said I didn’t even understand the question,” he said with a laugh.
The mood soured further when talk turned to the forthcoming referendum on Europe. Hinrikus was blunt: “It’s a freaking catastrophe.” If the out lobby won, “it would make sense for us to relocate to Europe … we’d move to Berlin”. Britain’s tech sector could be snuffed just as it’s getting started. Europe as a whole might soldier on, but the damage would be enormous.
Could the Valley’s success have been a blip?
Silicon Valley might be facing some downsides to its success, but there are of course upsides as well. The phenomenon of “clustering”, where multiple businesses in the same sector huddle together for mutual benefit, is very real, and Silicon Valley is the largest tech cluster in the world.
It isn’t even clear that the process by which that came to be is replicable. The birth of the valley was one part fortuitous circumstances (the proximity of major research universities to military establishments provided expertise and funding), one part culture (an attitude of openness and cooperation between the new tech firms let them get the jump on their more closed-up east-coast competitors) and one part major world events (the US was the only major developed nation that hadn’t seen its industrial base obliterated in the second world war).
The circumstances that led to Silicon Valley may never be repeated. But that isn’t the whole story as to why Europe doesn’t have its own Google. “The short answer is that one or two companies sold on the way up,” says Coppel. “Skype could have been the next great messaging platform, but sold in 2005 [to Microsoft, for $8.5bn].” He reels off other names: Booking.com, the Dutch travel site that is now owned by America’s Priceline; Zendesk, which was formed in Denmark and moved to San Francisco in 2008; and Evernote, which Russian Stepan Pachikov founded in 2002. “Now you don’t have to do what they did.”
Brown agrees. “The fact is, there is a lot of money for European startups now that can fund their growth to take them well beyond $2bn, $3bn: that wasn’t true for Skype. I don’t think pension funds and sovereign wealth funds were looking at investing in startups 10 years ago, but now they are.” Now, she says, “there is less of a drive for selling out early for European entrepreneurs, because they see what’s possible”.
Part of the issue is simply that a significant part of a mature startup ecosystem requires former founders to provide guidance and funding to the next generation. While Europe’s first wave of potential unicorns grew up, there simply weren’t enough of those former founders to help out, Brown argues.
But even if European startups are now free to grow to their full potential, that only solves half of the equation. The other question – the $250 billion dollar one – is whether the full potential of any of those startups takes them to the scale Europe needs to hold its own.
Where the smart money is
Some might. Spotify, for instance, has the potential to grow to become to music what Facebook is to social networking. But the company faces serious challenges from established US competitors such as Apple and Google, as well as an entrenched industry which is fighting tooth and nail to protect its turf.
For Galbraith, there are only two industries left where the potential is high enough to matter, and where the big players don’t already have an insurmountable advantage: financial technology and the “internet of things”.
The former, he argues, is a natural fit for a London-based startup looking to rule the world; the latter, for a Berlin-based company seeking to extend Germany’s formidable lead in manufacturing machine tools into the digital age. “At the moment, Germany makes the tools that China uses to make the tools to make other things. But they need to own the software too. Maybe internet of things is not the right term but… smart hardware, as everything will be.”
For his part, Galbraith’s going for the former. At Artemis, he’s set up a small incubator named Anthemis Foundry, where he and business partner Greg Dowling will be “designing companies”. The incubator is based in London, Europe’s financial capital, and is focusing on fintech. “Money is a language. It’s a truly global one where London sits at its centre in a truly globalised environment in a way that the US doesn’t. There are no massive financial institutions on the west coast of America other than [bond investor] Pimco.”
Of course, others have got the jump on Anthemis Foundry, and if Europe is to become the fintech capital of the world, the company that leads the charge may already have been founded. Transferwise hit a $1bn valuation in early 2015, for instance, while Adyen, an Amsterdam-based payments firm with clients including Spotify and Netflix, is worth $2.3bn at recent valuations.
Whether or not London has a natural advantage in fintech, or the US’s backwards banking infrastructure lends Europe the edge it needs, it will still be a challenge to match the biggest companies in the US. “But,” argues Galbraith, “it seems like, if this is a bigger issue than, let’s say, a Greek default, then it probably would be worth throwing €300bn at it to create an Apollo programme for a European platform.”
That’s not to say the EU should just build the platform directly (the memories Quaero should prove the folly of that idea), but that the continent as a whole should accept the fact that it’s worth making some very, very expensive changes to boost the industry.
“Look at France,” Galbraith says. In France, if you buy a painting, and sell it for a profit, there’s no capital gains tax paid on the profit, because the French government wants to use the tax system to encourage ownership of art. But, he points out, if you buy, say, a domain name and sell it for a profit a decade later, capital gains tax is still due.
The cultural differences between Europe and the rest of the world may ultimately be why no Google, Apple or Facebook has come from the lands that gave us the telescope, the steam engine and the printing press. “This is a sickness in Europe,” Galbraith says: “The past is valued more than the future.”
There’s also the question of motivation. Could it be that European founders were simply less driven, and more eager to sell out, than their US counterparts? “Not at all,” says Brown. “I would turn down an investment in any company which said its aim was simply to sell out.”
Skyscanner’s Smith is more sanguine. “We have an education problem: ambition is not taught in school.” And for those come to ambition themselves, he worries that they focus on getting rich first, and building a great business second – the startup equivalent of wanting to be famous, rather than wanting to be a musician.
José Neves, the founder of Farfetch, has a different theory: a cynical European press fails to boost startups at the right time. “When we raised money at a $1bn valuation, we were on the front page of the Financial Times – but the headline was ‘is there a tech bubble?’”
Neves is also the only European founder I meet to explicitly state the fear many have privately: “A business like Facebook, Instagram or Pinterest could never be built in Europe. Those are businesses that were burning through cash without a dollar in revenue,” and no European funder would have backed such a risky prospect.
Around the table at TransferWise’s dinner, Neves’ assertion is quickly countered. Eileen Burbidge, the chair of Tech City, pointed out that WhatsApp had just 55 employees at the time of its acquisition for $19bn by Facebook, while Instagram a few years earlier had been acquired for $1bn with just 18 employees; neither company was burning enough cash, she says, to frighten off even conservative European venture capitalists.
So if it’s not culture, and it’s not funding, it’s not infrastructure, it’s not (yet) immigration controls and it’s not (yet) fear of Brexit, then will there ever be a European Google? At my most pessimistic, I worry that the answer is no: America’s lead is too entrenched to be overturned short of the sort of catastrophic continent-wide wars that led to the last rebalancing of worldwide technological leadership.
But one thing that’s clear is that this is not a problem that Europe is ignoring in favour of easy gains elsewhere. A phenomenal amount of money, time and energy is being thrown at the issue. That doesn’t guarantee success, but it feels closer than it ever has before.
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