Is Europe blind to its own start-up potential?

“In Europe, there was the hype and then there was Skype – and that’s it.” This sentiment, shared by many a US investor five years ago, is no longer true. Skype is far from being Europe’s only technological success story.

In fact, home-grown tech companies have been driving the continent to world-leading levels of innovation and entrepreneurship. Take digital music, for example: Europe is the home of Spotify, SoundCloud and Shazam. To gaming fans, the home of Rovio, Supercell and King. To e-commerce, Skyscanner, Privalia or Zalando. In software, Criteo, Unity and OpenX.

It’s not hype, either. Neolane, Endeca and Q-layer are just a few of the European tech companies being sold at substantial prices. Since Skype, the billion-dollar valuations have come thick and fast.

And yet, after the initial start-up rounds, entrepreneurs are still struggling to raise cash. Most of the money they do receive is from outside investors, such as the US, and increasingly Asia.

According to EVCA, the European venture capital association, US investment in European companies increased by 165% between 2009 and 2011. Several US venture-capital investors and corporations are either raising funds with a strong focus on Europe or establishing Europe-dedicated funds with teams based in the continent.

Aside from public funding, the US is the most important source of money for European-based venture funds, and it’s where most successful tech start-ups choose to go public. Asian and Middle Eastern investments are in the running too, though some way behind.

So, where are all the European investors? Where are the pension funds, asset managers and corporations? It’s as though the continent’s economic opportunities are being noticed by everybody but native investors.

And yet, these same investors claim that Europe is underperforming. That’s why they don’t reward new companies for taking risks, which they perceive to be too high. Here we are again, back to the problem of hype – in this case, the negative kind.

It’s not too late for Europe to invest in its own entrepreneurs. But investors be warned: venture capital is a cyclical business and this opportunity will not last for ever.

This blog is part of a series of articles lending context to the World Economic Forum’s work in the field of European entrepreneurship. Click here to read Nicholas Davis’s introduction to the series. 

For more articles on entrepreneurship in Europe, click here.

Author: Matthias Ummenhofer is Head of Venture Capital at the European Investment Fund.

Image: The Euro sculpture is reflected in a puddle in front of the European Central Bank headquarters in Frankfurt. 21 January 2012. REUTERS/Kai Pfaffenbach