Can Europe ever build its own Silicon Valley?

The chasm between Silicon Valley and Europe’s tech sector seems, at first glance, to be as wide as the Grand Canyon.

Ask anyone outside of the industry to name some major tech firms and most will rattle off a list made up entirely of US companies. Ask the same person to name a European start-up and you are likely to get a blank stare.

Source: egovlab

How do they compare?

To get an idea of how the tech sectors in Europe and the US measure up, take a look at the number of ‘unicorns’ – start-ups with $1 billion valuations – popping up on either side of the Atlantic.

According to tech investment bank GP.Bullhound, Europe produced 13 unicorns in the year to May 2015.

In the same period, the US produced 22 unicorns.

So far, so encouraging. But then look at the valuations of all the existing unicorns in Europe combined: $120 billion. Compare that to a single US company, Facebook, with a market capitalisation of $227 billion, and you get a sense of how tiny the European sector is.

Why is it like this?

Silicon Valley is the undisputed centre of world technology. Part of the reason is historical, with the area close to good universities and military research facilities, but more recently much of the reason is also financial. The amount of venture capital funding available in the US has traditionally dwarfed that in Europe.

Analysis by White Star Capital, a tech fund based in New York and London, shows that Silicon Valley has over three times as many early stage tech investors as Europe.

Early investment means more companies getting off the ground and more companies able to grow rapidly.

Professor Mariana Mazzucato, a member of the World Economic Forum’s Council on the Economics of Innovation, believes it is not just venture capital that tech sectors need to thrive.

The economist says government investment is also key and that is where the US has done well in the past: “Why are all the innovative companies like Apple, Amazon, Google and Facebook coming out of the US and not Europe? The answer you will often hear is: Europe has lots of culture but there is too much state and not enough market. As a result, it is not entrepreneurial enough.”

She continues: “This view ignores the fact that all the revolutionary technologies that make the iPhone so smart were actually funded by government. Not through narrow market-fixing policies, but through mission-oriented policies that catalysed the creation of entirely new technologies and sectors.”

Does it matter?

We are experiencing only the beginnings of the digital industrial revolution. Those that hold power as the new industrial revolution unfolds can drive it and shape it.

Giants like Google and Facebook have enormous influence over the way we are using the internet and mobile technology. As businesses know to their cost, small changes to Google’s search algorithm or Facebook’s newsfeed policy can have a huge impact.

As David Galbraith, partner at venture investment firm Anthemis, told the Guardian, “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.”

Take a look at Google’s reach. Crossing linguistic and cultural barriers, it is the dominant search engine around the world. With nearly 90% of searches in the UK, 93% in Germany and a stunning 96% in India, it is clear that the company is in a powerful position.

Source: Statista

Can it change?

There has been a trend in the past for European start-ups to be bought up by US tech giants soon after reaching ‘unicorn’ status. Perhaps the most famous example is Skype.

The video calling service, founded by Dane Janus Friis and Swede Niklas Zennström in 2003, was sold to eBay for $2.6bn in 2005. This kind of sale seemed to seal US dominance by simply buying out any success Europe did manage.

The temptation to sell has often been put down to the relative lack of venture capital in Europe prepared to back tech entrepreneurs. If start-up entrepreneurs wanted money, they were often forced to look to the States.

In recent years, though, this has started to change with more money flowing into European tech companies than ever before. Figures from Dow Jones VentureSource, an investment database, funding for the continents’ digital sector almost doubled from $4bn a year to $7.7bn between 2010 and 2014.

Mark Tluszcz, chief executive of Mangrove, the Luxembourg-based venture capital firm that was an early investor in Skype, told the FT: “I really believe it’s a matter of time before Europe produces its great tech company… because it’s no longer a matter of capital.”

So, it is possible to find people willing to say that the scales might soon be tipped more in Europe’s favour. But it would be very hard indeed to find anyone willing to predict the end of Silicon Valley’s dominance.

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Author: Keith Breene is a Senior Writer at Formative Content. 

Image: People are silhouetted in front of a bank of QR codes. REUTERS.