Europe: a diffuse technological cloud or an operating ecosystem

In the world of European startups, much of the conversation centers around how they can differentiate themselves. One of the recurring questions is: How to build a startup ecosystem? It is an excellent question.

The beginnings of an ecosystem are there, but unlike the US, where there are a handful of major hubs attracting the lion's share of talent and investment, in Europe there is an appetite for experimentation that fails to fully take hold in Europe. a coherent whole and therefore geographical and model references.

Looking at Silicon Valley may be a hackneyed standard, but the San Francisco Bay Area is by far the most mature ecosystem out there. California attracted more than $100 billion of venture capital in 2022. New York is a distant second with around $30 billion, followed by Massachusetts (or more specifically, Boston), with around $20 billion. Europe, by comparison, saw around $100 billion investment in 2022. That sounds like a big number, but when you quickly compare the size of the economy of all of Europe with that of just California:

Currency: Dollars. Europe may be in a state of rapid growth, but the VC asset lags behind. For every person living in Europe, $134 is invested in the local ecosystem. For California, the same number is $2,650.

Office buildings and the internet can be found quickly in most places, so how did a sprawling area around San Francisco turn into a working ecosystem? The story is long, complex, and hard to replicate: Stanford University engineering professor Frederick Terman focused on radio engineering in the 1940s. Fueled by the Cold War and a lot of money from defense, built a department, and taught a group of people who would found the first wave of tech startups in the area.

Stanford created a business park to accompany its research activities and it continued to evolve over time. The region found itself in an upward spiral: More money invested meant more engineering talent flocked to Silicon Valley, which led to more innovation, which led to more tech companies, which in turn meant more money for defense and early private investors looking for opportunities in Silicon Valley. Lockheed opened a plant in Sunnyvale, mainly because that's where it could find engineers. Bill Hewlett and Dave Packard founded HP in 1939, and Shockley Semiconductors was founded in 1956, the same year that its namesake, William Shockley, received the Nobel Prize for co-inventing the transistor. Shockley's early employees left to found AMD and Intel, and from there, the rest is history: Silicon Valley had such a concentration of funds, talent, and technology that it was almost unstoppable.

Fast forward 70 years and Silicon Valley has only continued to grow. For startups, the way this shows up is that many people got very rich from technology and further accelerated the ecosystem by founding new companies. But crucially, they also became angel investors and advisors to others in the ecosystem. And because those acquiring other businesses are also often based in Silicon Valley, integrating technology and people becomes much easier.

So how does this relate to Europe? Well, according to leading European venture capitalists, in a recent report, creandum there are 65 cities that are home to 514 “tech hubs” on the continent. Of course, it's a good thing that the European startup scene is evolving and growing, but even after a couple of decades of trying to make ecosystems thrive, Europe seems to be turning on its head. According to the report, "Europe finally has the pieces in place to challenge the US as the world's leading tech ecosystem." Sounds good, but there is still a lot of work to be done before there is a self-sustaining and fully functional startup ecosystem. The truth is that every place is trying to do it differently. That means there can't be just one strong ecosystem; instead, the result is a handful of promising ecosystems that don't really make it to where it is, say, Silicon Valley.

In the contacts made as a pitch coach with startups, every time I start working with a new one, a key point is to evaluate the size of the ambition: “Sure, it is raising $5 million in this round, but what will happen? with the $30 million that will be raised in the next round?” is a question that often perplexes founders who can't think big enough. That's a real systemic challenge for a highly fragmented ecosystem that seems to have a tendency to take exits too soon, think too small, short, and fail to reap the benefits of the global ecosystem like in Silicon Valley, Boston, and New York. As much as the needle points in the right direction, the simplest truth is that there is no startup ecosystem in Europe that even comes close to the third-tier ecosystems in the United States of the best startup machines on that side of the world. puddle.

This does not apply only to new companies. There are exceptions, of course, but it is worrying how often you find investors, angels, institutions, accelerators and other advisers in Europe who don't seem to fully understand the nature of a VC-backed company. In many conversations, you come across people who are timid in approach and conservative about their ambitions, optimizing for slow, steady, and predictable growth. Sure, you have to survive the current financial slowdown, but settling for a small way out and trying again is detrimental to the entire ecosystem. Without large, robust exits, the VC model doesn't work. Without multi-million dollar results, founders don't build the level of wealth it takes to attract or be a truly effective investor.

Still, there are glimmers of hope. In Creandum's European portfolio, for example, the investor points to 20 unicorns, including Depop, iZettle and Pleo. There is even some indication that the steering wheel is starting to pick up speed. Spotify and Klarna are particularly fertile ground for startups: the two unicorn companies have been the breeding ground for more than 60 startups, founded by alumni of both.

Europe appears to be particularly strong in climate technology, perhaps because the continent takes the climate crisis much more seriously than the US. While companies experienced a crisis of faith quite serious (and reduced funding) over several years, Europe has invested heavily in the climate. The Creandum report suggests that 22% of total European funding is going to climate technology this year, compared to 7% in the US. That's smart: investing to reverse climate change is a predictable win right now . Personally, that gives me other lines of analysis regarding other issues, but in any case, greater investment on this front cannot be a bad thing.

Even so, Europe continues to fight against fragmentation; As much as we are seeing strong startups being built, the potent combination of Brexit, COVID-driven supply chain disruptions, and the Russian invasion of Ukraine, regulation, financial crisis, among other factors, add to instability and uncertainty. to stage. For startups, those uncertainties could be opportunities, but in an underdeveloped startup ecosystem, it could pose more risk than reward.

Creandum's general partner, Staffan Helgesson, said he is "confident that, in the next 20 years, Europe can take the lead in emerging technology sectors, including digital health, climate technology, fintech and AI, which They are critical to our economies and our lives.”

His confidence is debatable or nuanced, but you have to celebrate the competition. It's very easy from an advisory position to be critical, I don't have the answers on how you build a powerful ecosystem, but the number of European startups raising money in the US because VCs in Europe have a different view or the funds to build to the level that makes sense for companies that are on that scale of ambition. If Europe could find a way to create a deeper collaboration and a more cohesive ecosystem to continue to nurture and finance its startups, it would not experience a constant flow of talent and investment to the US.