Why Asian startups should prioritize Europe

November 17, 2014

In my travels for work I’ve had the honor to meet hundreds of inspiring entrepreneurs from all over the world.

Setting aside China, and in a gross over-simplification, domestic markets in East Asia could be characterized as either i) mature or ii) emerging (Japan, South Korea, Singapore, Taiwan, in the former; the rest of Southeast Asia in the latter). For the mature economies, the domestic markets may be large and lucrative, though not necessarily large enough. Many ambitious Japanese and Korean tech firms for example are smartly setting their sights on international expansion. Southeast Asia seems to be a favored region for many, and I understand this if the objective is a land grab of a rapidly emerging user base.

Those startups targeting developed markets, however, seem to focus on the two largest economies in the world: China or, even more predominantly, the U.S. Although it is ironic for me to say this as a Silicon Valley native in origin, I believe that many Asian startups should consider prioritizing Europe over the U.S. and China in their global expansion plans.

The glamour of Silicon Valley

I understand why growing tech firms favor the U.S. Historically, the epicenter of tech entrepreneurship and its corresponding financing sources is Silicon Valley. History witnessed a virtuous cycle of creating, enterprising, destroying, and rebuilding there, so even today Silicon Valley symbolizes the entrepreneurial dream. Films like The Social Network perpetuate the glamour. (For a brief recap of how the Valley of Hearts Delight became today’s Silicon Valley, see my three-part series here).

Startups launching in Silicon Valley — or increasingly, other pockets of entrepreneurship, like NYC, L.A., Austin, Boston, Chicago, Seattle — benefit from a vast pool of talented workers in a domestic market that is both huge and sufficiently homogeneous that enables massive scale without even worrying about the localization for other countries.

So although the U.S. market is undoubtedly ‘large enough”, the aforementioned fortuitous conditions have also fostered a tech ecosystem that is a red ocean. Tech firms vying for traction usually must raise tens if not hundreds of millions of dollars to elevate themselves above the noise level. Talented developers gravitate to tech hubs yet also demand substantial remuneration and retention packages or else they jump ship in a red ocean full of competitors and substitutes. It seems that to be taken seriously these days in Silicon Valley one almost has to enter the “billion dollar valuation club.”

Europe: undervalued and underestimated

Europe, on the other hand, represents a compelling market which still remains somewhat undervalued, at least for the moment. Collectively, Europe is the largest developed market in the world. Of course, unlike the U.S., Europe is not homogeneous, but rather a collection of nations, each with its own unique governance and culture. So penetrating Europe in any real depth requires an understanding of each country, or at least the major ones, which is the primary reason that U.S. tech giants tend to look toward India or China before Europe.

Yet for many sectors in which Japanese startups lead, I submit that Europe is more attractive than the U.S., India, or China. After Japan and South Korea, Europe boasts the best wireless network infrastructure in the world. Mobile penetration in Europe is the highest on the planet.

EU member states comprise a developed market of consumers and businesses with substantial proportions of disposable income and capital expenditure. In mobile revenue potential, European consumers demonstrate some of the highest levels of monetization in the world, often higher than American consumers and trailing only Japan and South Korea.

The explanation for this is manifold. For one thing, Europeans spend more time in public transport than Americans (who commute in cars). This excess time in trains, metros, and buses day in and day out adds up to a lot of spare time to engage with a mobile device. The vast majority of EU mobile subscribers have unlimited data plans, and pay less for them than Americans, thanks to a fiercely competitive telecoms market (EU operators are consistently struggling for this reason). Data connectivity is fairly ubiquitous now too.

Europeans embrace freemium (and stickers!)

The freemium model has a long history in Europe. Public healthcare is nearly universal, while for a fee consumers can purchase supplemental private coverage. Same goes for education and unemployment insurance. So a free-to-play mobile game with in-app purchases is not unnatural for a European consumer.

Culturally, Europeans tend to be more open-minded to embracing foreign innovations than Americans. I know certain readers will bristle at this statement, but it’s not a moral judgment I’m making, rather an observation of historical context. European countries individually are too small and too close together to allow for isolationism. The grand project of the European Union solidified the free flow of people with ideas across the borders. The U.S., in contrast, with its creativity of Silicon Valley and sheer scale of domestic market could afford a mindset of only looking inward for a while. Not to say it had a monopoly on innovation, but there was certainly enough to go around.

There are of course certain segments of new technology products for which the enormous U.S. market makes it worth the daunting scale of investment required. For other segments, however, targeting Europe first is a no-brainer. Stickers (stamps) is one. Even mobile gaming, to cite a second example, is probably another. I believe that firms like GungHo and Gumi are demonstrating extraordinary vision with their substantial investments in Europe.

A word of warning: Europe has its share of challenges. Its heterogeneity of markets and web of regulations are not negligible. However, for its educated and talented pool of workers, its vast middle class with spending power and sophisticated consumption habits, its stable business frameworks, and its still-as-yet reasonable value for money, Europe’s advantages outweigh those drawbacks.

Combined, the mature economies of Asia along with Europe represent the largest component of the developed Rest-of-World market outside the U.S. and China. As more emerging geographies join this community, the Rest-of-World will represent the most important economy in the world. Expect more on this theme…

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posted in technology, venture capital by mark bivens

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