The Wall Street Journal and Dow Jones VentureSource recently started publishing a list of companies that are valued at $1 billion or more by venture-capital firms.
Here it is in graphical format (credit to J.Peng).
The qualification criteria for the club are: privately held companies that have at least VC firm in the capital and have raised money in the last three years. Companies that were majority-controlled by an institutional shareholder or represent secondary deals are excluded.
The data confirms what many members of Europe’s startup ecosystem suspected, yet seeing it in printed form somehow stings more. Of the 59 companies in the BDSC today, a mere 3 hail from Europe. Unsurprisingly, the vast majority are U.S. companies (mostly from California), but China alone boasts almost 3 times as many companies as the whole of Europe.
Why so few European unicorns ?
First, my apologies for employing the insufferably overused term unicorn. I would argue that until we can stop calling them unicorns they will continue to not exist (note: excellent joke I read on Twitter the other day: Q: what is the plural form of the word ‘unicorn’? A: ‘portfolio’).
Anyway, consternation and speculation abound on the reasons for this dearth of billion dollar babies in Europe. Here are my thoughts:
- VC in Europe is still relatively nascent compared to the U.S. (remember the Silicon Valley of innovation and VC started back in the 1950s).
- Europe is not a homogeneous region like the U.S. or China, but rather a diverse collection local countries, each with their own set of macroeconomic issues, regulatory hurdles, or well-intentioned but misled policy (sometimes all of the above!).
- A chronic, across-the-board lack of sufficient late-stage financing sources.
- An inherent cultural tendency toward risk aversion.
- Perhaps as a result of the above two points in particular, a VC practice of deploying smaller investment tickets, which often translates into undercapitalized startups or companies railroaded into profitability over growth earlier in their cycles.
The three European companies that made the list — Powa, Spotify, and Delivery Hero — have several things in common. All have raised raised multiple and increasingly large rounds of funding (3, 7, and 9, respectively), and all raised from historically tier-1 VCs like Accel, Kleiner Perkins, Northzone, and Wellington. All three have ambitions beyond their domestic markets. They also prioritized growth over profitability for far longer than a typical European startup.
As for the future, a variety of forces are at play, yet net-net hopefully give some grounds for cautious optimism that more European companies will enter this club. The new generation of European entrepreneurs demonstrate global ambitions and the innate ability to transcend boundaries. A handful of European VCs are starting to crush the small ticket philosophy — Index Ventures, Northzone, and Accel come to mind — which I submit reflects a greater theme of 99/1 is the new 80/20. Strong regional infrastructure like data pipes and physical rails fosters innovation. Finally, to invoke Jean Paul Getty: a billion dollars ain’t what it used to be. I expect this club will grow in membership.
David Jouarisse wrote:
BLABLACAR (transport/etravel and big data main sectors?) not on the list yet but it should be soon (it would already be in the “billion dollar company club” if it was American!). Neither OZON, the “Russian Amazon” with CEO Maelle Gavet (making profits soon contrary to Jeff Bezos!)… For sure it’s Russia, “only” a 200m people speaking market and not part of “EU” – a 500m people market (vs 300m for North America). Yet 80% of Russian population is located before the Ural, in geographical Europe…
But probably in current times, the Wall Street Journal finds it more relevant to reduce Europe to “EU” and apply media sanction (in Pravda style), Anyways. Similarly, Israel (doubling population in a couple decades, mostly from European origin) listed so many tech companies in the US; they are from that perspective closer to the US market than Europe in the tech world, but not considered in the “EU” list either, even with brains born and grown in Europe… I don’t have in mind a recent billion dollar company from there though; WAZE comes out as the most noticeable recent hit.
VC from an international perspective is an interesting subject dear to me. AKKA Venture’s website is not updated but develops a few ideas about that subject: http://www.akkaventure.com/Our_international_approach/page2 – it is not as bad for Europe as this article from the WSJ puts it if we judge by the large number and great quality of intellectual and entrepreneurial talent that we have in Europe; with several places with greater infrastructures that in Silicon Valley, much lower costs (of living, housing, salaries) and more stability/loyalty of our engineers and developers. As for quality of life, it’s a side topic but Sweden and France don’t rank low 🙂
The main reason why “EU” (Europe without Russia, Israel, and without acquired and listed companies…) has much less billion dollar companies than the US market is because the US have most of the deep-pocket blue chips taking over (in more or less early stages…) European targets and counterparts with active external growth strategies. Google right now sits on a pile of cash of $70b… Recent examples include Swedish MOJANG acquired by MSFT for $2,5b… yet another Swedish billion dollar company (besides SKYPE, MYSQL etc.)… Also quite a few billion dollar companies from Europe got listed and are not in that list; French CRITEO as one of the best recent hits.
Interestingly, the biggest European billion dollar company in that list, SPOTIFY, comes from Sweden, which has a small domestic market (10m people..). Having a thorough knowledge of that Scandinavian market, I can underline the – difference of mindset – from entrepreneurs from those smaller countries; they tend to “think global” quicker than their a lot of their European counterparts (like Israel) with larger domestic markets… They master English better early in their life and that too is a (small but..) factor.
Regarding SPOTIFY a case that I have known well, I can underline that it’s not only about European entrepreneurs’s behaviours but also the investors. As a matter of fact, several European investors found Spotify’s series A’s valuation already way too high back then in spring 2008…. while it was barely 5% of the valuation of the company by the time Keiner came into play a couple years later… We can congratulate Northzone about that matter, who had also given a term sheet to Skype back then but was it a valuation problem?..
The risk aversion is indeed less important with American investment style and entrepreneur’s mindset having less fear for failure (beyond risk) and probably too, more appetite for BIG success (beyond success)… One could see it as more enthusiasm, more (sales and marketing) agressivity and more confidence if not determination, to generate big returns. American VCs make much larger series A in particular while in Europe we make a lot more sporadic “powder financing” that just can’t (despite claims and expectations) give birth to global or at least pan-European (if even national) champions!
American VCs tend to “think bigger” and expect larger exits coming from their home market with so many deep pockets; so they are willing to pay higher valuation at the entrance and shoot bigger tickets upfront. Do not let us forget it’s getting like a club too; like for example, some investors getting indirect rewards when GOOGLE acquired really high price some of their portfolio companies, facilitated by their former investors.
While it was the anniversary date of Kennedy’s death a few days ago, if we go back to the source of the American’s lead in Technology; it came not only from extremely large military investments (similarly in France CEA, THALES, DASSAULT generated strong ecosystems…) but also in particular from the moon program as Steve Jobs recognised himself! A company like Apple would probably have been created only a couple of decades later if this program had not been launched and watching the history of the Valley; MSFT, APPLE… it all started from the moon program. That is the historical perspective.. First French VCs started mostly in the early 80’s after coming back with a lot of enthusiasm and positive energy (isn’t that the greatest strength of the American market?)… from the valley in the late 70s’ ; that little gap in the beginning made a big difference; not sure the acquisition of MSFT by a European company back then (in talks, Hermann Hauser..) would have made a difference…
Link | November 26th, 2014 at 10:08