Modern European Venture Capital is a recent affair. Yet some time ago, Europe stood at the centre of advanced scientific and philosophical thinking in the world.
Some of the most profound thinkers flocked here to share their ideas, many of which must have sounded crazy. Such an assemblage of intellectuals soon resulted in many brilliant scientific discoveries and useful inventions that improved the quality of life, stimulated entrepreneurship, and created a surplus of wealth. Of course, this happened way back in the 15th century, during the period of the Renaissance.
Since then Europe has fallen behind the rest of the technological world and today is playing catchup with Asia and the United States. Yet, recently, there are indications that Europe is on the rebound. In fact, it could be on its way to becoming the most entrepreneurial continent in the world. And just as it had been for the Renaissance, technology innovation is driving Europe’s present emergence. There is, however, a limiting factor. And for Europe to regain its place once again among the world’s elite technology-driven centres of commerce and industry, it must be able to surpass this present constraint.
The Unstoppable Rise of Tech
Despite several market crises that include the Dotcom Crash in the early 200s, the global financial crisis of 2008, and the present worldwide Covid-19 pandemic, the tech sector continues to rise in terms of investments and value.
In the last decade alone, the combined equity value of the tech giants such as Apple, Microsoft, Amazon, Google, and Facebook, along with upsurging Chinese tech powerhouses Alibaba and Tencent grew to close to $10 Trillion.
US startups-turned-tech-giants own the lion’s share of global equity value and account for 10% of the jobs generated.
Consequently, the increase in tech activity and innovation has resulted in a corresponding rise in economic prosperity. In a 2009 study published in the OECD Digital Economy Papers, Taylor Reynolds demonstrated that telecommunication investment positively correlates with economic growth.
You can observe the same trend in other sectors, where technology innovations and organisational evolution have generated more efficient systems and economies of scale.
When the Renaissance blossomed in Europe, the patronage of wealthy families was essential to sustaining intellectual advancement, technological innovation, and entrepreneurship. In exchange, the patrons had the opportunity to flaunt their fortune, power, and status.
In the same way, venture capitalists played an important role in the explosion of innovative tech ventures that ultimately resulted in economic prosperity. The boom required both VCs and entrepreneurs. Without the financing VCs made available, not many tech companies would have been able to sustain themselves through their growing pains.
A Change in Direction for European VC
Europe has never lacked visionaries and entrepreneurs. What Europe lacked up to this point have been the capitalists to help fund tech startups.
There are indications that this could be changing.
10 years ago, Europe barely had any Venture Capital. It did not have the same openness and intrepid outlook as the US one. Tech ventures existed, but the numbers placed Europe as being some 50 years behind America in terms of capital invested, technological innovation and entrepreneurship.
Things began to change in 2005. European VCs began investing in tech startups. From a comparatively modest contribution to the total global VC investment of EUR 27 Billion, Europe’s VC investments have steadily increased. Today the continent contributes about 15% of the total EU 230 Billion VC investments worldwide.
In the last 10 years, Europe has produced more than 200 unicorns: startups that eventually evolved into billion-euro enterprises, and realised 4X or more in returns for their investors.
It is interesting to note that most of these superstar ventures were VC-backed. This demonstrates that, with support from VC funds and their investors, Europe is capable of producing viable businesses. These, in turn, can stimulate industries and buttress the regional economy. In fact, from being 50 years behind the rest of the tech world, Europe is now investing what the US used to only a decade ago. From a 50-year lag to “just” a decade behind.
It is also worth mentioning that European VCs alone raised 38% of worldwide seed-stage capital since 2019.
These developments demonstrate that Europe has the capacity and the resources to fund promising tech startup ventures. The 10-year technology gap separating it from the US and China can be realistically overcome. Europe is in a good position to become the most technopreneurial economy in the world.
A Snowball the Size of Europe
The emergence of tech startups has another positive effect on European business. Inspired by the success of European tech companies such as Spotify and Skype, founders and employees of these firms have spun off and started their own tech ventures or VC funds.
As Yoram Wijngaarde puts it, “Europe is now capable of building, scaling and supporting global tech companies, in a way that it never has” since the Renaissance era.
The Showstopper
Sifted reports that there is a 12% decline in VC investment in 2020 compared to the previous year. The biggest reason, of course, is the global Covid-19 pandemic. Sifted also points out that investment numbers reflect the state of the pandemic. Cities that have been hit hardest by the disease – Madrid and Berlin, for example – have experienced the biggest drops in investments.
The cities that have escaped relatively unscathed by the raging virus, such as Zurich and Helsinki, have seen a sharp rise in the number of investments.
It looks like the onset of the pandemic has curtailed the momentum that Europe’s VCs and startups have been building up over the last 10 years.
Our efforts to catch up with the US and China to take our place as one of the world’s elite tech entrepreneurial region has clearly stalled. One of the main reasons is that the pandemic has given investors “cold feet”, instilling fear at the apparent uncertainty of things right now.
In Danger There is Opportunity
I find quite uncanny that what is happening today somewhat parallels the conditions toward the end of the middle ages. The troubling years that eventually ignited the Renaissance period.
Europe was then recovering from the loss and suffering of the Black Death, the bubonic plague, which killed millions and wrecked its economy. But the same misfortune turned into an unprecedented opportunity, especially for those who were willing to take risks to secure a profitable outcome.
Which brings me to what I want to convey about this whole thing. While the dangers of Covid-19 are real, many of the limitations we perceive are not. Many investors today have locked up their cash for fear that the pandemic will wreck the economy. This reaction is intuitive and understandable. But it is not very sensible.
Warren Buffet once gave this advice to investors. He told them,
“Be fearful when others are greedy, and greedy when others are fearful.”
This is the mindset that investors need to embrace within the context of the European tech startup ecosystem. Why? Because technology is what will allow us to bounce back. It’s through innovation that we Europeans can, once again, regain a leading position in prosperity and business.
It is counter-intuitive. In fact, it may seem insane to traditional, conservative investors.
Reflect on this: Today US startups account for 10% of jobs and the lion’s share of the top global equity value.
A single tech startup creates demand for skilled workers and may potentially create significant value and impact on the economy. And Europe has everything it needs to catch up much sooner than people may expect, especially in sectors like Deep Tech and Fintech.
Courageous action by investors and fund manages in the face of imminent danger is the correct and effective approach that will bring us closer to a modern European renaissance.