London Technology Week, which finished yesterday, offered further evidence of the UK’s position as a global leader for innovation and entrepreneurship.
The week of face-to-face events was accompanied by a series of eye-catching investment-related announcements from Google and Amazon, as well as a study which revealed that women are three times more likely to be working in London’s startup community than Silicon Valley.
This is all good news, but we shouldn’t crack open the champagne just yet.
Although London – and indeed Europe – are housing growing numbers of major internet players, other recent data suggests that they are struggling to keep pace with activity on the other side of the Atlantic.
The success story is, therefore, a rather more mixed affair.
One the one hand, there are major success stories to celebrate and a new breed of successful European start-ups to watch. Yet at the same time, there are also structural challenges and strategic lessons which need to be learned if Europe’s start-up space is to unlock its full potential.
It’s some of those lessons and developments that we explore here.
London – Europe’s Tech Giant
First, the good news…
According to Oxford Economics, London’s digital technology sector now employs c.200,000 people, akin to 3.5% of London’s total workforce. Since 2010, the number of digital technology businesses in the UK capital has increased by over 12,000, creating 30,000 new jobs in the process. With 40,000 digital technology businesses now present in the city, the sector is expected to contribute £18bn to London’s economy in 2015.
Alongside this, research published by EY has revealed that over 1,000 foreign direct investment’s (FDI) had been made in London in the past decade. This is considerably more FDIs than rival cities such as Paris (381), Dublin (162) and Madrid (139). In fact, London – with 16.5% of all such investments during this period in Europe – has enjoyed more FDIs in the last 10 years than any single European country has.
Here come the European Unicorns
In the past year, they identified 13 tech companies – with a bias towards internet/software – joined this illustrious billion-dollar club.
Of these so called “unicorns,” 8 were from the UK, 3 were from Germany with France and The Netherlands each home to a further unicorn.
Across the continent, Europe is now home to 40 unicorns; a net rise of +10 on last year. (NB: Three European companies – Monitise, Boohoo.com and eDreams – saw their values drop in the past twelve months below the magic $1 billion+ valuation.)
Of these 40, as well as being home to the most new European-born Unicorns, the UK is the originating country for 17 of them; a long way ahead of other European countries.
Interestingly, it is Sweden – home to just under 10 million people, but major companies like Skype and Spotify – which sits in second place in this table, ahead of their more populous European neighbours like Germany and Russia.
Health warning: US firms and growth still lead the pack
Collectively, these European companies are worth $120 billion, meaning that the average European ‘unicorn’ is valued at $3 billion.
These are big numbers, but they’re dwarfed by the world’s biggest media tech companies.
And although Europe is producing more billion-dollar companies at a faster rate than ever before, the American economy is still growing at a faster pace in this digital arena.
As a result, despite the fact that Europe’s population is more than double that of the USA, GP Bullhound noted that America saw “22 new companies gain a valuation north of $1 billion in the same period.”
Investment is being driven by the mobile internet
There are a myriad of potential reasons for this variance in growth, including cultural differences, scale, as well as potentially lower levels of venture capital investment. But, either way, this difference (13 new European Unicorns vs 22 in the States) gives a quick insight into part of Europe’s start-up challenge.
Fueled by cheap smartphones, expanding global markets, cloud technology and the Internet of Things, last year global investors poured over $32 billion into mobile tech companies; akin to a staggering $300 million per day.
Analysis from the investment bank Digi-Capital, has predicted that the mobile internet will grow over 300% to $700B in 4 years; so it’s no wonder that this is where investors and companies all around the world are placing their bets.
As a result of these levels of investment, Digi-Capital has identified 68 global companies who now enjoy $1 billion + valuations.
Many of these start-ups originate from outside of Europe and the sheer number – and financial value – attributed to this global cohort gives an indication of how competitive this space is. For Europe’s new unicorns, maintaining and growing their market position, will not be easy.
Speed and agility are vital to get to the top
In an earlier analysis of 20 “billion dollar” mobile internet companies, Digi-Capital identified a number of key lessons which European Unicorns need to take on board.
In particular, they found that: “extreme speed [is] key to entering that exclusive club, and agility critical to staying there in a continuously disruptive market.”
“Mobile internet first mover advantage is more extreme than in any other technology market in history,” they wrote, “with a direct relationship between total value created and value created per year.”
“WhatsApp and Snapchat are poster children for this dynamic,” Digi-Capital says, “delivering around $4B value per year to shareholders since their founding.”
For these companies, the speed and scale of their growth is nothing short of staggering.
In contrast, GP Bullhound’s exploration of Europe’s new unicorns identified a much slower growth curve. Their journey is typically much longer, with companies often founded by experienced entrepreneurs in their thirties and taking an average 8+ years to reach a “liquidity event” (sale or IPO).
This may result in a surer-footing, but it also makes it much more difficult to potentially create – and own – a new market.
“Entering the billion dollar club is difficult, but staying there is even harder”
Speed, agility, early market dominance and on-going ruthlessness, appear to be the dominant characteristics of those companies at the top of the start-up pile. And they’re traits you need to retain if you are to survive and flourish.
For established firms, this means on-going “agility and a willingness to eat your own lunch before somebody else does,” Digi-Capital advises, highlighting efforts by major corporates such as Tencent (which owns three of the world’s biggest five social networks: WeChat, QQ and QZone) and Facebook (WhatsApp, Instagram and Oculus Rift), to both grow and consolidate their businesses.
With disruption a cross-cutting theme which transcends sectors and geography, the company observes that: “the pyramid of consolidators is changing constantly, with today’s growth companies becoming tomorrow’s consolidators and some former giants struggling to adapt.”
Whether Europe’s emerging Unicorn’s become absorbed as part of these consolidation efforts, or they will be able to grow – and with it absorb some of their rivals and peers – remains to be seen.
With the only certainty in this space being uncertainty, it’s not surprising that investors are spreading their bets far and wide. Who knows, perhaps one of GP Bullhound’s “Unicorn foals” will break free of the pack and become a true world-beater.
Only time will tell.