There’s a widely held belief that European entrepreneurs can’t build large, valuable technology companies, and as a result, investment performance in the European venture asset class is poor. As my old statistics professor used to say, “correlation does not imply causation.”
Europe is perfectly capable of building great technology companies. Below is a graphic from a presentation of mine highlighting successful $1B+ companies built in the US, Europe and China. As you can see, the United States and Europe have been effectively on par with each other since the beginning of the decade.
Now some readers may argue that the graphic may contain a bit of data massaging. Betfair is an unrealized return, although there are rumors it plans to float a $2.5B IPO this year. VistaPrint is a US company but it started in Europe while Robert Keane was studying for his MBA at INSEAD and raised its first round of $8 million from Sofinnova, a French venture capital firm.
A more poignant criticism of the chart is that the $1B line is arbitrary. If you were to consider all the exits from $600M+ in Europe, the balance would tip in the US’s favor (DataDomain, Riverbed, etc are just shy of the $1B mark). Europe doesn’t tend to produce as many of the $600-$1B exits that have become the lifeblood of the US venture industry.
It’s still an impressive bit of data. Europe barely registers as a place to build companies to most people in the technology industry, The data shows otherwise.
If that’s the case, why is the overall European venture investment track record so poor? The data suggests that most European venture firms have a tough time beating the S&P 500. If valuable companies can be built in Europe, why do venture firms struggle so much?
This requires a more careful analysis and will be the subject of another blog post. The short answer is that there is a paucity of investors with sufficient operating experience and know-how about how to build valuable companies. Startups need all kinds of help to sacle, at each stage in their history. Unfortunately, the number of investors who can provide this is pretty minimal in Europe. When you look at the European venture scene, you find a lot of former investment bankers and management consultants, and only a handful of individuals who grok technology, can understand go-to-market challenges, have the ability to help build world-class engineering and commercial teams, and have a wide network across the technology landscape. It also doesn’t help that European investors are more risk-averse than their West Coast colleagues, which is a more pronounced phenomenon of the difference between East and West Coast investors. It also doesn’t help that venture investors in Europe capital-starve their investments, with the data showing that European startups get on average about 1/3rd of the capital that US startups are able to raise. And that’s just the investor side of the equation. There’s also the issue of finding the right technical talent, the challenges of growing a company in the wrong milieu, building the right investor syndicate, being plugged into the right networks, having startups that can quickly iterate and change plans, etc…
On a side note.
When I was last in Silicon Valley, a friend of mine who used to run search for Yahoo! challenged me to name the number of $1B+ companies founded (incorporated) after 2000 from Stanford/HBS who is starting up a new company challenged me to name the number of $1B+ companies founded (incorporated) after 2000. A few names came to mind. The obvious being Facebook but also Silver Spring Networks, which I think will get to a $1B+ outcome. He swatted these all down, saying none of them have had realized exits. The only one in the US he said fit the criteria was YouTube. Scary. If that’s the only one, and we’re in 2009, that’s a pretty ringing indictment of the venture industry’s inability to grow large valuable companies this past decade.
Last night, while having dinner with a colleague at ePlanet Ventures, I realized there is at least one more. Baidu was incorporated January 18, 2000, went public August 5, 2005 and is currently worth $12.81B.
Are there any others I’m missing?
