When we refer to the technology flywheel, we ‘re talking about the compounding effect entrepreneurial activity has. In other words: success breeds success. This is what we’re seeing happening in Europe. At lightning speed, the bar is being raised for quality of ideas, ambition levels and execution capability.
As we look forward to Europe’s next act, we explore the additional factors which - if we get them right - can ensure Europe unlocks its full potential on the tech stage and beyond. By aligning the entire ecosystem around this shared goal, and recycling talent and capital at scale, we can turn stumbling blocks into the building blocks of the future.
💪Charting progress
When asked what poses the greatest challenge to European tech, the key challenges highlighted by respondents all related to slowing down Europe's ability to reach its full potential. But with the level of ingenuity and grit demonstrated by the talent building European tech, we are confident of making progress against each of them. Let's dive in!
This is no time to get complacent. Two-thirds of businesses told us they would grow much faster if Europe’s market were more harmonized.
Providing better access to funding and talent, redefining software engineering and facilitating instant payments are just a few examples of how Europe could build on its current momentum. As an EU citizen, I feel proud of how far we’ve come already, and know that we will do even better soon.
Startup employment growth is defying the law of large numbers
Startups are a consistent motor for growth, and a driver of innovation and change. Employment in the tech sector is soaring thanks to the vibrancy and strong growth of Europe's startup community. The year-on-year growth of startup employment reached record levels in 2021 to hit 10.9%, accelerating once again even as the absolute numbers get bigger. The tech sector in Europe looks like it's defying the law of large numbers. Employment in the overall economy in Europe also rebounded strongly in 2021, helping to make up for a historic fall in 2020 as a result of the pandemic. The overall two-year change is perhaps easier to understand: While European employment as a whole has grown by 0.4% over the past 24 months, European startup employment has grown by 19.4%, having added around 400,000 new roles over that period. This leads to an interesting question: how can this level of growth be sustained or even further accelerated?
Ambitious individuals are choosing tech
European tech benefits from a deep and experienced talent pool. The growing number of tech hubs distributed across all corners of the region have their own strengths and sets of attributes that make them unique, and knowledge and experience are flowing through an ever better-connected Europe. But talent acquisition continues to be a bottleneck, and lack of diversity risks being compounded over time.
Europe's best and brightest talent are making a bet on tech
Europe's tech talent pool has been transformed over the past two decades, and the current crop is without question the strongest cohort European tech has ever had. Europe's young talent is increasingly making a bet on the tech world. And in return, those same people are being empowered by new tech companies to become leaders early on in their career. In these roles, they are now often being surrounded by experienced founders and leaders, many of whom have worked at other tech companies - some successful, some not - and who actively apply the lessons learned to help set this new generation of talent up for success. The execution capabilities of the talent pool has never been better.
Is tech making a big enough bet on talent?
Europe's tech success stories would not exist were it not for the vision, ambition, and grit of the founders behind these companies. But success is also dependent on the employees that build these companies along the way. The ability to take part in the success of a company through employee stock options is critical to attracting, retaining, incentivising and rewarding talent. It's also a foundational feature of the whole ecosystem, enabling talent recycling and unlocking the capital to pay it forward. On this front, Europe is still lagging behind. By the time they reach Series C stage, European leadership teams own on average less than half the stock options of their counterparts in the US. As the #notoptional campaign led by Index Ventures has argued for years, fixing this must be a top priority for European tech.
During the past 20 months, it’s been inspiring to see young technology companies weather the storm and continue to be exceptional drivers of economic growth and job creation.
To sustain this path of growth, it’s important that the government continue to provide encouraging conditions for high-growth entrepreneurship. First of all, entrepreneurs need favourable, clear regulation. On this front, I am pleased that, at the start of 2021, we passed into law a set of provisions that provide more options for extensive employee ownership in private companies.
Secondly, the government continues to be an important source of funding for startups. In this realm, I am proud of our choice to prepare ourselves to commit €250M of equity financing to Finnish startups in the spring of 2020 on the back of Covid-19 outbreak . Luckily, only part of the capital was needed to support the ecosystem, while the signalling effect to the market was strong. In due course, I hope it will also allow all Finnish taxpayers to reap the benefits of the exceptional potential of young technology companies.
Expanding the total addressable talent market
Tech still has a diversity problem, and it is only going to get worse unless industry leaders – whether on the building or investing side of the table – make a conscious decision to set this as a priority. The numbers speak for themselves. In addition to simply being the right thing to do, fixing this issue represents a huge opportunity to expand the total addressable market for talent and ideas in Europe. It's exactly the type of asymmetric upside opportunity that defines the industry.
European diversity initiatives are growing
There are a number of organisations that are actively working to improve diversity and inclusion in the European tech ecosystem, such as the top 26 organisations and initiatives identified by Sifted. There is also an increasing number of networks that are growing to try to bridge the knowledge gap and unlock access for women, ethnic minorities, and people from other underrepresented groups.
10x10
United Kingdom
23 Code Street
United Kingdom
50inTech
France
Ada's List
United Kingdom
Alma Angels
United Kingdom
Blooming Founders
United Kingdom
Colorintech
United Kingdom
Czechitas
Czech Republic
Female Founders
Austria
Femstreet
Online
Foundervine
United Kingdom
Fundright
The Netherlands
Girls in Tech
Switzerland
Google for Startups
Europe
Inklusiiv
Finland
La French Tech Tremplin
France
One Tech
United Kingdom
Portuguese Women in Tech
Portugal
Rails Girls
Finland
SheTech
Italy
Station F Fighters Program
France
Willa
France
Women in AI
Online
Women in Tech DK
Denmark
YSYS
United Kingdom
#BcnTech4Women
Spain
Paying it forward
Talent recycling enables new companies to learn from others’ experiences and avoid mistakes. But it also has other virtuous implications for the European tech ecosystem. For example, one of the ways in which the tech community "pays it forward" is by setting up tuition-free coding schools across Europe. The curriculums are mostly project-based, with collaborative peer-to-peer learning. Some schools go even further, and partner with the local tech community to provide their students with targeted employment opportunities. Whatever the model, they are helping to transfer knowledge from one generation to the next, and enabling more technically skilled workers to enter the job market. European tech's “pay it forward” mentality is kicking into the next gear.
kood/Jõhvi
set up by founders of Wise and Bolt in Estonia
School 42
set up by Xavier Niel in France
01 Founders
set up by Made.com founder in United Kingdom
Hive
set up by Supercell founders in Finland
Codam
set up by the founder of TomTom in the Netherlands
Building better companies
European Tech has become a breeding ground for companies across all sectors. From eVTOL jets and quantum computing to B2B marketplaces and SaaS, Europe is proving it can do it all. Today's generation of European tech startups are coming out of the blocks faster than ever and scaling at an accelerated pace compared to prior generations. But there are still many structural challenges holding back better business connectivity across Europe, such as the friction associated with talent mobility and the ability to expand quickly across the region.
Are regulatory hurdles slowing down progress?
Founders are still faced with a series of structural impediments when operating in Europe. A key impediment is continued funding limitations, with close to half of founders still finding access to capital a challenge that limits growth prospects. Another key limitation is the continued fragmentation of rules across European Union member states, especially as 50% of founders also mention that expanding into other European markets has gained importance this year.
It is crucial for founders to have a seat at the table when it comes to policy and as new regulations are being discussed. Without founder representation, these changes may have unexpected consequences.
Like everyone, entrepreneurs have faced enormous challenges and barriers as a result of the pandemic. But they've also proven an incredible resilience and even unique growth. Startups are a key engine of economic growth for our region and a key agent of digitalization. They are the innovators in crucial industries such as health, education and cybersecurity. The only way for governments and legislators to support startups is to take the time to understand them and for regulation to keep pace with innovation.
Companies emerge to lower friction for others
A growing list of European tech companies have emerged to address the problems facing startups, scaleups and other companies as they look to scale and expand across Europe. Below is a curated selection of companies representative of this trend. These companies help to reduce complexity for startups and scaleups, as well as consumers - each in their own way. In some cases, these companies have already grown to become large, highly-valued companies, such as Taxfix and Remote, which are now valued at greater than $1B. This is a reminder of the scale of the opportunity to address problems or compliance headaches associated with a complex and fragmented regulatory landscape.
Estonia
Immigration management software designed to help clients relocate their new international employees
Estonia
Intelligent cross-border compliance platform intended to deliver critical services for logistics providers
Germany
Relocation software designed to facilitate global mobility for companies and their international employees
Germany
Online tax assistance platform designed to simplify tax declarations
Germany
Marketplace and platform for patented technologies that connects pioneering research organisations with innovative companies across industries
Remote
Recruiting platform intended to help companies of all sizes to hire top talent from all over the world
Switzerland
Energy software designed to empower energy providers
United Kingdom
A platform intended to connect small businesses and large to tender and contract opportunities from governments
United Kingdom
Online knowledge base technology intended to help businesses to work with government data
United Kingdom
B2B healthcare marketplace designed to transform the healthcare supply chain
United Kingdom
Tax preparation services intended to make tax planning easier and stress-free
Empowering world-class investors to fuel the flywheel
The European tech opportunity is huge, and has the potential to support a substantially larger level of capital investment as it continues its growth trajectory. This represents an opportunity to maximise the value captured by Europe itself, whether in the form of innovation, growth, employment or otherwise.
There is also still a largely untapped opportunity to match the hard-earned experiences, networks and capital of Europe's most successful founders and operators to more recent cohorts of talent. The alumni of more recent European tech success stories, such as Spotify, Pipedrive, Revolut, Wise and others are already actively investing in the next generation in increasingly systematic ways - but the more that others do this, the faster Europe's tech flywheel will spin. This is also an opportunity to catalyse a new generation of investors with more diverse backgrounds to fund more diverse ideas.
Are institutional investors betting on the future?
The share of capital deployed by different LP types into European venture capital and buyout funds varies significantly. The majority of government agency and corporate investor capital commitments are allocated to venture capital, but every other institutional investor type indexes massively towards buyout allocations over venture capital. Pension funds, for example, are allocating 19x more capital to European buyout funds than to venture capital. The weighting towards buyouts is even more extreme for sovereign wealth funds. For every dollar allocation to venture capital by a sovereign wealth fund, $49 is allocated to buyout funds. Are they placing a right-sized, risk-adjusted bet on the future?
European VC is delivering world-class returns
European venture capital is delivering stellar, benchmark-beating returns – and has been doing so consistently over an extended period. The Cambridge Associates index for European VC outperforms the US equivalent across 1, 3, 5, 10, 15 and 20-year horizons. This is the most widely-cited benchmark of venture capital performance globally. In the context of previously discussed institutional investor allocations to European venture capital and buyout funds, it's also noteworthy that European VC has outperformed the European Private Equity index across pooled horizons of one, three, five, ten and 15 years.
Fostering a new generation of investors
As Europe seeks to build a deeper and more diverse investor base, a number of programmes have emerged across Europe. Some seek to open venture capital up to young and diverse talent that has lacked historic access, while others give new generations the tools to start angel investing. These initiatives are leading the way to create more depth and diversity in the investor talent pool.
Future VC
Angel Investing School
Newton Venture Program
Included VC
On Deck
Facilitating liquidity and recycling to supercharge
With over $180B of combined exit value across European tech companies this year, there are clear signs that Europe's leading tech companies are finding paths to liquidity. This benefits European builders and investors, but it is also important for the role it can play to inspire the next generation of entrepreneurs and raise their ambition levels. Celebrating successes and establishing European tech entrepreneurs role models is an important contribution to building the mindset that anything is possible for tomorrow's generation of European entrepreneurs.
European companies still face occasional additional obstacles, for example in how different European countries treat income and stock package taxation compared to the US.
There are also a number of processes that can limit tech talent mobility - e.g. the three month notice period that’s common here, versus the two weeks that’s standard in the US. Of course, social security programs and overall wellbeing are generally better in Europe, so things balance out.
Unlocking Europe's massive upside
We think this chart is a great way to anchor the potential for Europe in the years to come as it focuses its efforts on becoming a deeper and more liquid marketplace for ideas, capital and talent. Focusing solely on global tech public equity value, the region’s technology companies represent just 7% of total global public tech market cap. This is massively underweight compared to Europe's share of global GDP (22%) or its share of total global non-tech market cap across all equities (19%). To punch at its true weight, Europe's share of global tech market cap should be approaching these levels. In other words, its share needs to triple at least.
But do public markets investors get tech in Europe?
Over the years, European exchanges have been losing out to the NASDAQ and the New York Stock Exchange (NYSE). An increasing share of sizeable European tech companies are choosing to list in the US rather than in their home country, which can in turn shift the future centre of gravity as companies sometimes move their headquarters to be closer to their investors in the public capital markets. UiPath is one notable example that serves to highlight this point. In 2021, the combined market cap of the top 5 largest tech IPOs in Europe did not match UiPath's $36B first day market cap after its IPO on the NYSE.
Share of total public $1B+ European tech companies (%) by region of exchange and founding date
- European exchanges
- US exchanges
- Notes
- S&P Capital IQ Platform, as of date 15 November 2021, for illustrative purposes only.
Europe is missing M&A firepower
Europe is also lacking a more active pool of domestic buyers that are prepared to place large ticket bets on European tech companies. It's not that there aren't buyers, but rather that European buyers tend to make much smaller acquisitions. By contrast, US public tech companies are becoming more active than ever in European tech and are leveraging their strong balance sheets to acquire European tech companies at large valuations. The share of M&A deal value involving at least one public US tech company buyer is at 55% – the highest it has been over the past 5 years.
Exits are a feature, not a bug
We analysed the rate of exit following each successive funding round for a standardised cohort of 1,064 companies that raised a qualifying Seed round between 2010 and 2013. We compared the exit likelihood of US and European tech companies, and found a meaningfully large gap from the outset, which grows increasingly larger over time. European tech companies are often thought to be selling too early, but this disproves that assumption. In fact, European tech companies should be exiting at a much faster rate given the benefits that come with recycling.
So let’s end with our predictions for where tech is going in Europe. Whichever way you model it, whether you go highly conservative or not, we’re going to see trillions of dollars of value created by technology over the next decade in Europe. Maybe it’s another three trillion dollars, maybe it’s five trillion dollars, but whichever scenario plays out, the upside is huge.
We struggled to pick one chart or quote to close the report. In the end, we went back to the very first State of European Tech from 2015 and the closing remarks to our original report. It's a quote from Supercell co-founder and CEO, Ilkka Paanenen, who shared his views when we asked him then to look ahead to how European tech might evolve over the coming years. His insights could not have been more prescient and also remind us beautifully of the critical role that role models can play to inspire a new generation of founders and continuously raise the bar on ambition. We can't wait to see what is next for European tech.
Over the next ten years there will be a lot more successful companies out of Europe. And I think that people will have stopped wondering about this rise of European tech, as it has become something of a norm. We won’t have the debates on European versus American technology entrepreneurship, and people will definitely have stopped questioning Europe’s role in global tech. I think people will take it for granted that all technology entrepreneurship is global by nature, including entrepreneurship in Europe.
Extract from the "State of European Tech report 2015"