The EU Blames Unfair Competition, Obama Blames Parochialism But Is the Real Reason for Europe's Tech Malaise Lack of Funding?

Didn't some European author write something about it being the best of times and the worst of times? He was probably pre-IPO and maybe even in beta, but whatever: we feel his pain.

Commercial relations between The Continent and The New World have been a bit testy of late. The Europeans seem to think the US is bent on global domination, while the Americans appear to believe this is just so much sour grapes from a bunch of losers with unscalable concepts.

The real truth, as the following article explains, may be a lot simpler: American entrepreneurs have access to far more venture funding than do their cousins across the pond - like five times as much - and the result is predictable: the people with the capital can do more with greater impact in a shorter period of time. In text books, that's called a competitive advantage.

The strange thing is that the European larder is hardly empty. In fact, available venture capital for European firms has never been greater. It's just nowhere near as much as that accessible to American startups. And this despite a notoriously conservative contemporary US investment culture.

There are logical reasons for this based on historical norms and experience. And despite the funding gap, Europe has produced numerous exemplary tech ideas, companies - and a tidal wave of individuals who have decided to seek their fortune elsewhere, not the least being in companies like Apple and Google. But if the trend is going to change, more funds are going to have to be made more available. JL

Mark Scott reports in the New York Times:

European companies have been receiving more venture capital than ever before. European start-ups raised about $7.6 billion last year, a 41 percent leap over 2013.But that was only about one-fifth the amount raised by American technology companies.

When Arnaud Bertrand helped found HouseTrip, a vacation rental website, in 2009, his goal was to build a rival in Europe to Airbnb, which was then a year-old start-up.

From offices in central London — equipped with game tables and colorful photos of European cities — HouseTrip quickly raised almost $60 million from private investors, expanded to more than 30 countries and hired over 100 people, from London to Lisbon. The aim was to connect travelers with people looking to rent out their homes.

“The focus from Day 1 has been Europe,” said Mr. Bertrand, 30.

But over the last six years, HouseTrip has found itself in an increasing struggle to compete with Airbnb, which has become the global leader in short-term rentals. And like many other European start-ups trying to compete against bigger American rivals with international ambitions, HouseTrip is having to adapt its business model. It is now trying to mine smaller markets, rather than compete head-on.

There might be any number of explanations for Airbnb’s rapid ascent — management prowess, savvy marketing or a better stable of available properties. But there has been one clear, made-in-the U.S.A. advantage: funding, and lots of it.

 

Funding Gap

Venture capital funding in Europe was up sharply last year, but the amount raised was far less than the level in the United States.

VENTURE FUNDING FOR START-UPS

$40

billion

$37.9

United States

30

20

Europe

10

$7.6

0

’08

’10

’12

’14

Note: Includes start-ups in business and finance, consumer services and information technology.

Source: Dow Jones VentureSource

Airbnb, based in San Francisco, had early and ample access to venture capitalists in nearby Silicon Valley, including Sequoia Capital. Jeff Bezos, the billionaire founder of Amazon, also bought in. So far, Airbnb has raised almost $800 million in funding, giving the company a valuation of about $13 billion.

It is that kind of money that enables American start-ups to almost immediately pursue global ambitions, taking on and often besting European and other international competitors.

Another San Francisco native, the ride-booking company Uber, has raised nearly $5 billion, much of it from American wealth funds. The money has given six-year-old Uber a valuation of $41.2 billion and helped propel it to global prominence, though not without controversy.

At the same time, Snapchat, a mobile photo-messaging service founded by students at Stanford University (in the heart of Silicon Valley), has raised roughly $650 million in private funding, enabling it to expand rapidly in Europe, Asia and beyond.

“There’s a much better awareness by U.S. start-ups about the importance of global expansion,” said Eileen Burbidge, a partner at the London-based venture firm Passion Capital, who previously worked at Yahoo and Skype.

As the United States economy improves, the funding gap with Europe — struggling to avoid recession — has only grown. No wonder many European tech entrepreneurs are now trying to adapt — by giving their start-ups a more local focus or trying to carve out a market niche.

HouseTrip, for instance, has pulled back from many of its European markets to focus primarily on France and Britain, which represented the bulk of bookings. It has also targeted families who are looking for vacation rentals of a week or longer, forgoing the larger short-term rental market where Airbnb dominates.

And recognizing that HouseTrip needed a change at the top, Mr. Bertrand stepped down as chief executive last year. He remains a major shareholder and has taken the title of president. But he handed the reins to George Hadjigeorgiou, the start-up’s former chief operating officer, who had previously worked at Yahoo.

“It’s early in the game, and we had to focus,” Mr. Hadjigeorgiou said. “Airbnb is educating people about our market. We still can be successful by focusing on family vacations.”

Other European start-ups also have changed their strategies in response to American rivals.

Hailo, a British ride-booking service similar to Uber, based on a smartphone app, recently abandoned its United States ambitions and is trying to protect its strength in places like London, where the app has established itself with the city’s taxi drivers. Hailo, which has raised roughly $100 million since it was founded in 2010, including money from the billionaire British entrepreneur Richard Branson, also targeted Asian cities like Singapore and Osaka, Japan, where Uber has yet to cement its dominance.

As Hailo’s financing indicates, European start-ups are not necessarily impoverished. And some, like Spotify, the music streaming service, and Mojang, the Swedish company behind the Minecraft game that was recently acquired by Microsoft for $2.5 billion, have become global champions in their own right.

In fact, whether in the converted warehouses of East London, the bohemian lofts of Berlin, or the Ikea-furnished offices of downtown Stockholm, European companies have been receiving more venture capital than ever before. European start-ups raised about $7.6 billion last year, a 41 percent leap over 2013, according to the data provider Dow Jones VentureSource.

But that was only about one-fifth the amount raised by American technology companies, which secured a combined $37.9 billion in 2014, up more than 30 percent from the previous year.

And this year is off to such a roaring start for American tech financing that some experts are warning of a potential bubble. In January, Uber announced that it had raised yet another round, receiving $1.6 billion from clients of Goldman Sachs’s private wealth unit.

“The world has changed beyond compare when someone like Uber can raise a couple of billion dollars almost overnight,” said Sonali De Rycker, a London-based partner at the venture firm Accel Partners. “Competition has never been so fierce.”

To some extent, European entrepreneurs have brought the American onslaught upon themselves. United States entrepreneurs once saw international expansion as secondary to domestic growth. But the rise of copycat companies around the world has spurred the Americans to spend internationally before local rivals can become entrenched.

“If you’ve got a business that works, you have to go global as quickly as possible,” said Ben Holmes, a partner at Index Ventures, which has supported the Dropbox, the file-sharing service now valued at about $10 billion and based in San Francisco.

But for Florian Meissner, a German entrepreneur, trying to duplicate the offering of a big American rival was never the idea. EyeEm, a Berlin-based mobile photo app that he helped found, works similarly to Instagram, but is aimed at a narrower audience.

As Mr. Meissner sees it, Instagram, which was acquired by Facebook for $1 billion in 2012, is a service people use to upload photos from their children’s birthday parties. EyeEm, which started in 2011, has tailored its app for serious photographers, who want to share professional-quality photos on their smartphones.

The opportunity is certainly smaller. EyeEm says its user numbers are only about one-twentieth the size of Instagram’s 300 million global users. But by focusing on a niche, Mr. Meissner says the German start-up has built a loyal following among photo-savvy users and avoided becoming a mere Instagram copycat.

EyeEm’s high-quality images also led to a deal with Getty Images last year in which people’s smartphone photos were included in the company’s collection of stock images. EyeEm, which now employs a total of 55 people — divided between Berlin and San Francisco — takes a percentage of the royalty paid for each image used.

“We would never have tried to build something similar to Instagram,” said Mr. Meissner, adding that most European start-ups will find it hard to compete directly with better-financed American rivals. “If you are running a taxi app in Austria, I would just stop,” he said. “Uber is coming after you.”