Where have all the start-ups gone?

The take-away

  • From 2012 to 2016, almost half of Europe’s start-ups were bought by American companies.
  • Europe needs to back young entrepreneurs, be less risk averse and shed its hostility to rapidly earned wealth.

Europe’s politicians have been so focused on Brexit and the migration crisis that most will have failed to notice an upcoming and perhaps even more damaging hit to the EU’s economic prowess: the ongoing loss of technological know-how and intellectual property to the United States.

It’s a threat that has crept up quietly, under the radar. But there is no doubting that when a European technology start-up is put on the block there is a strong chance it will be acquired by an American company. Silicon Valley’s finest – Google, Microsoft and Facebook – are leading the pack in buying up Europe’s innovators.

How this may change, if at all, under the nascent Trump administration is anybody’s guess. But for the moment the numbers speak for themselves. In an analysis of tech acquisitions in 2014, market researcher Tech.eu found that 122 (or almost 37%) of the 332 European companies sold that year were snapped up by US-based firms. The next largest acquirers were Germany (40 firms), the UK (33) and France (30).

Over the years, though, the US tech haul in Europe has been even higher. In a detailed analysis of acquisitions from 2012 to 2016, the European Commission-backed Startup Europe Partnership, which connects innovators with major European corporations in a bid to improve the prospects for nascent tech firms, found that an incredible 44% of European start-ups were bought by American interests.

Does it matter in a globalised world? Well, yes – because whole new areas of emerging technology are at risk of being plucked out of Europe and developed under US control instead. To get a grip on just what it all means, and the high cost to Europe’s intellectual capital, you need only glance at the attrition this ongoing US shopping spree has had on one promising area of endeavour: artificial intelligence, a field currently led outside the US by the UK and Israel. From mid-2015 to early 2016, at least five super-innovative British AI start-ups were snapped up by US firms:

  • DeepMind, the deep neural networking pioneer – whose technology famously beat the world Go champion – was acquired by Google for almost $500 million;
  • Swiftkey, a maker of predictive, swipe-based touchscreen keyboards, went to Microsoft for $250 million;
  • Magic Pony Technology, which develops computer vision and image clean-up algorithms, was sold to Twitter for $150 million;
  • PredictionIO, which has engineered an open-source machine learning platform, was bought by cloud computing platform Salesforce for an undisclosed sum;
  • VocalIQ, maker of a high-fidelity speech recognition AI, was purchased by Apple for more than $50 million.

Multiply this AI activity across all technological domains and the know-how losses could be profound. Across Europe, just five American firms – Amazon, Apple, Alphabet (Google), Microsoft and Facebook – accounted for the acquisitions of no fewer than 52 firms between 2011 and 2016.

Other major league American buys included Microsoft snapping up Skype for $8.5 billion in 2011. Skype for Business is now an essential component of Microsoft’s teleconferencing and HoloLens products. Knocking that deal well into touch, however, was US-based mobile phone chip maker Qualcomm’s $47 billion acquisition of NXP Semiconductors of Eindhoven in October 2016. A maker of automotive and secure payment card microchips, NXP was a European corporate champion, having previously been the semiconductor division of Philips.

It is not a situation that Europe can allow to continue unabated. After all, observers ask, what is the point of EU universities teaching and developing engineering talent and generating valuable patents only to have the revenues, profits and jobs that stem from such EU-nurtured technology benefitting American interests?

On the plus side, some bright minds of Europe’s top technology-creating universities are addressing the issue by putting forward new ideas, including ambitious tax plans and changes to the patent system. But it will take much more than a few incentives to create a European Google, Facebook or Amazon. What’s needed, say many experts, is a change of culture and attitudes. Not only venture capitalists but major institutions like the European Investment Bank and the European Commission should confidently back youthful entrepreneurs, be far less risk averse and shed their hostility to rapidly earned wealth.

“What Europe needs are more fertile conditions for tech-driven entrepreneurship which will not only help to keep European inventions in European hands, but also attract more non-European entrepreneurs”, says Georges Romme, chair of entrepreneurship and innovation at the Technical University of Eindhoven (TU/e).

At the Technical University of Munich, Ann-Kristin Achleitner, a professor specialising in entrepreneurial finance and technology transfer, agrees that addressing the loss of European start-ups to the US is crucial. “These trade sales to the United States are too common”, she warns. “We have quite a lot backed up in the technology pipeline and we clearly need to better leverage the transfer of that technology to create start-ups that stay in Europe. If you move ownership of companies abroad, you also move control of jobs.”

No profitability without a huge market

So, what can be done? Just what is the attraction of the US? It will help to go back to basics. Starting a business is all about hard work: entrepreneurs have to dream big, define their unique selling point, ram it home, revise that idea multiple times in the face of user feedback (known as “iterating” in start-up jargon), obtain initial seed funding and then get the firm off the ground.

It’s when a company begins to succeed that predators begin circling. This is when the start-up needs further investment, and possibly a complete buyout, so that it can hire more people and scale up into a bigger company (simply known as “scaling”). And it is worth remembering that the point of running a company is not to grab headlines in Wired or Handelsblatt with your cool gadgets but, ultimately, to make money.

“The ideal long-term metric is profitability”, says Rashid Mansoor, a London based tech entrepreneur. “Becoming profitable requires scale in a large market, and frankly the US is a single huge market, while the EU is much more fragmented.”

As there are many more mature tech companies in the US, with deeper pockets and a greater appetite for technology, it follows that there will be a higher probability that a start-up is bought by a US-based giant. And that is particularly the case when there are major synergies between the buyer’s tech and the target’s – as with Google’s extensive AI research and that of DeepMind.

Unfortunately, America’s success at buying EU start-ups seems to breed still more success. “Since there have been fewer large exits in the EU, the ecosystem is less wellgeared for large exits or acquisitions”, Mansoor explains. “Successful EU companies are more likely to be bought out all the sooner by US-based giants.” This in turn means that the likelihood of a giant – like Google, Microsoft or Apple – emerging in Europe is diminished.

The EU’s Startup Europe Partnership acknowledges that “continental Europe currently does not create new growth businesses as well as other parts of the world, Silicon Valley in particular”. And it is also attempting to plug start-ups into Europe’s major corporations – heavyweight industrial firms like Unilever, Telefonica, and Orange – in a bid to try to keep innovators thinking European when they seek investors.

But there is another level to all this, and it goes to the heart of the difference between America’s “go-for-it” approach and Europe’s staider view. The fact is, say some commentators, the European establishment has a deep-seated attitude problem when it comes to accepting the leaps of faith necessary for deep innovation to flourish.

Searching for European hots pots

Other cultural factors are at play, too, says Dominique Foray, an expert in the economics of innovation at École Polytechnique Fédérale de Lausanne. “There’s a paternalistic management culture that emphasizes control over local empowerment and delegation and that is incompatible with fast growth firms”, he says. On top of that, a fear of the stigma of failure and a general lack of recognition of entrepreneurs leaves Europe behind in the hard-nosed business stakes. “There are many obstacles to emerging firms in Europe and this generates an incentive to move and find a better location.”

That said, attitude is beginning to improve as innovation hubs take off. “Some of these obstacles are slowly being removed thanks to the development of rich and powerful start-up ecosystems”, says Foray. He has a point: Berlin, for instance, has become a major tech hub. TechCrunch, a venture capital tracking site, says one start-up was being founded there every 20 minutes last summer, after the UK’s Brexit vote.

Like Foray, TU/e’s Romme sees innovation hubs as crucial and wants to see many more of them, perhaps in towns and cities laid waste by the departure of legacy industries. “I’m talking about places that can model themselves after rustbelt cities, such as Akron and Detroit, that are now leading hotspots for tech-driven entrepreneurship. These regions are much more important for the current US economy than Silicon Valley”, Romme says.

“There are a few European hotspots, such as Dresden, Berlin and Eindhoven, but Europe needs many more. The EU therefore needs to grow the number of smart locations if it wants to keep the best entrepreneurs in Europe.”

Scandinavian countries like Sweden or Denmark could lead the way with early encouragement of entrepreneurial culture. “Schools, including primary schools, and universities have put innovation and entrepreneurship on their curricula”, says Søren Salomo, professor of Management Engineering at the Technical University of Denmark. “For example, computer games simulating start-up challenges have been introduced to new students. This action alone can’t explain increased start-up intentions, but together with other measures these countries have achieved sufficient critical mass to establish a sound environment nurturing more start-ups.” The results are encouraging: Sweden has the second highest number of unicorns in Europe, while the World Bank has listed Denmark amongst the best countries for entrepreneurs.

Mansoor, the London entrepreneur, has experience raising investment for start-ups at multiple stages: he founded AdBrain, which uses agile software to track e-commerce customers’ buying preferences across their devices, and he is now CEO of Hadean, which has written impressive software that cuts the time of writing computer algorithms by months – and the costs by millions of dollars. He has just closed a round of financing for Hadean in which he successfully sought European investors with “risk appetites similar to Silicon Valley investors”. He wanted them to be in it for the long term. “This is generally an atypical approach for EU investors who favour lower risk and shorter-term exits”, Mansoor says. However, for his next round of financing he will be approaching US investors as well.

Perhaps Mansoor has hit on the right answer: using a mix of European and US investors with the right attitudes to long-termism and risk. At the same time, TUM’s Achleitner says Germany’s large corporations are tuning in to the innovation that can be brought in by acquiring a start-up. “Germany is changing. Big companies like Siemens and Bosch and others are looking much more at companies they can buy. They play a key role in the ecosystem and are very important candidates as buyers of innovative start-ups.”

Whatever the ultimate answer, doing nothing to improve Europe’s lot is not an option. As James Wise, a partner with Balderton Capital, a London technology venture fund, says: “Unless we look to protect and nurture our technology companies in the same way we would do our energy or defence companies, we run the risk of losing a huge source of economic growth.”