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EURO-TECH

The next silicon valley won’t be in the US

Reuters/Fabian Bimmer
Gaze into the Euro-future of the next big tech.
  • Joe Schorge
By Joe Schorge

Managing partner, Isomer Capital

There has never been a better time to invest in European tech.

Not only is the continent challenging US dominance of tech innovation, but the European tech landscape is expanding rapidly beyond the continent’s established hubs.

Top-line analyses of this investment often focus on the three major cities of London, Paris, and Berlin, which together accounted for the majority of venture capital investment across the European continent in 2018.

So why are investors increasingly looking beyond these European powerhouses in their bid to unearth the next $10 billion company?

London, Berlin, and Paris have undoubtedly driven the boom in European technology and are home to many of the tech sector’s biggest names, including companies like TransferWise, Delivery Hero, and Bla Bla Car. London’s 25 $billion companies alone are reportedly worth a cumulative $60 billion.

But despite the advantages that these vast tech ecosystems generate, as analytics firm Dealroom notes, the biggest increases in VC funding in 2018 were in Spain, Italy, Belgium, and Denmark.

Of the five largest European IPOs by exit value in 2018, four came from non-hub cities around the continent. The world-famous Spotify began life as a Stockholm start-up, while Adyen and Avast Software were founded in Amsterdam and Prague, respectively.

Tech success in these non-hub European cities have continued as a trend throughout 2019. Q2 and Q3 saw significant numbers of non-traditional tech-hub locations generating unicorn-level valuations, with $8.7 billion raised in Q3—a 44% increase compared to the same period last year.

While we don’t expect to see London’s top position under threat any time soon, the continent is developing a far more diverse and widespread technology landscape than ever before. And this is ultimately good news for entrepreneurs and investors alike.

Location, location, location

Of the five largest European IPOs in 2018, four came from non-hub cities around the continent.

It’s not just the sheer number of successful businesses originating from smaller European tech hubs that’s increasing. Common regulation, business-friendly governance, and ease of travel means that it’s much more viable for small businesses, from anywhere in Europe, to establish offices in larger cities as well. This allows any business, whether founded in Berlin, Barcelona, or Bratislava, to gain access to vast talent pools and established customer bases. The number of genuinely world-leading companies that are being founded in cities like Stockholm, Madrid, and Amsterdam means that for investors looking for 10x or even 100x returns, looking beyond the traditional hubs is now a must.

These figures support the ever-increasing likelihood that Europe’s next $10 billion tech company will be founded outside of the big three hubs. With the borderless nature of the European Union, Europe’s tech talent is able to move wherever the innovation is, largely unconstrained by national borders.

With Europe home to at least 30 different hubs it promises 50,000 or more professional developers—more developers in total than employed in the US.

Along with this large pool of talent available to start-ups, we have increasingly entrepreneur-friendly regulation being implemented across Europe.

This proliferation of the European technology ecosystem also creates a plethora of funding opportunities across seed to late stages, with more than 700 start-up accelerators listed across the continent. offering seed funding alongside mentoring and support programs, which encourages and nurtures innovation from an early stage.  

It’s a European VC’s world

As this ecosystem matures and the number of larger companies increases, the opportunities for experienced VCs are also booming. A number of the top European VCs have now lived through multiple economic cycles, which has helped them garner the expertise and experience to be able to spot the high-potential businesses early on and help build them into world-beaters.

This means that fewer European tech startups are having to turn to the US for capital and more European investors are gaining access to this phenomenally high-growth industry.

Technological difficulties

The diversity of the booming European technology sector and its investment opportunities also presents major investor challenges, of course. Because the next multi-billion-dollar company could be founded anywhere in Europe, for instance, covering and accessing all corners of this market is becoming more and more difficult.

With more successful European technology companies being created in smaller and non-traditional markets, investors must first be able to identify and reach these companies if they want to take advantage of the best opportunities.

Many businesses in smaller markets are backed early in their life by local and/or specialized VCs that provide expert support along with capital to help companies grow. For institutional investors without the vast networks required to reach every part of the European technology ecosystem, finding and investing in these specialized VCs is the key they need to be able to unlock the sector’s vast potential.

But if one thing is clear, it’s that getting exposure to a wider pool of European tech startups is critical for savvy institutional investors, both in terms of the depth of opportunities in cities like London and Berlin, but also—and especially—in newer, lower profile places.

In the drive to increase the odds of achieving mammoth returns, it’s important to widen your investment horizons to include Europe in its entirety.

As the market expands, locating the experts for each pocket of innovation becomes both the challenge for institutional investors and the best way to achieve the returns that are propelling Europe to the top of the technology food chain.

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