Europe, the place “not” to be?
2011 has been a year of incredible, unpredictable and often dramatic events, including revolutions, natural catastrophes and economic crises. The Eurozone crisis is one of the major crisis that has hit the Western world for decades, and suddenly our world is very bleak, headlines are dramatic and everyone wonders how we will get out of this mess. The increasing contrast between the health and dynamism of the so-called emerging markets and the challenges and deep crises of the older Western economies, is stark.
Hey, I can see growth everywhere!
In such an environment, the Technology sector seems to follow a very different path. Putting the bleak macro data to one side, we have looked at the revenues of the European technology portfolio companies in our latest fund. So what can we see there? Growth! Growth everywhere to be precise. In bad times and in good times, we can find technology-driven companies who can continue to grow, for a good part disconnected from the local GDP data.
The sample includes the following companies: Dailymotion, Farfetch, Fizzback Foundry, OpenCloud, Qype, Ubiquisys, WorldStores, Zong (all European companies in Advent Venture Partners’ latest Tech fund, we removed the scale for confidentiality reasons):
Those companies are all very different and are exposed to very different sectors, including SaaS, mobile, online advertising or ecommerce, some selling to enterprises, others to consumers, some focused on a single country, others selling globally. But they all rely on technology, innovation and entrepreneurship as key levers to build their business. On average the companies were forecasting to grow revenue by 101% in 2011 vs. 2010. But we are not on our own here! Looking around, many companies in our eco-system, big and small, see growth everywhere too. So why is that?
In a public debt crisis, Europe remains a huge market with great business opportunities.
First of all let’s not forget that so far this crisis is very much a public debt crisis rather than a private sector crisis. Although the moods are similarly negative, the situation is very different from 2008, it’s now about public debt, not consumers or businesses failure.
A US entrepreneur told me recently: “Well it looks pretty nasty over there, so not sure we should be investing in Europe right now”. From a distance this seems to make sense but I argued the contrary: “be contrarian and expand in Europe, at a time when fewer people will do it, especially if you are confident to have a differentiated product with strong potential demand”. We have seen this with one of our US investments, a company called Vitrue offering a SaaS platform to help brands manage their presence on social networks. We could see the demand from European brands and partnered with the company to help them enter Europe. Since then Europe is a growing region for Vitrue and we are hiring many people across Europe to meet the demand.
With a GDP of over €12,200 trillion in 2010, the economy of the European Union is still the largest economy in the world according to the IMF. This is a huge market that is technology savvy, increasingly connected (mobile and broadband) and educated. As such Europe is a huge platform to build and grow businesses.
With strong secular trends, the fundamentals in Tech are excellent, as evidenced by new wave of successful entrepreneurial businesses
We live in ages when technology has never had such a profound and fast impact on our lives, both personally and professionally. Fundamental technology shifts are reshaping the whole tech environment and “Mobile”, “Cloud” and “Social” are three new platforms emerging on which entrepreneurs can build businesses faster than ever, more capital efficiently than ever. This is a global phenomenon and Europe is undoubtedly impacted. This means that there will be losers, those who cannot adapt fast enough, Nokia is probably the most visible example in Europe. But new entrepreneurial businesses are emerging in big categories across Europe, creating companies with global leadership potential, like Spotify and SoundCloud in music, farfetch.com and Klarna in eCommerce, Voyages-Privés and Bookings.com in travel, Rovio and BigPoint in gaming, Criteo in online advertising, etc.. Europe’s strength is not just about lifestyle and luxury (with super stars such as LVMH or BMW) it is also about innovation, technology and entrepreneurship.
The way forward
Let’s not write off Europe! We have many reasons to be optimistic, as we have a huge market, a lot of talent, plus a renewed sense of energy and ambition within the entrepreneurship community. 2011 saw many transactions with US companies acquiring strategic assets in Europe, often for their technical talent and global customer base. Take Zong, originally from Switzerland, and a leader in mobile payments acquired by eBay/Paypal last year for $240m. The company managed to leverage its mobile know-how built in Europe and applied it very successfully to become a global leader in this field. Sadly strategic moves by the largest European TMT companies are still rare (Orange’s acquisition of Dailymotion in France being a notable exception in 2011) but we are creating fast a new generation of companies able to become large, global leaders in their field. This also translates into very good returns for venture capital and growth equity investors in Europe, taking Advent Venture Partners as an illustration (4 exits for 6x returns on average in 2011).
At a time when Europe is facing so many challenges we ought to focus on supporting education, innovation and entrepreneurship, these are essential areas of investment for Europe to get back to growth. It will take time and a key short-term challenge in Europe remains access to capital, as debt to smaller companies is vanishing and equity pools remain sparse, compared to US and Asian Tech markets. Going forward, Europeans need to promote entrepreneurs as role models, this is something that Americans do so well. These are the people we, and the whole of the technology investor community, work with every day, and guess what, we see growth everywhere!