European technology: the next global superpower
Europe has the potential to create more value from technology than any other region.
Our tech industry has long been overshadowed by the US and China, with the discourse dominated by speculation about when Europe will ‘catch-up’ with its predecessors. Not only is this unfair given the relative youth of the local ecosystem, but we’re already seeing clear indications that Europe is, in fact, on the cusp of joining the ranks as a global tech superpower.
The headline numbers are well publicised: European tech is a $3 trillion dollar industry with a 27 percent compound annual growth rate (CAGR) since 2015. The region has built over 300 firms valued at over $1 billion, diversified across 29 countries.
But it’s a deeper dive that reveals Europe’s potential. Growth is driven by a blend of innovation, talent, and capital which any ‘superpower’ needs to thrive. We may be in an economic downturn, but copious data proves this underlying strength.
Europe’s early stage pipeline of cutting edge tech is closing in on the US. There is now parity in the number of new start-ups being created each year. Europe captures 30 percent of global early-stage funding (rounds under $5 million) versus 36 percent in the US - a gap that has halved in just five years. And we have stronger momentum, growing at a 24% CAGR in the past 10 years, vs 4% in the US. At this growth rate, in just five years Europe will overtake the US.
Moreover, the conversion of these early opportunities to billion dollar plus firms is equal, with 1.9 percent of seed-funded startups making it to unicorn status in each market.
Europe's leadership in purpose-driven tech, accounting for more than half of early-stage investments into firms addressing the UN's Sustainable Development Goals globally, gives it an edge. We’ve maintained this through the downturn, whereas North America and Asia decreased their investment in the sector sharply.
Talent has historically been a concern. Yet Europe boasts twice the number of software developers as the US and four of the world's top ten technical universities (vs. three in the US), providing a strong foundation for tech leadership. Moreover, 18 percent of the world’s AI research talent is based in Europe - in parallel with the US.
We know that raw talent isn’t enough. Europe now has a deep pool of experienced, multi-cycle leaders that had not previously existed in the region. Skype set the bar in 2005, and with new alumni networks such as BlaBlaCar, Klarna and Adyen we’re seeing a new level of talent emerge. More than 1,400 companies have already been founded by alumni of European unicorns started during the 2010s, 160x the 1990s.
This pipeline is converting to financial returns. European VC has delivered outperformance across two decades against benchmarks for US VC, European buyout and public equities.
With such a strong early stage ecosystem, the question remains as to whether Europe’s future as a tech superpower is now inevitable. We wouldn’t go that far - there’s work to do to improve the scale-up journey.
Innovation needs funding. European dry powder (money raised by venture capital firms to be invested in tech) sits at $44 billion, but this is still a long way behind the US and Asia. We remain dependent on volatile, external sources of capital and the risks of this are now playing out. In 2021, each dollar from European investors was matched by 66 cents from the US, a number which is now down 50%.
Europe is behind on institutional funding from inside Europe.
US tech has attracted huge investment, and these returns are better diversified amongst the general population through local insurers and pension funds. For European citizens, and the overall GDP of each nation, to secure all the benefits available from tech we need local pension funds and life insurance companies to invest for growth. This provides a greater pool of unlisted capital, and more potential to keep local scale-ups in the economy long-term.
The Government has a role. France has shown real leadership with initiatives like Scale Up Europe helping build momentum around the European Tech Champions Initiative, EIF’s €3.75B Fund of Funds, to support European growth technology. This goes some way to help, but we must engage the private sector to succeed long term. Governments can play a huge part in facilitating this, for instance via adjustments to Solvency II, to help EU insurers invest in unlisted equities. Regulatory change of this nature could be a game changer, especially when it comes to maintaining our leadership in purpose-driven, breakthrough technologies which typically have a longer investment horizon.
It’s not just about unlisted funding. 2021 saw an unprecedented wave of European IPOs and listings that stayed in Europe, with Wise, Deliveroo, Truecaller and more. Many of these firms are still thought to trade at a discount to the US. For Europe’s early stage pipeline to stick for the very long-term, Europe must provide an attractive listing environment, alongside deeper, sophisticated and more liquid pools of institutional capital.
European start-ups, and therefore venture capital, are on a trajectory to create more value than any other region within ten years. It’s a claim based on data and first hand experience of the ecosystem since its inception. In the twenty years since Skype was created, the industry has overestimated the short-term potential of the market, and underestimated the long-term. This rhetoric leads the ecosystem to question what Europe hasn’t yet achieved, and in doing so, to fail to see the possibilities.
There’s space for the next global tech superpower to be forward-looking, durable, and purpose-driven. It’s not about following the US’ lead, but instead creating a better technological future, which truly meets the needs of modern society. Europe can, and should be, the superpower to take us there.
This article originally appeared in Le Monde on 14th June, 2023.
