If one takes a look at the Forbes Global 2000, a list of the largest public companies in the world ranked by various factors such as sales, profits and market capitalization, one sees many well-known names in the technology industry: Apple, Microsoft and Google, as well as Asian tech giants such as Sony and Tencent. Two continents here are represented: North America and Asia, which begs the question—where are the European tech companies? The “hottest” European technology company is Spotify, which made its initial public offering on the New York Stock Exchange in April of this year and is now worth 26.29 billion US dollars, with a ranking of 1644 on the Forbes Global 500. The actual largest European tech company, however, is the German enterprise software company SAP, with a ranking of 181 on the Forbes Global 2000.
The key question, therefore, is why European companies are underrepresented in the tech industry, especially compared to how European companies fare in general. Out of the top twenty-five firms in the Global 5000, five are registered in Europe. This has not always been the case: there have historically been European tech giants, Most notable is the Finnish company Nokia, who was the largest maker of cell phones from 1998 to 2012. How can it be, then, that no European company since has replicated this success?
Venture capital in Europe
The first area in which Europe lags behind other regions such as the US and Asia is in the realm of venture capital. To be clear, there are localities in Europe where there are burgeoning startup ecosystems. London, for example, is home to many successful financial technology firms, such as the app-based Monzo bank, or the foreign exchange service TransferWise. However, in general, venture capital in Europe lags behind that of North America or Asia. One explanation could be the fact that the European venture capital industry is relatively new compared to that of the US, or it could be the fact that European venture capitalists are less likely to wait for a return on investment. A typical exit (the point at which venture capitalists sell their investments in companies) in Europe is around $100 million, whereas in the US it is around $250 million or more.
One can discuss many technicalities as to why European venture capital is less developed than that of the US, but the result is that European startups lack funding compared to their American counterparts. European companies have less room for growth with this lack of capital, meaning they cannot develop to be as large as their counterparts in nations with more available funding.
The problems with European unity
Theoretically, the EU should make creating a Europe-wide technology company easy. The single market, the Euro, and common EU laws should mean that a company founded in Germany could easily expand to France, then Britain, until it reaches the entire continent. Yet, the commonality provided through the EU does not provide relief from the problem of European unity. The EU is a common institution in most European countries, but the continent itself is heterogeneous. For example, the EU recognizes twenty-four official languages. Compare this to the US, where English is the de facto national language, or China, where Chinese is the official language. This is a problem for European businesses who wish to cross borders; they have to localize, whether it is through language or conforming to quirks in local law.
Hence, a situation is created where many successful European startups have not crossed borders and therefore have not reached new markets for growth. Monzo, for example, only operates in the UK as of now, and Zalando—a German fashion retailer with a business model similar to Zappos—operates in nineteen nations but is fairly unheard of in the UK. The problem with having so many different nations and cultures in the EU means that companies may find it hard to spread across the continent, again hampering growth.
Poaching from abroad
Even if a European tech company becomes successful, there still runs the risk that the company could be bought out by a non-European company. In 2016, the Japanese corporation SoftBank acquired the British ARM Holdings for thirty-two billion dollars, which could be understood as a big loss for the European technology sector. ARM’s chip designs power ninety-five percent of all smartphones in the world, and with the smartphone market’s growth, the fact that the revenue is now going to Japan means that the UK and Europe are losing the revenue from a lucrative business. Other examples of acquisitions include the Chinese conglomerate Tencent’s acquisition of the Finnish game development company Supercell (the makers of Clash of Clans) in 2016, or Microsoft’s purchase of Skype in May 2011.
With a lack of venture capital funding, European companies may choose to be acquired by non-European firms, as they can provide the funding for growth. The Dutch travel website Booking.com was purchased by the American Priceline in 2005, which owns many travel booking sites such as Kayak. Gillian Tans, who ran Booking.com at the time of the acquisition, commented that “maybe if at that time there would have been more funding available, Booking would have made different choices.” Inevitably, if competition for funding for startups favors companies from the US or Asia, who have more resources, then Europe will lose this battle
Lack of risk-taking
Europe may also face a major cultural barrier. In general, Europe tends to be more risk-averse than other parts of the world, perhaps contributing to a lack of success. Airbus, the European aviation conglomerate, faced competition against its long-time American rival, Boeing, which launched the 787 in 2003. By all accounts, the 787 was a revolutionary plane with many firsts in the industry. Airbus had to compete, but instead of developing an all-new design, it decided to simply create another iteration of their A330 airliner (which first flew in 1992), called the A350. Expectedly, Airbus’ risk aversion backfired, when major customers told Airbus to develop an all-new design, or else risk losing out to Boeing. Airbus was forced to cancel its original plans for the A350 and release the A350 XWB, a completely new design which has been commercially successful so far, with 890 orders as of the end of September 2018. While Airbus learned from its mistakes, its risk aversion cost it a potential advantage over its American rivals.
Nokia is another example of how European risk-aversion caused a company to lose their advantage over their rivals. In 2007, Nokia was at the height of its popularity, with an estimated market share of 49.4 percent in smartphones. Yet, when Steve Jobs, then the CEO of Apple, announced the original iPhone in 2007, Nokia started to falter. Nokia refused to ditch their Symbian operating system, which was designed for older-style smartphones, and upgrade to Google’s Android, believing adopting Android would be a short-term solution for a long-term problem. Six years later, in 2013, Nokia’s market share considerably decreased to just 3.1 percent. Microsoft purchased Nokia’s cell phone business in September 2013, with the Nokia brand disappearing in 2014 before its comeback in 2017. Time will tell whether Nokia will reach its former heights, but the fact that Nokia stuck to its guns and failed to embrace new technologies could have contributed to the downfall of this once-iconic brand.
European tech companies cannot be accused of being completely risk-averse. Yet, there are multiple instances, like the two outlined above, that show how European companies tend to take fewer risks and have a more cautious attitude. An article in the Japan Times contrasts Europe with the example of Silicon Valley, where there is an established community of entrepreneurs, tech professionals and venture capitalists. In Europe, these networks are less well-established so there is perhaps more caution when it comes to investment or developing new products.
This is coupled with another major cultural difference: that Europeans tend to choose “safer” careers like investment banking, law, or medicine, instead of being entrepreneurs. An article in the Wall Street Journal, for example, states how an entrepreneur was rebuffed at a school career fair event in favor of these “safer” professions. The legacy of the US being a “pioneer” or “frontier” society is also apparent. Americans tend to have an attitude of “fending for themselves”, which lends to an entrepreneurial spirit, as opposed to the more communitarian attitudes of Europe, which result in less risk-taking.
European society, then, does not lend itself to risk-taking or an entrepreneurial spirit as much as, for example, the US. These societal differences potentially result in a lack of startup culture in Europe, which has eventually manifested in a lack of high-value technology companies compared to other regions in the world.
It is not impossible for Europe to become a place where technology giants can be created and nurtured; the fact that Europe has had tech titans in the past such as Nokia, as well as Europe’s successes in heavy industry, show that Europe does have a chance when it comes to developing successful startups. Yet, Europe still has a great number of barriers– most notably cultural, financial and societal ones–that hinder its chances as a continent compared to North America and Asia.