European tech landscape: expanding & growing
Europe from a GDP perspective is equivalent to the US, but obviously it's multiple countries which is something that has slowed progress historically. This is changing as the European tech landscape continues to broaden and it’s the fastest region of growing venture capital investment.
The European framework comes of age and what we are now beginning to see is a few things happening at the same time. A framework of founders and company builders has been created from the first generation of European tech companies who have then gone on to form their second company, their third company, their fourth company. At the same time, venture capital in Europe is growing politically, which previously wasn't widely available. Whether it be the French government launching initiatives to invest in French companies or whether it be with venture capital funds in Europe now growing to scale. The growth capital is becoming a political necessity as countries want their big companies to stay in their home countries rather than move abroad like the Swedish company Spotify that relocated to the US and listed there. Historically the assumption was when you grew to scale at critical mass you needed to go to the US for further capital, for growth and for listing.
As European companies see others successfully scale in Europe that changes the belief that the company can stay domestic and grow from a European basis.
Furthermore, if you think at what really drives tech growth one of the key factors is the engineering to build the infrastructure. In Europe we have 50 cities closely knit together where we have some of the best engineering schools and universities in the world and what is beginning to be seen is that ecosystem being leveraged. Therefore, rather than talent migrating to Silicon Valley it’s staying in Europe and creating a tech hub whether that be in London, Berlin, Paris, Amsterdam or Barcelona. This is evident in the types of companies in the European market where the likes of Agile Payments which is a €100 billion market capital company born out of Europe, listen in Europe and has grown to become a global leader alongside the likes of Stripe. So as European companies see others successfully scale in Europe that changes the belief that the company can stay domestic and grow from a European basis.
European Investor mindset is evolving
Historically, US investors have been more focused on growth with a higher level of comfort to prioritise this over near-term profitability than European investors. There are a couple of factors contributing to this. Firstly, the US has had growth companies emerge, scale, and succeed for longer than we have had in Europe. When you look at tech global leaders you think about FANG, Meta (formerly Facebook), Amazon, Netfilx and Alphabet (Google), or the next generation of SAS businesses, most of them are US companies. There is a natural delay in the understanding of how these companies formed, succeed, and grow which is now coming across to Europe. Investors 5-10 years ago were not so focused on the cost of customer acquisition, unit economics, churn, land grab, the marketing spend to build terminal margins to then lead to Earnings Per Share (EPS) which is ultimately the driver of success over a 10–20 year period. Amazon proved this by building a very large company without making a profit for a very long time.
The European investor is thinking differently compared to 5 years ago and this is much more akin to how the US investors think today.
In Europe we’re seeing the market adjust how they think about growth, how they look at growth adjusted to the opportunity in terms of TAM (Total Available Market) and focusing on what a company might be in 3-7 year cycles or sometimes longer, rather than what the company is today and what the earnings can be in a month or a quarter. This is evident across the different verticals with companies like Auto1, or nascent payment companies like Wise and in the private markets with Klarna and Revolut, we are seeing these changes across banking infrastructure, e-commerce, and social influencer led commerce. The European investor is thinking differently compared to 5 years ago and this is much more akin to how the US investors think today.
Digitization will continue to drive growth
The theme of everything being digitized is a result of the change in how we interact from an industrial or manual sense to a more online and digital nature. This is a structural shift where in our day to day lives we are seeing that acceleration towards tech nascent companies in all aspects of life, more than we did 5 years ago. The concept is simple, where verticals such as food delivery, ecommerce, transportation, marketplaces etc is applied to the power of the internet and the cloud. Think about Auto1 and how we interact with car manufacturers and OEMs (Original Equipment Manufacturer), health insurance, any segment of our life. You can then move down to esoteric areas such as CleanTech or FemTech, things that are far more niche but are undergoing digitization and in segments that are less advanced there are opportunities for first mover advantage.
The spectrum where these companies could influence is infinite and that adds to the reason why capital is moving earlier in the life cycle of companies and why the number of unicorns that are created globally continues to accelerate.
To develop the thinking of what will be the next big area you can be as extreme as you want. For example, flying into Space what are the utility functions with SpaceX? Is it going to be satellites? Is it going to be EV (Electric Vehicle) and how big is EV? Are we going to have carless distribution and logistics? Automated logistic warehouses where all the picking and packaging is done by robots, robotics, life science. The spectrum where these companies could influence is infinite and that adds to the reason why capital is moving earlier in the life cycle of companies and why the number of unicorns that are created globally continues to accelerate.