The Rise of Europe’s “Super-Scale Ups”

William Stevens - CEO, Tech Tour & James Burnham - Strategic Adviser, Tech Tour


Since the start of the decade, and with little in the way of public attention, something remarkable has happened across Europe: a new generation of high impact, world leading innovative companies has not just been born, but have grown rapidly into international businesses.


These companies, which cover a multitude of sectors, backed by venture capital funds, are powering a virtuous circle of growth that both enables societal transformation and takes advantage of it. Through the Tech Tour Growth 50 we shine a light on this success.


Tech Tour Growth 50 companies are understandably strong in areas where Europe excels, and where companies are becoming world leaders. These include B2B software and services, the Internet of Things, Cybersecurity, Healthtech and Fintech.


These “super-scale ups” have the clear potential to become Europe’s next “unicorns” – private tech companies that have a valuation over $US 1 billion. And outside of their common financial metrics many are backed by European venture capital firms that have already helped build unicorn companies or individual “super angels” and unicorn founders such as Charles Dunstone (Carphone Warehouse) backing Nutmeg, William Reeve (Love Film) and Murray Salmon (Net-a-Porter) backing Secret Escapes and Oleg Tscheltzoff (Fotolio) backing CarPrice.


In the Tech Tour “super-scale ups” universe we identified 284 European companies, versus 833 in North America. So Europe still lags, but considering venture backed companies as a whole in the US raised 5x the amount of capital than their European counterparts in 2017, with the US having approximately 3x the number of “super-scale ups”, the outlook for European companies is strong.


Europe, however, is actually creating less unicorns, while the number of super-scale ups is increasing. In 2015 Tech Tour identified 121 European super-scale ups and in the same year 10 unicorns were born, in 2017 with 284 European super-scale ups only 5 companies hit unicorn status. In the US 27 unicorns came into existence in 2017, and in China there were 22 unicorns from a base of just 181 super-scale ups2 . And while being a unicorn isn’t always everything, their emergence can serve as a useful proxy to look across the relative success of regions.


So why is this the case – and does it matter?


Governments, and to a certain extent large international corporations across Europe, all fund a myriad of programmes – from tech incubators and accelerators, to putting millions of euros (and pounds, and krona, and zlotys) every year into venture capital funds and programmes. The European Union also has many programmes aimed at supporting tech start-ups.


But if these companies fail to become world leaders we all miss out and as the analysis by the UK’s National Endowment for Science, Technology and the Arts (“NESTA”) points out “the majority [of startups] don’t survive ten years (62 per cent), and of those that do, most stay small. Only 10 per cent of those that survived had more than ten employees ten years later”. This early stage “valley of death” is, however, well understood and the “super-scale ups” have well passed this point, what is little talked about is a second equity gap where growth companies have lower valuations than the US and lack the availability of European growth investment capital. Or in other words the finance and support to get really big.


According to figures from GP Bullhound US unicorns have valuation to revenue multiples 2.5 times greater than European unicorns. In the US traditional asset managers have also invested in super-scale ups pushing them to unicorn status. In Europe this has not been the case and while the concern of a tech bubble, which will leave the market littered with “unicorpses” may have some foundation in the US – the reverse seems the case in Europe.


In fact US investors have been quick, perhaps unsurprisingly given the amounts of capital available, to invest in Europe’s super-scale ups. In this year’s Tech Tour Growth 50 US investors accounted for over 35% of investors (by number of investors) with 88% of companies having at least one US investor. 2017 has also been a bumper year for European venture backed companies fundraising efforts raising €16.9 billion, yet while European VC funds enjoyed a third successive year of capital raises above €7 billion, this is less than half the amount of capital invested in European venture backed companies in 2017.


So the challenge is twofold: getting European super-scale ups to get really big, and perhaps more politically, ensuring Europe benefits from their success.


A perfect partnership


Analysis from Global Corporate Venturing showed that in 2016 investment in tech companies from large corporations measured up to 67% of all capital invested globally, yet only accounted for 20% of the number of investments – or in other words corporates can write large checks.


However, in the last 5 years US corporates have been twice as active in tech investment compared to their European counterparts. European venture backed companies as a whole received €6.5 billion4 in global corporate venture capital investment in 2017 and US corporates with an active venture capital unit outperformed their respective stock market indices by over 30% over the last ten years.


Meanwhile only 4% of investors by number in the Tech Tour Growth 50 were either European corporates or CVCs, although European corporate venturing as a whole is on the increase with 120 active European CVCs in 2017 – up from 47 in 2011.


Innovation of course is difficult and unpredictable, but large corporations are acutely aware that digital disruption is here to stay. Just look at all the corporate accelerator programmes and incubators backed by the world’s largest banks.


As Julia Pratts, Head of Entrepreneurship, at IESE Business School says: “We are moving toward a hybrid model in which innovation - from the combination of the best features of the corporate and the start-up world – provides the new solutions for the complex problems we face in business and society at large”.


Europe has over 20 years of substantial and significant start-up programmes and investment – in fact the super-scale ups we see today are the rewards for this effort, and while no one is dismissing new start-up initiatives, matching the balance sheet power and international connections of Europe’s multinationals with the proven disruptive (and undervalued) power of Europe’s super-scale ups promises much for both. At Tech Tour, as always, we look on market developments with an interested eye, and are ready to play our part in supporting the European tech ecosystem.


Image: Tech Tour


Sources: PitchBook, Global Corporate Venturing