Europe is more of a fuzzy tech cloud than a functioning ecosystem

Whenever I spend time in the European startup world, a lot of the conversation is focused on how it can differentiate itself. One of the recurring questions is: How do we build a startup ecosystem? That’s an excellent question.

The beginnings of an ecosystem are there, but unlike in the U.S., where there are a handful of major hubs attracting the bulk of the talent and investment, in Europe, there is an appetite for experimentation that fails to fully settle into a coherent whole.

Looking to Silicon Valley might be a trope, but the San Francisco Bay Area is by far the most mature ecosystem around. California attracted more than $100 billion of venture investment in 2022. New York is in a distant second place with around $30 billion, followed by Massachusetts (or more specifically, Boston), with around $20 billion. Europe, in comparison, saw around $100 billion of investment in 2022. That sounds like a big number, but compare the size of the economy of Europe versus that of California.

You can find office buildings and fast internet in most places, so how did a sprawling area around San Francisco become a working ecosystem? The history is long and complex, and hard to replicate: Stanford University engineering professor Frederick Terman was focusing on radio engineering in the 1940s. Fueled by the Cold War and a lot of defense money, he built a department and taught a bunch of the people who would found the first wave of tech startups in the area.

Stanford created a business park to go along with its research activities, and it kept evolving with the times. The region found itself in an upward spiral: More money invested meant that more engineering talent flocked to Silicon Valley, which sparked more innovation, which led to more tech companies, which in turn meant more defense money and the first few private investors looking to Silicon Valley for opportunities. Lockheed opened a plant in Sunnyvale, mostly because that’s where it could find engineers. Bill Hewlett and Dave Packard founded HP in 1939, and Shockley Semiconductors was founded in 1956 — the same year its namesake, William Shockley, was awarded the Nobel Prize for co-inventing the transistor. Early employees at Shockley left to found AMD and Intel, and from there, the rest is history: Silicon Valley had such a concentration of funds, talent and tech, that it was almost unstoppable.

Fast-forward some 70 years and Silicon Valley has only continued to grow. For startups, the way this shows up is that a lot of people got very wealthy from tech, and they further accelerated the ecosystem by founding new companies. But — crucially — they also became angel investors and advisers to others in the ecosystem. And because those acquiring other businesses are also often based in Silicon Valley, integrating the tech and the staff becomes a lot easier.

So how does this relate to Europe? Well, according to top European VC Creandum’s recent report, there are 65 cities hosting 514 “tech hubs” on the continent. Of course, it’s positive that the European startup scene is evolving and growing, but even after a couple decades of trying to make ecosystems thrive, Europe appears to be spinning its wheels. According to the report, “Europe finally has the pieces in place to challenge the US as the world’s leading tech ecosystem.” It sounds good, but there’s still a lot of work to be done before there’s a fully functioning, self-sustaining startup ecosystem in place. The truth is, every locale is trying to do it differently. That means there can’t be a single, force-of-nature strength ecosystem; instead, the result is a smattering of promising ecosystems that don’t truly get the job done.

I work with quite a few European companies as their pitch coach, and whenever I start working with a new one, I know I have to gauge what the size of the startup’s ambition is. “Sure, you are raising $5 million this round, but what will you do with the $30 million you raise in the next round?” is a question that stumps founders who are unable to think big enough. That’s a real, systemic challenge for a vastly fragmented ecosystem that appears to have a tendency to take exits too early, think too small, and fails to leverage the benefits of the startup ecosystem in Silicon Valley, Boston and New York. As much as the needle might be pointing in the right direction, the simple truth is that there isn’t a startup ecosystem in Europe that comes anywhere near even the third-tier ecosystems in the U.S. — and definitely nowhere near the dogged, determined sophistication of the top startup machines on this side of the pond.

It’s not just the startups, either. There are exceptions, of course, but it’s worrying how often I run into angel and institutional investors, accelerators, and other advisers in Europe who don’t seem to quite grasp what the nature of a VC-backed company is. In various conversations, I’m confronted with people who are shy and conservative about their ambitions, and optimizing for slow, steady, predictable growth. Sure, you have to survive the current financial slowdown, but settling for a small exit and trying again is detrimental to the entire ecosystem. Without big, beefy exits, the venture capital model doesn’t work. Without multibillion-dollar outcomes, founders don’t build the level of wealth it takes to really be an effective angel investor.

Still, there are glimmers of hope. Across Creandum’s European portfolio, for example, the investor points to 20 unicorns, including Depop, iZettle and Pleo. There’s even some indication that the flywheel is starting to pick up speed. Spotify and Klarna are particularly fertile ground for new startups: The two unicorn companies have been the breeding ground for more than 60 new startups, founded by alumni from both.

Europe appears to be particularly strong in climate tech, which is perhaps a function of the continent taking the climate crisis a lot more seriously than in the U.S. While venture saw a pretty serious crisis of faith (and a reduction of funding) over the past couple of years, Europe has invested heavily in climate. Creandum’s report suggests that 22% of total European funding is flowing to climate tech this year, versus 7% in the U.S. That’s smart — investing in reversing climate change is a predictable win at this point. Personally, that gives me pause, but more investment on this front can’t be a bad thing.

Still, Europe continues to struggle with fragmentation; as much as we are seeing strong startups building, the potent combination of Brexit, COVID-powered supply-chain disruptions, and the Russian invasion of Ukraine all add instability and uncertainty to the mix. For the right startups, those uncertainties could be opportunities, but in an underdeveloped, fledgling ecosystem, it could pose more risk than reward.

Creandum general partner Staffan Helgesson said that he is “confident that in the next 20 years, Europe can take the lead in emerging tech sectors, including digital health, climate tech, fintech and AI, that are critical to our economies and lives.”

I don’t share his confidence, but I celebrate the competition. I know it’s super easy to sit where I’m sitting and be a critic — I don’t have the answers to how one builds a powerful ecosystem — but the number of European startups that raise money in the U.S. because the VCs in Europe don’t have the vision or the funds to build to the level that makes sense for companies at this scale is worrying. If only Europe could figure out a way to create deeper collaboration and a more coherent ecosystem to keep fueling and funding its startups, it wouldn’t experience a steady stream of talent and investment upside flowing to the U.S.