All Aboard the Trans Europe Express! Episode 1: The Introduction
In response to Eric Newcomer's three-part series on European VC, I have written a trilogy on the European tech ecosystem's historical, structural and cultural characteristics.
Wow. It’s been such a long time. Over 13 months in fact. To succinctly put it, I started a new job AND Corona reached Germany at exactly the same time. I needed to learn how to do my job and, to be brutally honest, didn’t feel like pontificating in a world of such tremendous uncertainty and chaos.
Anyways, I think I have learned a lot in this period and have become genuinely happier and more fulfilled. Perhaps I’ll expand on this in a later post.
Quick bio for those who are new: I’m a 24 year old American who has been living in Berlin for the last 2 years. In the past, I have attended institutions such as Sciences Po Paris and the University of Pennsylvania. I have spent time working at leading venture capital firms in both New York and Berlin. I currently work at Choco, where I lead the Market Intelligence team.
This is me as a younger, less mustachioed man in Montreal, Summer 2018 (for the thumbnail)
A Comprehensive Overview of What’s to Come in the Series
Eric Newcomer, the long-time Bloomberg tech journalist who has now gone the route of many peers by going Direct-to-Substack, has recently published three pieces on the opportunity in the European technology ecosystem. He takes a highly investor-centric approach, more profiling the select individuals who have grown their net worths from the continent’s startup successes than probing any of the historical, structural, or cultural reasons for why the ecosystem looks the way it does today.
He adequately identifies many of the most notable firms, funds, and people in the region. He mentions the big contemporary success stories of Hopin and UiPath, along with the investors who have been involved. He spends his entire second installment profiling the top US funds’ engagement with Europe. This part is his weakest, as it amounts to little more than short snippets from interviews with people who are now staking their careers on successful investments in European tech firms. As one would expect, they express bullish sentiments in their conversations with Mr. Newcomer, though, hardly go any deeper than saying they are excited to make future investments and are pleased with those that have already been marked up. The third section profiles Blossom Capital’s Ophelia Brown, who is indeed someone under the radar from the US perspective. Mr. Newcomer’s shortest section (one wonders if he got a bit bored), this deep-dive does little more than reveal the origins of Ms. Brown’s firm and profile a few successful investments.
Ultimately, after reading Mr. Newcomer’s work, I found myself wanting for more, much more. So I decided to put together a trilogy of my own and give the story of European technology the thorough examination it deserves.
I will look at Europe’s tech ecosystem from three perspectives. My first installment will look at the historical angle. Europe has gone through multiple cycles of startup creation. We currently find ourselves in the third wave of this ecosystem’s history. The first wave (1985-2001) was largely characterized by a lack of sophistication on the side of European capital allocators and a sense that Europe was a bargain bin for Americans to mill around in times of boom but largely forgettable when belts tightened. I see the second wave (2007-2015) defined by the activities of Rocket Internet. The German incubator of largely copycat commerce companies, while rightfully controversial, endowed those in its orbit with critical experience, relationships and capital that would be used as fundaments for the contemporaneous third wave. I also link some academic work on emerging market conglomerates functioning as private capital markets to the Rocket Internet story. The third section deals with the current cycle (2015-onward). I mention some firms and funds that have come from former Rocket Internet associates. I hint that many share a similar DNA: an attraction to businesses building with a consumer/SMB buyer in mind.
The second part of the three-part saga deals with a structural analysis of Europe. Using the example of the data warehousing solution Snowflake, I demonstrate that building an enterprise-facing tech company in California carries three distinct advantages over other locales. B2B software experts are overwhelmingly based there, leading to outstanding concentrations of technical understanding and best practices within founding teams. Selling to peer, venture-backed startups just down the road, who often have many pain points in common, makes for a very well-greased sales flywheel. Finally, B2B software founders in California enjoy credibility with the best investors that is simply unmatched elsewhere. This accrues further as a mechanism for hiring the most talented engineers, who like to pattern-match when considering new opportunities and see the equity investment of a well-regarded investor as providing social capital gains to all of those in the company's orbit. I then move on to proving that Europe’s comparative advantage lies with building consumer-focused companies rather than B2B ones. I look at the data around European unicorns founded in the last decade, noting that the vast majority are consumer-focused with a rather heavy operational focus. I finish it off by looking at some of the hottest sectors today in Europe, suggesting that many hyped companies here share a focus on addressing the commerce stack.
The final section is probably the most interesting one. Something I quickly noticed after moving to Berlin two years ago was that the social contract that governs the behavior of participants in the European system is rather at odds with that of the US. I lean heavily on Alex Danco’s pioneering work on social capital (no, not the firm). I discuss why startup employees in Europe are not incentivized to care much about the development of the ecosystems they work in. I bring up that the hierarchy of occupations on a social capital basis is nearly reversed between the American West Coast and most of Europe. Risk aversion and fear of uncertainty play a significant role in determining what roles are social capital-optimal and which ones are not. Ultimately, this leads to much weaker inter-mingling between the labor and capital classes of European tech. As a consequence, European innovators do not enjoy the same degree of the useful “Social Capital Fog of War” and thus must waste time posturing and gathering credentials. Ultimately, the system in the Old World is designed to function on transparency, order and certainty, which does not effectively incubate dynamic constituent parts. I conclude the section exploring how this systemic weakness is impacting capital allocators in Europe, borrowing Everett Randle’s excellent framing. I conclude that non-dynamic investors, who have outsized faith in rules, structure, and process will have their lunch eaten in the medium-long term by those who have a big appetite for uncertainty.
In the following three weeks, I will serially publish this series, focusing on the historical, structural, and cultural dynamics at play in Europe. I will then come back one last time, (hopefully) taking advantage of reader feedback, and synthesize the aforementioned currents into a coherent view of where Europe really stands as an ecosystem at this stage.
I hope you will follow along on the ride. See you next week.