All Aboard the Trans-Europe Express! Episode 3: The Structural Perspective

At the structural level, Europe favors commerce companies over enterprise ones

It’s great to see those who have been following along since the start again. For those new, you can catch up with the series by reading the introduction here and last week’s part on focusing on Europe’s startup history here. Very grateful for all the words of support, sharing, and feedback so far!

This week, I explore the structural dynamics at play within (and without) Europe’s ecosystem. I start by telling the story of cloud data provider Snowflake, which has been a runaway success coming out of the American West Coast. Snowflake’s rise was thoroughly influenced by the favorable structural dynamics that underpin the Silicon Valley enterprise software environment. In Europe, the structural dynamics are fundamentally different and favor building technology companies that service consumers and/or focus on the commerce value chain. The data around unicorn outcomes in the last decade support this, as does taking a look at some of the hot sectors seeing strong investor interest of late. I wrap by admitting that Europe has indeed made solid progress towards building more robust enterprise companies but also hint that ultimately trying to beat the Americans at their own game may not be the best path forward, largely due to the social capital dynamics I will get into next week.

I hope you enjoy!

Snowflake and why it’s just easier to build B2B in California

I think American business software dominance comes down to three main structural vectors: human talent, inter-startup sales flywheels, and credibility with investors and employees. Snowflake, the cloud data warehousing darling, is a useful example to illustrate this.

Snowflake was founded by three Europeans in Silicon Valley in 2012. Benoit Dageville and Thierry Cruanes knew each other from roles as data architecture nerds at Larry Ellison’s B2B behemoth Oracle. As with many enterprise software founders in the United States, inspiration for their new venture came from their observations while doing their day jobs at a large incumbent. They were the experts. If anyone was going to build the next-gen cloud data warehousing solution, it would be them.

While expert when it came to the technical aspects of what needed to be built, the men were not necessarily business leader material. Their initial investor, Mike Spieser of Sutter Hill Ventures, led the company’s operations in the beginning. None of the three co-founders have ever served as CEO. Spieser built up the company in the very beginning and successfully hired his replacement, a veteran of Microsoft called Bob Muglia. Muglia presided over tremendous growth but ultimately made way for another European, legendary Silicon Valley CEO Frank Slootman. Slootman developed his bona fides at two other successful California business software firms, Data Domain and ServiceNow, exiting both with strong outcomes for investors and employees.

The abundance of operational and technical leadership talent around Snowflake has been fingered as a large factor in the company’s success. B2B software experts, and the networks that bind them, are simply on another level in California. Best practices and technical understanding that would be considered outstanding in Europe are relatively commonplace on the West Coast. Tight physical, social, and occupational networks have driven the cross-pollination that makes possible such exceptional concentration of human capital. This convergence just does not exist on remotely the same scale in Europe.

In practice, this deficit manifests within middle management of European technology firms. At the executive level, top startups, especially with distinguished investors on their cap table are able to bring exceptional people on board. Over at Choco, we recently hired Vikas Gupta, a veteran of Dropbox, Uber, and Facebook as our CTO. At Gorillas, the hyperscaling grocery delivery platform out of Berlin, Ronny Gottschlich, who was the CEO of Lidl UK for six years, serves as their CCO. Filling out the roster of operational function leads and engineering/product managers is a much different challenge. In contrast to California, where there are hundreds of companies with org charts chock full of experienced heads across many different disciplines, the ecosystem in Europe is too immature to be rich in this way. To compensate, it is common for mid-level startup leaders to come from consulting firms or large corporations. Of course, talented people can come from anywhere but the compounding effects of multiple layers of experience at the functional leadership level should not be underestimated.    

On top of talent advantages, Snowflake, like many peer B2B technology companies based in the Bay Area, also benefited considerably from selling their products to other venture-backed, fast growing businesses. An abundance of capital, operators who are naturally inclined to procure the newest cutting-edge tools, along with relationships facilitated by investor networks (like intra-portfolio sales), make targeting other B2B startups geographically and culturally proximate an enticing proposition. While Snowflake now has thousands of customers across many sectors, including over 1/4 of the Fortune 500, it counts Bay Area B2B firms like Adobe, Hubspot, DocuSign, Okta and Coupa as key accounts. This is not to mention other well-known technology companies based in Northern California like Chime, DoorDash, and Electronic Arts. Snowflake is not even an amazing example here, as it has one of the highest ACVs in SaaS (>$100k/year) so prefers to go after larger prey. I’m thinking of firms like Gusto, Ramp, and Looker, whose value propositions are based on solving problems of fast growing businesses, though there are many examples.

Geographical, and by extension social and cultural, proximity is really important, especially when trying to grease the sales flywheel. Enterprise software companies founded in Europe are simply at a massive disadvantage here. Mr. Newcomer points to UiPath as a success story that has broken this norm, but, in truth, approximately 99.8% of the company’s all time total revenues has been generated in the last three or so years. The company moved its HQ to New York City from Romania in 2017.

Nonetheless, Eastern European companies have effectively replicated the playbook first employed years earlier by Israeli enterprise software entrepreneurs, who have built businesses like SimilarWeb, Melio, and Compass. After building the initial product and generating early traction in the home market, firms move their more commercially minded leaders to America while keeping the engineering setup in the old country. This arbitrage allows companies to enjoy superior access to the most important software market in the solar system while retaining technical expertise at a favorable cost. 

Western European startups are generally less keen on the ‘Israeli Playbook’. With exceptions in the healthcare space (a whole other essay could be written on this), Nordic, British and German companies tend to stay put in Europe and pursue their significant but not massive home markets. It is possible to build a tech company valued between $1-3 billion that focuses only on Western Europe. For those whose ambitions are even greater, it is extremely rare to see such a regional focus on Western Europe. The market fragments in this part of the world are large enough to focus on for 2-3 years (and often indefinitely) while firms coming out of Poland or Bulgaria must go international from day one if they want to build a massive tech business. And, if you must go international, why not head to the US?  

Finally, B2B technology companies enjoy credibility with investors and talented employees alike that most European software firms could only dream of. When an experienced technical founder builds enough conviction to leave their often very well-paid jobs at incumbents to found a promising B2B software company in the United States, investors’ eyes see $$$ and typically line up to invest (now, more than ever). This credibility with investors naturally leads to an easier time attracting top talent, who like to pattern match and see a big round by a well-regarded investor as a strong endorsement of a particular project (Europeans for the most part don’t really think this way; it’s a social capital thing, I’ll explain next week). Hiring talented engineers is usually of greater importance in B2B companies than in B2C, where the technical challenges are more intense, the requirements from buyers more stringent, and competition focuses on technological moats more often than in consumer-facing products. The self re-enforcing credibility B2B ventures enjoy in the United States, as a result of investor conviction, ultimately serves as a moat to challengers from other parts of the world.

Consumer/SMB startups, on the other hand, do not benefit at the same scale as business software firms. Thus, European technology entrepreneurs grasp the comparative advantage they possess in the consumer market, and subsequently target their efforts at ventures in that space more zealously.

Few Recent European Unicorns are Enterprise Companies 

By my count, from data from only 10 of the 24 ‘unicorns’ founded in the UK since 2010 have SaaS business models. Looking deeper, I would say only 3 are really pure play enterprise software companies (Darktrace, and Rapyd).

Moving the query to Germany, only 5 companies meeting the same criteria are displayed, though I would again reduce that to 4 pure play (Personio, Mambu, Sennder and Celonis). There are 13 companies total in Germany that have reached unicorn status in the last 11 years. The majority are consumer-facing companies (Auto1, FlixBus, Hello Fresh, N26 and so on).

Finally, looking at the Nordics, there are 4 companies that have made ‘unicorn’ in the equivalent timeframe. None of them are really enterprise software companies, except for Itiviti (which I had never heard of). The four don’t include Spotify, Klarna or iZettle, who were all founded before 2010. Those also don’t offer pure SaaS products but rather technology to facilitate digital commerce, excepting the Spotify anomaly.

Chirag Modi tweeted out a report on Kinnevik, one of Europe’s most successful investors in growth-stage technology firms. 55% of their portfolio value lies within a segment they call “Consumer Services”. This doesn’t even include Zalando, from which the Swedish firm has profited handsomely. The concentration within this segment is rather consistent with the ecosystem at large.

Kinnevik’s best bets have been on consumer companies like Global Fashion Group and Oda

It would of course be easy to fixate only on unicorns and leave you here, but I won’t. Instead, let’s look at a few younger and less highly-valued firms, and the trends they embody, to see where European founders and their investors are seeing the comparative advantage.

The Default Gestalt for European Startups is still Commerce

Commerce is still probably the dominant theme in the Old World, though the businesses funded more recently have significantly different models than their execution-play predecessors.

Headless platforms for building online commerce experiences are a hot category, where there is conviction that European firms can lead. Commerce Layer, a rare Italian startup, is backed by Benchmark, with Eric Vishria sitting on the board. Saleor, a similar company based out of Poland, recently announced a modest seed round, with Chris Schagen, a former executive of headless CMS provider Contentful, itself a sneakily under the radar B2B player out of Berlin, participating. Both companies seek to sell to merchants situated between mom-and-pops and large firms with dozens of in-house developers, a sensible market to address coming out of Europe.

On the other side of the commerce spectrum, investors are excited by ventures that are looking to acquire and consolidate existing ecommerce sellers operating on platforms like Amazon. Heroes, out of London, raised some $60 million in Q4 of last year to bring economies of scale to retail operations enabled by Amazon. SellerX, in Berlin, raised even more to do the same thing, notably from previously mentioned Cherry Ventures’ founding partner Filip Dames, with his pal, Zalando CEO David Schneider participating. Within this vertical, there are a couple other companies that have raised solid rounds as well. 

Another category of interest, much closer to home, is technology for the gastronomy industry, particularly that which has a sustainability focus. Christophe Maire and Atlantic Labs, out of Berlin, are the investors of note here.

They seeded Choco, where I work, which has gone on to raise from notable investors such as Coatue and Bessemer. Choco builds technology that brings the relationship between restaurant and vendor online. This allows each side of the transaction to consolidate their ordering relationships into ‘Chats’ on the app, which ultimately leads to fewer errors and food waste. All three founders were affiliated with Rocket Internet. Rekki, in London, is doing something very similar. They have raised comparable amounts of capital, also from distinguished investors.

Grocery ordering is red-hot, with Berlin based Gorillas reported to be raising their next round seeking a $4b valuation. Zapp, which Mr. Newcomer mentions, is also delivering products with freaky fast SLAs in the UK. The company raised from Lightspeed recently. There are a handful of others too, like Flink out of Berlin and JOKR, which raised from top German fund HV and Tiger.

There have also been enterprise software transactions of note recently. CRM provider Pipedrive, out of Estonia, cut a deal with big time PE shop Vista, valuing the firm at $1.5 billion, a big win for Estonia and early backer Atomico. Another B2B Atomico portco, Aiven out of Finland, raised a round led by IVP, announced in the last weeks, that comfortably grew their valuation past half a billion United States dollars.

Europe is indeed moving past the commerce-dominated era of the late aughts and early 2010s. The Zeitgeist is slowly moving towards building businesses that serve more corporate customers who are willing to pay healthy sums of money and offer more useful unit economics than the costly to acquire and retain consumers of yesteryear. However, for the most part, we see that neither large enterprises nor other startups are the targets of this new wave. Rather, it is SMBs and largely known consumer segments who are being served by this generation of startups.

I’m afraid the significant advantages US firms have when it comes to enterprise software persist because of the ecosystem strengths that have developed on the West Coast for decades. Central to the Californian puissance is its highly developed social capital network. In the next section, I will discuss the deficit Europe faces in this regard, which in my opinion is the single biggest force holding it back.