A recent article in Germany’s Focus magazine highlighted the disparity in market capitalisation between giant US tech players, fast-growing Chinese digital companies and much more modest European tech startups.
In Europe, only 20-year-old SAP registers a nine-figure market cap (at $134 billion) and still is smaller than Netflix ($145 billion) -- not to mention Amazon, Alphabet and Microsoft (each around $750 billion) and Apple (more than $900 billion).
China’s Tencent ($490 billion) and Alibaba ($469 billion) are each more than triple the market cap of SAP, and Korea’s Samsung is more than double ($310 billion). After SAP, the biggest European tech market caps are Spotify ($28 billion) and Zalando ($13 billion) -- chump change to any of the big US or Asian players.
For Europe this means that tech startups do not provide the same upside for investors as do their peers in other regions, in spite of Europe and its 300 million citizens representing one of the world’s most powerful and cohesive markets.
European investors also do not own a significant percentage of the shares of the dominant tech players -- leaving Europe without a strong voice at the table as decisions are made that affect the cultures, economies and political lives of Europeans, among others.
There are structural and cultural reasons for this, some of which are within Europe’s ability to address, as respected investor Klaus Hommels of Lakestar has frequently pointed out. Europe invests much more in older industries, such as agriculture, than in newer tech industries that are likely to create the most value and have the greatest impact on future prosperity.
For European tech founders this state of affairs understandably prompts dreams of the US -- either to move there and try to reposition as a US-based startup (possible, but fraught with danger); or to try to attract the attention of US or Asian players for investment or potential acquisition.
Building for a trade sale may often be the best option for founders and early-stage investors in Europe -- but may not provide enough of the upside that later-stage investors are seeking, leaving promising European startups short of much-needed growth capital.
For American and Asian companies looking at expanding into Europe, it means that there are probably opportunities to pick up a bargain -- acquiring promising startups with team, capabilities and a growing customer base and then rebranding or incorporating them into existing operations. US companies ought to be looking at peers in Europe to see where they can acquire growth at a good price.
On the flip side, however, well-funded US and Asian tech companies who have enjoyed the benefits of a vastly higher market cap can just as easily decide to outspend European rivals and try to beat them in their own home markets. Yes, European startups will have the advantage of local knowledge and relationships, as well as first-mover advantage locally -- but American and Asian companies can afford to spend and invest until they get it right, if the opportunity is sufficiently worthwhile. And the more progress these interlopers make, the more they may drive down the valuation of the local player, until the local player throws in the towel and sells out.
Of course, the above scenario is somewhat simplistic and there are many stories of smart European founders winning battles against bigger entrants from overseas -- but even these can be considered more as local skirmishes than as winning the global battle.
So overall, our advice to our US clients is to take advantage of the opportunity to both build and acquire in Europe -- and our advice to our European clients is to build for an eventual trade sale. This will be the order of things until Europe addresses some of the structural deficiencies described by Hommels, and levels the playing field with the US and Asia.