How Europe can become a launchpad for global tech giants

Tech funding in Europe is evolving as the bloc pursues its ambitions to become a launchpad for global technology firms.

Speaking at Goldman Sachs’ Disruptive Technology Symposium in London, Taavet Hinrikus, founding partner at the venture capital firm Plural and co-founder of the financial services company Wise, said Europe is well-placed to become a technology hub, given its strong education system and entrepreneurial culture. At the same time, he cautioned that Europe’s funding ecosystem still needs to develop in some areas.

One example is the distribution of investors for private companies in Europe. The venture capital firm at which Hinrikus now works is a partnership between five former company founders, based on the thesis that founders are well-placed to help younger companies grow. When he started Wise, Hinrikus said, he was drawn to investors who had experience founding and building companies. Yet many of Europe’s venture capitalists don’t come from that background. In fact, 90% of general partners in the region are ex-bankers or consultants.

“There’s nothing wrong with that — for later-stage investing, it’s great,” Hinrikus told his audience. “But for the early, transformative stages, we strongly feel that the scar tissue makes you a better partner to entrepreneurs,” he said.

At the same time, Hinrikus also pointed to his native country, Estonia, as a model for Europe as the bloc seeks to host more technology giants. Replicating Estonia’s strong tech ecosystem could help Europe mirror the Baltic republic’s high rate of company creation per head of the population, he said.

The development of Europe’s tech ecosystem

Looking back to his early career as the first non-founding employee of the internet communications company Skype, Hinrikus said that Europe’s funding ecosystem has made progress since the early 2000s.

When asked whether Skype could have grown the company further rather than selling to eBay in 2005, Hinrikus pointed out that there were limits to the volume of capital that founders could raise at the time.

For example, tender offers — allowing early-stage investors and employees to sell some of their stock to strategic investors — were not an option back then. Tender offers and other forms of secondary liquidity have since become a popular way for founders and early-stage investors to raise further capital and scale their companies before taking them public or selling them. These options are often pursued alongside a preferred equity fundraising round.

“I think if there had been some kind of secondary liquidity, they would have loved to keep on going. History would look very different, I think. But in retrospect, everything is easy,” Hinrikus said.

Looking to the future of European technology, Hinrikus told the symposium that investors need to be more willing to take risks on deep technology companies — companies founded with the goal of solving engineering challenges. Many of the world’s biggest technology firms — from microchip giants to spacecraft manufacturers — fall into this category.

“I think that's something which is oftentimes missing in Europe. It's easy to finance a software-as-a-service company, and most European venture firms are happy to do that,” Hinrikus said. “But… I think we'll see a lot more outcomes in the field of deep tech in the future.”

Estonia as a model for European technology

Despite its relatively small population of 1.3 million, Estonia has had a high rate of success in incubating technology companies. At the time of writing, it’s been the birthplace of 10 tech unicorns (privately owned startups valued at over $1 billion), according to a startup program run by the Estonian Business and Innovation Agency. That places it among the world’s top countries for per-capita company creation rates in the technology sector.

Hinrikus said Europe, like his native Estonia, is in a strong position to become a technology hub. Europe produces a comparable number of STEM graduates and AI researchers to the US. Equally important, Hinrikus said, is the bloc’s embrace of innovation.

“I think if we look at the young European people who want to be entrepreneurs, who have the ambition, it's great now. Twenty years ago, that wasn’t the case. But now there are a lot of people who think entrepreneurship is an answer,” Hinrikus told attendees of the event.

Estonia also benefited from some early technology companies founded after the dot-com boom in 2000, which helped drive the development of a tech ecosystem in the country.

Drawing on the example of Skype — which was founded by a Swede and a Dane, but originally developed by Hinrikus and other Estonian software engineers — he said that multiple European unicorns can be traced to Skype’s success. Skype’s growth enabled founders and early employees of the company to invest in new Estonian startups.

“That acceleration was humongous, and the next unicorns to come from Estonia... we can trace them all back to Skype. I think just having that early push, showing what's possible, and having that inspiration really served well,” he said.

In particular, Hinrikus pointed to Skype’s sale to eBay for $4.1 billion in 2005 as evidence that Europe could create highly valued, global technology businesses.

“I think we needed the local success stories,” Hinrikus said. Seeing the growth of big tech companies in America had limited resonance for European entrepreneurs if they felt it couldn’t be replicated at home.

But following the success of Skype’s co-founders Niklas Zennstrӧm and Janus Friis, Hinrikus added, Europeans saw what was possible closer to home. “I know Niklas is an average guy, just like me. If he could build Skype, and I could build Wise, that means you could build something,” he said.

 

This article is being provided for educational purposes only. The information contained in this article does not constitute a recommendation from any Goldman Sachs entity to the recipient, and Goldman Sachs is not providing any financial, economic, legal, investment, accounting, or tax advice through this article or to its recipient. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this article and any liability therefore (including in respect of direct, indirect, or consequential loss or damage) is expressly disclaimed.