The Trickle Down Effect

Last week, Fred Wilson wrote a good post on tech ecosystems and cycles of development. He talked about how one highly successful and ‘foundational’ company will lead to the formation of multiple successful companies further down the line, and that you can extrapolate that forwards to see how strong eco-systems get built. Silicon Valley is obviously the best example of this and has been around for more than 40 years.

I think and write a great deal about tech eco-systems and I think that Fred has an interesting way of looking at it. I’m a big believer that one big success can lead to many more down the line. A successful exit creates wealth, experience and confidence that can all trickle down to the next generation of companies.

This made me think about what Europe’s big success stories have been and wondering whether they have also triggered this kind of trickle down effect.

There have been a series of European technology success stories over the years. In the 1970’s Sinclair Research and Acorn Computers were founded and both played important parts in the early history of the PC industry. Also in the 1970’s, SAP was founded in Germany and is now one of the world’s largest enterprise software companies with a market cap of  $70bn.

In the 1980’s ARM and Psion were founded, which were closely related to Acorn and Sinclair.

In the 1990’s Autonomy and MySQL were founded and both went on to billion dollar exits.

Also in the 1990’s a number of highly successful ecommerce companies were founded including Lastminute.com, Net-a-Porter and Vente-Privee. All three of these companies were true pioneers in their categories.

In security, Sophos was founded in the 1980’s and, over time, solidified its place as one of the world’s leading anti-virus software packages.  In 2000, we founded MessageLabs to move the anti-virus and anti-spam process into the cloud. Soon after, Scansafe was founded to do the same with web security. There was certainly some cross-fertilization in the way these companies emerged and went on be successful on a global scale.

More recently, Skype was founded in 2003 and has come to define a new category for voice calling between computers over the internet. In 2011, Skype was sold to Microsoft for $8.5bn.

I’m not trying to position this as anything like a complete history of large European technology businesses. I’ve just tried to pull out some companies and themes that I think are interesting. I’m sure I’ve missed out lots of great companies, especially outside of the UK.

The point I’m trying to make is that there have been numerous large and important European technology businesses created over the last 40 years or so, almost dating back as far as the Valley. They haven’t of course been as large or as numerous as those in the US but they are most definitely there.

So why haven’t these companies contributed to an on-going strengthening of the eco-system in the same way as they have done in the Valley? While I’m sure these companies have had a beneficial effect on the next generation (and I’m hopefully part of that) it is negligible as compared to the Valley.

I think there are two main reasons for this.

First, Europe is a large and fragmented market that makes it more difficult for these benefits to trickle down. Even in the US the eco-system was all concentrated around one hub in the Valley. The rest of the US was seen as too far away to really benefit. In Europe the region is not only divided by distance but also by different languages and cultures.  Clearly, all the good things created by a successful company are literally lost in translation the further they have to travel to other cities and countries across the region.

Second, the IPO market in Europe for technology businesses has always been virtually non-existent in comparison to the US. I’ve written about this before but the public markets in Europe have never really got their heads around the technology sector and especially the way you have to place a significant amount of value on growth and future potential.

As a result, European tech businesses have either had to move the bulk of their operations across the Atlantic to support a US listing or they have had to rely on being acquired by large, public US companies. All of this means that so much of the trickle down value of great European tech businesses gets broken up prematurely and often reassembled in the US.

Thankfully we are starting to see the European tech scene coalesce around central hubs with the two main ones being London and Berlin. Talent and resources are being tapped from across the region and centralized. For me this is a really important development for a number of reasons but especially in helping the all-important trickle down effect that provides the foundation for any successful eco-system.

In terms of the public markets I think this is a more difficult problem to solve. Governments need to help and try to make their exchanges as competitive as possible to encourage more companies to choose to IPO in Europe and continue to grow as opposed to being lost to the US in one form or another. But I don’t see this happening any time soon.

I’ve no doubt two of the key ingredients of a successful eco-system are concentrated hubs and a dynamic IPO market. For Europe I’m encouraged that at least one of these areas is being addressed but similarly frustrated in terms of the public markets.