Fragmented ecosystem hampering European venture

Returns enjoyed by Silicon Valley investors in the digital economy are often much higher than those in Europe. Accel Partners is set to shatter venture capital records with an expected 700x multiple on its investment in Facebook, more than four times that recorded upon Bessemer Venture Partners' sale of European online telecommunications giant Skype.

Some industry players have blamed this disparity on a lack of opportunities in Europe; a claim Davor Hebel, partner at Fidelity Growth Partners, flat out refutes: "there are tons of opportunities in Europe. We have identified over 2000 growth businesses". The maturity and super-concentration of Silicon Valley compared with the fragmentation of the European market expertise seem a less reductionist explanation.

Nicolas von Bulow, partner at Clipperton Finance, a financial advisory firm that works with technology companies and investors, in part attributes the European problem to "fragmented ecosystems, which mean you end up with local champions with turnovers of €200m and above, which you probably wouldn't have even heard of abroad".

Furthermore, Europe does not enjoy the super-concentration of finance, IT, universities and tech clusters characteristic of Silicon Valley. Innovative spaces in Europe are spread in capitals across the continent, including London, Berlin and Paris. According to von Bulow, "innovation is about ecosystems. The US only has one real cluster. We have more, but we do not have the critical mass needed. With technology you need super-concentration in a single area." Taking the example of government-backed ‘Silicon Roundabout' in East London, he suggests that patience and cross-party stability are crucially missing: "Policy makers are not patient. We need to focus on collaboration and stabile policies that do not change as power switches hands."

Similarly, innovation must rise above national politics to supranational levels, with each European country looking not to further its national success in innovation but that of Europe as a whole. Perhaps the European Commission's recent launch of its Digital Agenda, which aims to double the current percentage of retail sales completed online from its current 3.4% by 2015, may help unite the market and put an end to "each nation feeling it has won a battle against another nation, when globally is has lost", according to von Bulow.

In terms of e-commerce though, both Hebel and von Bulow agree that Europe is faring well. Macroeconomic trends underpin the growing e-commerce market. Increased access and improvement to broadband services and payment systems have gradually built consumer confidence in the online marketplace and fuelled a willingness to buy. In digital design, a heavier focus on the user experience has vastly improved the interface that unites consumer and product. The inexorable spread of the smartphone and its accompanying arsenal of e-tail apps has meant that an online purchase is never further than a few taps away.

The Commission's Digital Agenda seems to represent a supranational nod of acknowledgment to a growing e-commerce market. If the initiative proves successful, it could underpin a thriving European exit environment for venture backers. Indeed in December 2011, Isis' sale of online cycling retailer Wiggle to Bridgepoint saw the private equity firm reap a 69% IRR and 15x multiple.

More specific trends are identifiable within e-commerce itself. The success of European fashion e-tailers is one such notable development and an unsurprising one at that, given the historic prestige of European catwalks. Between 2007 and 2012, unquote" recorded 257 investments in the personal goods and retail sectors, and an increase in investments in online-only companies is recorded throughout 2011. With the notable success of fashion-focused e-commerce companies such as Summit Partners-backed Vente Privée and Accel-backed Showroomprive.com, it seems the European subsector has the potential to create substantial value.

E-tail though does have its victims; recent reports reveal the growing vacancy rate in high-street retail premises. Many smaller bricks and mortar retailers, unable to compete with the economies of scale enjoyed by larger e-tailers, have fallen victim to digital Darwinism and been forced to shut up shop. This, of course, has repercussions on employment rates.

While European e-commerce seems set for growth, it must not go it alone. Silicon Valley cannot be dismissed as a competitor as contact must be maintained to allow entrepreneurs to leverage on developments in US-based startups.

Patience though seems a necessary virtue; it has taken UK fashion e-tailer and Index Ventures portfolio company ASOS twelve years to achieve its international success. A short-term focus on IRR might have hindered such growth. Von Bulow suggests that where Europe falters against its US competitors is in its propensity for quick sales. He suggests that "if you sell a company that has grown to say a €20m turnover, you might make money quickly but you will lose the infrastructure you have built, which is fundamental for the growth of a country. Companies need to remain sustainable, independent and ambitious". Had Zuckerberg sold Facebook prior reaching such disruptive levels, a plethora of follow-on startups would likely not exist. Perhaps the heavy focus on returns is more a hindrance than a concern.

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