Ambarish Mitra remembers the phone call well. The voice at the other end — from a US company he refuses to identify — invited him to fly across the Atlantic to discuss a $1.5bn deal to buy Blippar, his three-year-old start-up.
The conversation only lasted a few minutes. Mr Mitra gave it some thought, then turned the deal down. A year later, the Blippar founder and chief executive says he has not had second thoughts about keeping his London-based business independent.
“We did the right thing,” says Mr Mitra, 36. “An entrepreneur always knows when to sell their company. You know you’re on a high, you can see all the internal data and economic indices. We believe we’re going to be one of the biggest businesses in the world.”
Such brazen confidence is a hallmark of Silicon Valley: Facebook chief executive Mark Zuckerberg dismissed several multibillion-dollar takeovers, and Snapchat founder Evan Spiegel rejected a $3bn buyout from Facebook in 2013. Their decisions to stay independent were made easier by cash from venture capitalists eager to bankroll their fast-growing businesses.
But European entrepreneurs, lacking an equivalent of Silicon Valley’s VC-laden Sand Hill Road, have tended to accept large acquisition offers. Skype, the video calling service founded by the Dane Janus Friis and Swede Niklas Zennström in 2003, was sold to eBay for $2.6bn in 2005.
Now European tech start-ups are starting to eye a bigger prize. Blippar, makers of a free augmented reality and image-recognition app, received a $45m injection in March from Qualcomm Ventures, the venture capital arm of the US chipmaker.
Mr Mitra’s decision to remain independent comes as more money is flowing into European tech companies than ever before. According to figures from Dow Jones VentureSource, an investment database, funding for the continent’s digital groups almost doubled from $4bn a year to $7.75bn between 2010 and 2014. In the first three months of 2015, companies in the sector raised just over $2.5bn, the highest for any quarter since the start of the decade.
“I really believe it’s a matter of time before Europe produces its great tech company,” says Mark Tluszcz, chief executive of Mangrove, the Luxembourg-based venture capital firm that was an early investor in Skype. “That’s really just a matter of time because it’s no longer a matter of capital.”
Brussels vs the Valley
While growing, European tech investment is well behind that in the US. Over the past five years, US venture capital funds have raised $96bn, according to the National Venture Capital Association, and have drawn on existing cash to invest a total of $160bn — $70bn of it in Silicon Valley alone. The gap, in terms of funding and valuations, is also widening. Uber, the taxi app group, has obtained $5.9bn from investors, while payments group Square has raised close to $600m. Silicon Valley also offers a larger pool of experienced executives and programmers to hire from.
As a result Hussein Kanji, a partner at London’s Hoxton Ventures, advises many of his portfolio companies to move from Europe to the Bay Area. “I would argue that the smarter money, mostly through wisdom and experience, is also in the US,” he says.
Yet there is a growing confidence — perhaps overconfidence — from investors and entrepreneurs that the region could soon produce its first independent global tech giant.
One of the likely contenders is Spotify, the Stockholm-based company that has already become the world’s largest music streaming service. In June, it raised $526m in a funding round that valued the company at $8.5bn, making it one of the most heavily backed European tech start-ups in history.
Daniel Ek, its chief executive, says he has also rejected large takeover offers.
“It’s never really about [selling the company],” he says. “It’s been about how cool would it be to build a Google or a Facebook or a company of that stature out of Sweden and out of Europe. No one has really done that before.”
The clamour for a European tech champion has never been more pronounced, with US groups facing increased regulatory scrutiny in Brussels. Once lauded for its innovative spirit, Silicon Valley is under fire for its market dominance, tax avoidance strategies and handling of personal data in the wake of the revelations by US whistleblower Edward Snowden.
In April, the battle reached new heights when the European Commission formally accused Google of illegally abusing its dominance of the search market, launching one of the most significant antitrust cases of the internet age. Regulators have also announced investigations into the privacy practices of Google and Facebook and probes into the tax practices of multinationals including Apple and Amazon.
Some countries and cities, particularly in France and Germany, are considering, or enforcing, bans on Uber. This month, Uber temporarily suspended its UberPop ride-sharing service in a number of European locations — including France, where two of its executives were arrested and ordered to stand trial in September over allegations about the legality of the service.
The cases have been met with howls of protest from the US, reaching all the way into the White House. US President Barack Obama suggestedthat European officials are engaging in protectionism to support “some of their commercial interests”. He told the news site Re/code in February: “We have owned the internet. Our companies have created it, expanded it, perfected it in ways that [Europe] can’t compete.”
Some European regulators believe they should offer the region’s tech groups a leg up and protect them from being swallowed up by US rivals. Among them is Florence Raynal, an executive at France’s privacy watchdog CNIL, who argues that Europe’s tough data protection rules should be seen as a positive — offering a competitive advantage to local groups. But the region’s venture capitalists dismiss the idea as a losing strategy, only able to slow but not stop the advance of Bay Area companies.
“If anybody believes Europeans will create a better business environment than Americans, they’re completely dreaming,” says Mr Tluszcz. “We don’t have this in our culture.”
The US tech companies under fire in Europe argue that the EU’s regulatory framework actually works against the creation of international digital champions by forcing them to comply with Byzantine rules and regulations across each of the 28 member states.
At a gathering of tech entrepreneurs in London in June, Eric Schmidt, Google’s executive chairman, suggested that Europe should instead create a “digital single market”.
“When you buy a piece of music or entertainment, the internal boundary that exists in Europe determines the price, the deal and whether it is available,” he said. “This makes no sense to the citizen who himself or herself has mobility across these boundaries.”
He was pushing at an open door. In May, the European Commission set out proposals for a digital single market that would reform legislation on everything from parcel delivery to online retailing.
Slacker no more?
Even if Europe is unable to create tech giants in Californian quantities, there is a hope it can unearth some of real quality. Investors are increasingly willing to back the sentiment with hard cash. And it is coming from a mixture of sources.
New tech venture funds are springing up among the start-up “clusters” emerging in cities such as London, Berlin and Stockholm. Estimates from Hoxton Ventures suggest that about 20 groups are trying to raise cash to establish tech investing funds in the UK capital alone, which could bring a further $1.5bn into the European tech scene. Other newcomers in the city, including Mosaic Ventures and Felix Capital, have created funds of $140m and $120m respectively.
Venture capitalists from the US — after years of thumbing their noses at European efforts — are also beginning to dip their toes in the market.
Among them is PayPal co-founder Peter Thiel, who last month invested in two Berlin-based start-ups through his Valar Ventures group. This marked a significant U-turn for the German-born Mr Thiel, who once said he had an aversion to investing in Europe because it was a “slacker with low expectations”.
In the past 12 months, Andreessen Horowitz, the venture fund co-founded by Netscape pioneer Marc Andreessen, led a $58m funding round in TransferWise, a London-based online money transfer group, and took a $20m stake in Improbable, a virtual world creator also based in the UK capital.
“The notion of the most extreme, elitist, removed people saying they should be deploying a lot of money here is significant,” argues Ciaran O’Leary, a partner at Earlybird, a Berlin venture capital outfit.
There is also new capital entering the market from “non traditional” investors including wealthy families and individuals, investment banks, hedge funds and corporate entities. Often locked out of the US private tech market, where established American venture groups scoop up the best deals, these investors are stepping in when cash is most needed — at “later-stage” multimillion dollar funding rounds.
Funding Circle, the British online peer-to-peer lender, raised $150m in April — one of the largest funding rounds for a European start-up. It was led by Russia’s DST Global, the venture capital firm run by Yuri Milner, an early backer of Facebook, Airbnb and Alibaba. But the deal included money from BlackRock, the world’s largest asset manager, Singapore’s state investment fund Temasek, Edinburgh-based asset manager Baillie Gifford and US investment group Sands Capital Ventures.
Yet those who lived through the dotcom boom and bust in 1999 warn that the European market is also showing one of the less desirable traits of Silicon Valley: hype without substance.
Mr Tluszcz worries there is a “bit of an effervescent market, pulling in investors of all types”. He cites TransferWise and Shazam, a music recognition app, which have both received billion-dollar valuations this year despite, in his opinion, unproven business models.
Sonali de Rycker, a London-based partner at Accel Partners, says her firm discussed whether it should be involved in new funding rounds of between $50m and $100m for five European start-ups already within Accel’s portfolio.
“In some cases, these companies did not exist a year or a year-and-a-half ago,” says Ms de Rycker. “This is happening at a pace that we didn’t think was possible. It has never happened before in my 15-year history in this region.”
A graphic was amended on July 22 to reflect that Snapchat has raised $1.2bn, as was correctly stated in the newspaper version, not $1.2m