Two reasons why we need large indigenous tech companies

For a while now I’ve been saying that large indigenous tech companies are a vital component of a healthy startup ecosystem. Large companies are important sources of entrepreneurs, executives that can help startups grow, partnerships, and exits and all these functions come from human relationships and work better locally. Smart companies like Google and Facebook recognise the value that comes to them from working with startups around the world and have made strong efforts to forge local relationships at distance from their headquarters, but whilst this lessens the impact of distance from the HQ, it doesn’t remove it, and most large companies don’t have comparable programmes.

Reading about the JOBS Act this morning I learned of another reason why we need to build more large European companies: it is good for employment. According to the National Venture Capital Association (of America) ninety-two percent of job creation comes after IPO.

From a European perspective the important point here is that most acquisitions are made by US companies, and after that local job creation generally dwindles. Sometimes that is because the acquired business becomes core to the acquirer and new people are mostly hired in the US and other times it is because the acquisition goes badly and the acquired business withers.

The good news is that we are doing better and better at this in Europe. We now have a small but growing list of large public tech businesses in Europe, including ARM, CSR, Abcam, Betfair and QliqTech. We still have some way to go though.

That said, I don’t think there is a silver bullet that will enable us to quickly double the size of this list. Building an ecosystem takes time, and this is one component that can’t be hurried. It is tempting to say that European entrepreneurs and VCs should hold their nerve and not sell out to US acquirers but that ignores another greater imperative – the need to show success and get more money flowing into the local startup ecosystem, both from angels and LPs. Whilst at the margin it might be true that we could collectively build our companies for longer before selling most everyone I know would love to be involved in a billion dollar IPO, and they only sell out before then when in their assessment it is the right risk weighted thing to do. For every company I know that looks like it might have been sold too early there are others where it looks like the timing was impeccable from a valuation maximisation perspective, and there are others still which turned down high offers and later sold for a fraction of what they might have achieved.

The one thing that is making a difference in the short term is the greater availability of late stage finance from companies like DST, Oak and Tiger Global. Their investments in companies like Spotify, Wonga and Zalando is providing an increasingly important alternative to M&A for European companies that aren’t ready to IPO.