Europe’s answer to Big Tech
29 March 2021
Amazon, Apple, Google, and Facebook had an extraordinary 3rd quarter: $38 billion in profits on nearly $240 billion in revenue. Amazon’s profits are up 200% on the previous year. Google’s grew by 60% and Facebook’s 30%. Microsoft, which has now worked its way into a new ‘FAAMG’ acronym, made $14 billion in profit during the same period due to its booming cloud computing business. What has been a disastrous year for many restaurants, theatres, cinemas, airlines, higher education, and countless other industries has been the opposite for these US tech behemoths.
The US tech sector is today worth more than the stock markets of all 27 EU member countries combined.
But where are the European tech giants? Europeans are avid consumers of what Big Tech provides, yet 14 of the world’s 20 most valuable tech firms by market capitalisation remain US-based. In Europe, there is just one - SAP. The US tech sector is today worth more than the stock markets of all 27 EU member countries combined.
Nikolas Kairinos is the chief executive officer and founder of Soffos, a company which claims to be the world’s first AI-powered KnowledgeBot. He also founded Fountech.ai, a company which is driving innovation in the AI sector. Kairinos first started out in the tech industry as a programmer, aged 11, and is based in Cyprus.
Why does Nikolas believe Europe trails the US so badly when it comes to scaling up? “In many domains, the US has pulled far ahead of Europe. If we are to take my sector, artificial intelligence (AI), the US scene dwarfs Europe’s. But this is not for lack of trying on Europe’s part. Europe is home to a thriving hub of tech entrepreneurs, many with the potential to solve some of the world’s biggest challenges. But there are many reasons why the European tech sector is falling behind.
The US makes tech investment a priority
“Firstly, the importance of government involvement cannot be overstated. Not only does this lay the groundwork for infrastructure and regulation, it also encourages private investment. The US has long made clear its intentions to make tech investment a national priority, with huge amounts of national and private resources being directed towards R&D and removing barriers to innovation.
“On the other hand, Europe’s progress is hindered by a distinct lack of funding and increasing restrictions on R&D, despite having access to a wide pool of home-grown talent and a strong tech startup community. It’s possible for Europe to gain ground and close the gap, but it cannot afford to rest on its laurels. It must double down on its efforts and pave the way forward through better collaboration between citizens, organizations and governments.”
This is probably what Eric Schmidt, the one-time Google chairman, meant when he warned the Brits that the “UK does a great job of backing small firms and cottage industries, but there’s little point getting a thousand seeds to sprout if they are then left to wither or are transplanted overseas.”
So, why can't Europeans grow these seeds? According to Kairinos, “the problem isn’t the inability of individual teams to scale up good ideas, or the absence of a highly-skilled workforce. Instead, the shortage of tech behemoths is largely a result of Europe’s failure to effectively nurture its tech ecosystem.
In order to turn a powerful vision into a commercial reality, European businesses must have access to much wider support than they currently do.
“In order to turn a powerful vision into a commercial reality, European businesses must have access to much wider support than they currently do. Europe must continue to enhance tech expertise, grow start-up networks, invest in innovative ideas, and generally improve the landscape to encourage funding and government support. A favourable political climate is key to getting big ideas off the ground.”
It’s certainly true that American investors are very interested in the European market, where they often find good value and attractive opportunities at lower market prices than at home. It’s thought that around 39% of investment in European start-ups still comes from the rest of the world, much from the USA.
Around 39% of investment in European start-ups still comes from the rest of the world, much from the USA.
This is despite the fact that Europe has created 205 unicorns since 2005, with founders and early employees from Europe’s largest tech firms, including Skype, Spotify, LoveFilm and Klarna frequently keen to support the next generation of startups, scale-ups and unicorns. The trend for experienced founders to angel invest in the next generation of tech companies, plus a rapidly maturing tech ecosystem, is helping to establish Europe as an entrepreneurial continent, with start-ups now Europe’s leading engine for growth in the jobs market.
What does Kairinos think of the actions taken by the EU when it comes to regulation? Is there a risk of strangling nascent businesses in red tape?
“The EU bloc’s attitude regarding regulating technological innovation is well-intentioned, yet it risks stifling the future creation and deployment of new skillsets. Take the pilot of ethical AI guidelines released by the European Commission in April 2019, for example. The stringent framework for achieving trustworthy AI places a high burden on technologists looking to create the “next big thing”.
“It is characteristic of Europe’s overarching approach to AI and tech development more generally, whereby excessive red tape, legal limitations, and a lack of strong governmental support relentlessly threaten its position in the global tech race.
“There is naturally an element of risk involved with all new technology, particularly in the initial stages of development. Europe risks putting researchers off pursuing ambitious new projects by creating overly restrictive regulations.
“Regulation is undoubtedly a good thing. Too much premature regulation, however, risks causing more damage than it prevents. A balance must be found between ensuring that citizens’ rights are protected, technology is developed ethically, and that developers’ own needs are being met in pursuit of valuable new solutions.”
The next step is making France a real international hub, as London was able to do before.
When he gave an interview to the Financial Times sister site Sifted in October, Cedric O, the French digital junior minister, was bullish about his country’s prospects. He stated that there is more international talent coming to France plus a good measure of homecoming folk from both the US and the UK. “The next step is making France a real international hub, as London was able to do before...we are rolling out the red carpet for [Brexit fleeing] UK talent.”
The extent of his ambition was clear: “Getting a trillion-dollar company, that’s not something you can just declare,” he said. “The number one factor for valuing a tech company is its market size. The UK was taking advantage of the single market, but now it’s getting out of it. Not only has France been able to talk the talk but it’s also walking the walk. We’ve done the reforms and we can offer stability.” He is referring to the €7 billion budget for digital contained within the economic stimulus package.
Covid-19 has accelerated the development of digital by a factor of ten: what took a decade previously now takes a year.
Laurent Foata, Head of Ardian Growth, has nearly three decades of experience in tech investment behind him. He sees no reason for Euro despair and believes there is still much to play for in the tech game. “I’m very positive about Europe’s tech future. Covid-19 has accelerated the development of digital by a factor of ten: what took a decade previously now takes a year. It is a new revolution and Europe can play a leading role despite a more fragmented market than you see in the more homogenous America. The US does not have the ‘bling’ attraction it once did, and China is problematic for its own reasons. Europe is a steady geographic and economic area with a strong skills base. You have to look at history to understand entrepreneurs. They have a pirate’s energy. The system is Darwinist, in my opinion, and there are still many dinosaurs out there in the field.”
The latest European double unicorn
Foata’s confidence is borne out by the extraordinary story of Hopin. Still less than a year old, Hopin, a start-up that provides online events software and has taken the Covid-afflicted industry by storm, announced that it closed a $125 million Series B round of capital in November, just months after the company raised a $40 million Series A in the summer. According to Hopin’s CEO Johnny Boufarhat, the new capital was raised at a $2.125 billion valuation, making Hopin a double unicorn.
With a few more startups like that Europe will be challenging for more Global Top Twenty tech places before too long.
MORE REGULATION LIES AHEAD
So 2020 and the pandemic has consolidated the power of the largest tech firms and left them even more influential and controlling than before. The more frustrating news for Big Tech this autumn was the release in the United States of The House Judiciary Committee’s report into anti-trust which concluded: "To put it simply, companies that once were scrappy, underdog start-ups that challenged the status quo have become the kinds of monopolies we last saw in the era of oil barons and railroad tycoons." With Joe Biden now sworn in action on this front looks increasingly likely.
The challenge European regulators face is that consumers appear to be largely happy with the services that US Big Tech provides. There is little evidence of popular uprisings on issues of data privacy or adverse influence on electoral processes. In Brussels, Margrethe Vestager, Executive Vice President of the European Commission for A Europe Fit for the Digital Age, has said, “There is in my mind no doubt that platforms - and the algorithms they use - can have an enormous impact on the way we see the world around us. We need to know why we are shown what we are shown.”
In late November of 2020 the French tax authorities went it alone and began to demand millions of euros from US technology groups as they pushed ahead with a new digital services tax. Facebook and Amazon are among the companies to have received communication from French authorities demanding payment of the tax for 2020.
And it’s not just in Europe and the USA that regulators are expressing disapproval. In early December the Chinese government fined Alibaba and two other companies for not reporting - i.e seeking approval for - past deals. This seemed to close a regulatory grey area that China’s foreign-listed tech companies have exploited for some while. China’s market regulator fined Alibaba, Tencent-backed online bookstore China Literature and logistics group Shenzhen Hive Box for failing to ask for regulatory approval for deals made as early as 2014.