Hi, it’s Nicolas from The Family. Today, I’m sharing a broad perspective as to why we should be optimistic about European tech.
This is still my weekly newsletter and it still includes a 10-point personal essay, personal & company news, and curated articles. But as indicated last week, this issue comes after a big upgrade:
It’s been sent with Substack rather than Mailchimp. I first discovered Substack when Azeem Azhar migrated his Exponential View. Then there was quite a lot of media coverage when Andreessen Horowitz led Substack’s Series A. And I’m a subscriber to several excellent newsletters that rely on Substack, including Alex Danco’s and The Margins. I expect a better experience (Mailchimp is so heavy and slow!) and a better approach to engaging with readers.
I’ve also decided that I should rebrand this newsletter. It’s still about my four favorite topics (entrepreneurship, finance, strategy, and policy) but I now want to insist on the European perspective. The idea behind the title European Straits is that Europe should find its own narrow way between the tech giants that are the US and China. It’s in resonance with the market my firm The Family is addressing—and with the columns I’m now writing for Sifted.
Finally, I’ve created a dedicated Twitter account which you should follow to be kept in the loop of news related to European tech: @EuropeanStraits. In the meantime, let me start framing the conversation with a list of ten reasons why I think Europe will get better at building tech companies 👇
10 Reasons to Be Optimistic About European Tech
1/ Better entrepreneurial ecosystems. My colleagues at The Family have been touring the continent extensively over the past months, and they came back with a clear assessment of where Europe stands: many ecosystems are getting better by the day. It helps that a first generation of companies is on the path to success, lifting up all the others in the process. It also helps that we now better understand what makes a thriving ecosystem, the institutions we need to build to keep them ticking, and the good practices that need to become normal. To be fair, there is still progress to be made, notably in connecting those local ecosystems together to form a pan-European network. But the hard work is being done on the ground, and it should give us hope as to what the future holds.
2/ Workers jumping ship. As we go deeper into the Entrepreneurial Age, established corporations that fail to adapt are having a hard time retaining their employees. In particular, younger European workers are growing disillusioned: they don’t want to renounce their freedom and opportunities in exchange for stagnant wages and bad management in exhausted organizations—not to mention an unaffordable housing market and no shiny perspectives whatsoever for future pensions. The result is that more and more European workers are embracing alternate forms of work such as freelancing, joining startups, or even founding their own company. As I expect this squeezing of the corporate world to intensify, I see no reason why it wouldn’t translate into more dynamism in the European startup world.
3/ Governments catching up. A most enlightening experience for me this year was reading Joe Studwell’s How Asia Works. It explains why certain East Asian nations (namely Japan, Taiwan, South Korea, and Mainland China) have succeeded at catching up while others (Malaysia, Indonesia, Thailand, and the Philippines) have floundered. Studwell demonstrates that it takes resolute government action to put the national economy on the right track and orchestrate the process of development. One of my ideas these days is that Europe has become a developing region again as opposed to a developed one. And rather than being humiliated by that, we should realize that just like those successful Asian countries we must take the right steps forward. Some European governments might be listening!
4/ Brexit. I admit it’s hard to make the case that Brexit could be a good thing for Europe. But allow me to be contrarian here, and point out two scenarios. One could see the European Union doubling down on harmonizing regulations to further cement the relationship between remaining members. This could be a boon for startups: just as entrepreneurs have made it into financial services thanks to the payment services directive, they could succeed in many other industries thanks to the single market becoming more of a reality in related sectors. The other scenario (not exclusive of the first one) is that having left the EU, the UK doubles down on creating a favorable context for entrepreneurs. In this case, London could become the base for building tech companies in Europe—or what my friend Saul Klein calls the New Palo Alto.
5/ Harder industries. You know how it goes in the oil market: when prices go up, it becomes profitable to drill in more difficult places. I think the same effect is at play in the tech world, and it will benefit Europe. Almost 20 years after the dotcom bubble, software is now eating harder industries—those which rely on more tangible assets and are more heavily regulated. That will contribute to bringing down returns on invested capital at a global scale and thus make European entrepreneurs more competitive. Their operating on a fragmented market will become less of a liability because the industries currently being eaten are hard to take over anyway. Starting in Europe could even turn out to be an asset because it trains entrepreneurs to deal with physical and regulatory problems from an early stage.
6/ Distributed teams. Europe’s main problem when it comes to building tech companies is the scattered nature of its entrepreneurial ecosystem. London might be close to being the Silicon Valley of Europe, but most of the talent is located in other cities, from Paris to Amsterdam to Barcelona to Copenhagen to Berlin to Bucharest. Europeans still have a hard time working together because cultures are so different from one country to another. But in the near future we’ll see a much greater ability to manage distributed teams. It’s a trend originating in Silicon Valley, and the main motive is to escape the real estate market in the Bay Area. But I don’t see why Europe couldn’t seize this opportunity to try and build companies which operations are distributed across the continent.
7/ The tech backlash. Until 2016, the backlash against tech companies was confined to Europe, and you could even wonder if it wasn’t a plot to cripple European entrepreneurs while their US counterparts were racing ahead. (Like, was Edward Snowden actually paid by the CIA to frighten Europeans and lead them away from value-adding personal data collection?) But since Trump’s election, the backlash has become a Western phenomenon and it could very well lead to crippling US tech companies, too. It’s still too early to tell what will come out of the calls to “break up big tech”, but neither Trump, Elizabeth Warren, nor Margrethe Vestager are expected to make life easier for large US tech companies. This could provide room for European competitors if they play their cards right.
8/ The West closing ranks. An interesting phenomenon over the recent period is that US tech companies have been kicked out of most of the world. Many have deserted the Chinese market and some are encountering mounting difficulties in India. Meanwhile, tech giants are emerging in Southeast Asia, Russia, and, soon, Africa. What it means is that Europe will become all the more critical in relative terms for US tech companies: it will represent a larger share of their P&L, a broader pool of talent, and the result could be a deeper involvement from US tech companies in helping the European ecosystem take off—notably through acquisitions and, thus, liquidity. I know that it somehow contradicts the idea of a retreat because of the tech backlash, but it’s too early to tell how those two trends will evolve and interact.
9/ The global savings glut. You probably know that there’s too much capital in the world. As interest rates are lower than ever and investors are awash with cash thanks to dividends and share buybacks, they don’t know where to allocate capital so as to generate returns. US and Chinese tech companies have become a niche asset class for more and more allocators ready to renounce liquidity in exchange for high returns. We shouldn’t exclude the possibility that European tech catches up at some point. It’s true that the returns in Europe are far from competitive. But as the world gets more fragmented and there are early signals that you can build successful tech companies in Europe, allocators could take a second look and decide to bet more on European tech. It takes changes in asset management, though.
10/ Relocation of capital. Now this one is a bit more technical. Over the past weeks, people have heard about European institutional investors being kicked out of US-based venture capital funds. Apparently, the reason is the enforcement of Directive 2014/107/EU, which forces EU member states to collect and exchange more information regarding where taxpayers allocate capital. The result, as is the case with the US’s FATCA for European financial institutions, is a heavier burden on those firms to which this capital is allocated, including US-based VC firms. And while some of them are glad to comply with the paperwork, others—that is, likely the ones that are oversubscribed—have decided that it’s too much work and have simply sent the money back. The result is interesting from a European perspective: it means that European institutional investors don’t have the luxury of becoming LPs in the best US funds anymore, and thus have to seek tech-related returns here in Europe. So maybe we should expect a flow of domestic capital into European tech?
Please scroll down for a list of articles to dig deeper into all these specific issues.
🇸🇬 To celebrate the rebranding of this newsletter, I’ve decided to re-publish some of my favorite essays sent over the past two years (it will be two a week). Here's the story of how Lee Kuan Yew used learning languages to turn Singapore into one of the most advanced nations on Earth: Want to boost national wealth? Follow Singapore’s lead and learn new languages.
🎙️ By the way, back when I visited Singapore in March, I sat down with my friend Thomas Jestin for an extensive talk about The Family, my book Hedge, and technology across Europe and Asia. You can listen to the podcast (in English 🇬🇧) by clicking the following link—with direct access to various parts of the interview and a full written transcript! I’m very grateful to Thomas for the great opportunity—in partnership with French Tech Singapore and the ENGIE factory => Exclusive Q&A with Nicolas Colin, co-founder of The Family and author of Hedge: A Greater Safety Net for the Entrepreneurial Age.
⚗️ My colleague Sandrine Lacout has long been in charge of interviewing potential team members at The Family. She didn't have a background in HR, but rather just an innate sense of judgement when it came to others. Still, she had to keep developing her instincts, and she's now publishing a series of articles on how you can do the same. The first two are here and here (in French 🇫🇷 for now, but we'll have English translations out soon.)
💻 We recently held an event at The Family's Paris office on one of the biggest challenges facing a young startup: Recruiting and retaining talented developers. Our event manager Vlad Oustinov summed up some best practices here: Hiring & Onboarding Developers.
The Digital World Is Not a Flat Circle (me, The Family Papers, October 2015)
Silicon Valley VCs are investing more in European startups (Ian Hathaway, Sifted, March 2019)
A third of the world’s top startup cities are in Europe (Maija Palmer, Sifted, May 2019)
Welcome to Somers Town — a New Palo Alto? (Saul Klein, LocalGlobe, June 2019)
Google and Facebook Are Sucking the Brains Out of Europe (Lionel Laurent, Bloomberg, July 2019)
Europe is beating the US in fintech innovation, says Revolut’s Nikolay Storonsky (Michael Stothard, Sifted, July 2019)
How Elizabeth Warren Came Up With a Plan to Break Up Big Tech (Sheelah Kolhatkar, The New Yorker, August 2019)
How VCs cover Europe (Vincent Jacobs, Medium, August 2019)
Scaling in Lower Cost Locations (Fred Wilson, AVC, September 2019)
E.U.’s New Digital Czar: ‘Most Powerful Regulator of Big Tech on the Planet’ (Matina Stevis-Gridneff, The New York Times, September 2019)
Why Europe’s Single Market Is at Risk (The Economist, September 2019)
Asset Managers: Time to Account for Technology in Your Allocation Strategy (me, LinkedIn, September 2019)
From London, UK,