European Startups To The Rescue

In Europe, small companies are where the action is

Leopoldo Fernandez Pujals has a tempting recipe for a continent that craves jobs. A decade ago, as more Spanish women began entering the workforce, the Cuban-American marketer sensed Spain's growing appetite for fast food. So he invested $80,000 to start a pizza-delivery service in Madrid. Now, TelePizza boasts $260 million in sales and employs 6,000 workers. Since going public on the Spanish Bolsa in late 1996, TelePizza's shares have soared from $14 to $123, and its market cap now tops $1.3 billion. Says Pujals, a 50-year-old Vietnam war veteran: "More and more people are asking me: `What's our secret?"'

No wonder. At a time when Europe's industrial giants continue to shed workers, a raft of small, dynamic companies such as Pujals' are emerging. They are creating jobs and spurring economic regeneration--despite obstacles such as heavy taxes and red tape that have long discouraged the Continent's entrepreneurs. Indeed, Europe's hot growth companies are showing a remarkable ability to take advantage of the Continent's growing trend toward deregulation, its nascent secondary stock markets, and the rapid spread of the Internet, which puts companies in instant touch with new customers. Says Juan Roure, a professor at IESE Business School in Barcelona: "These are the companies that are most effectively creating value and jobs. They are changing the rules of how to compete in their markets."

Smaller growth companies have gone largely unnoticed among Europe's political elite until recently. But their continued success is vital if the Continent is to reduce the ranks of its 19 million unemployed. A new study by Europe's 500 Association, a nonprofit group linked to the European Foundation of Entrepreneurship Research, identified 500 small and midsize companies whose sales--and employment ranks--are soaring. Conducted by IP Strategies, an independent consultant, the study found that both service companies and small-scale manufacturers are providing entry-level jobs needed to combat Europe's 11% jobless rate. Moreover, they aren't just clustered around tech zones such as Munich and Cambridge but are dotted across the Continent.

Mostly privately owned, the 500 companies identified by the study increased their employment by a total of 183,000 jobs--an average 16% annually from 1991 to 1996. At the same time, according to the study, 290 of Europe's 500 biggest companies by market capitalization slashed payrolls by 4%, or more than 500,000 jobs. The lesson, says the study's organizers, is that Europe must foster a climate that will encourage thousands more entrepreneurial companies to flourish. Says Bert W.M. Twaalfhoven, co-founder of Europe's 500 association: "Philips and Siemens aren't creating new jobs in Europe. It's a whole group of hidden performers."

TECH, TOO. The No.1 job creator in the study is Pujals' TelePizza. It increased its payroll by 62% annually from 1991 to 1996, creating 5,787 jobs over five years as its sales jumped 1,364% (table, page 23). And it's not only low-skilled jobs that are growing among Europe's flourishing small and midsize players. Technology companies have also been among the leading job creators in Europe. France's Gemplus--a maker of plastic cards containing an embedded microprocessor and memory chip used in phone booths and bank cards--saw its sales leap 48%, to $569 million, last year alone as it hired 1,092 new staffers. Now, the company is considering going public, possibly on NASDAQ and a European exchange. Although there are disadvantages to starting a company in France, concedes CEO Daniel LeGal, Gemplus owes its success to "being in a market growing 25% to 30% a year."

Analysts expect the surge in sales and jobs at tech companies to accelerate as Internet use continues to spread across the Continent. "Growth in the Internet has helped fuel our business," observes Christopher Horn, CEO of Ireland's IONA Technologies PLC, which sells products that help diverse software packages work together. Founded in 1991, when Horn was a computer-science researcher at Trinity College at the University of Dublin, IONA now employs 470 people worldwide. Sales have more than doubled, from $21 million in 1996 to $48 million in 1997, and some analysts see revenues hitting $85 million this year. Last year, IONA went public on NASDAQ, through an initial public offering that valued the company at $360 million. Its shares, which were listed at $18, are now trading at $27.88.

In industries such as aviation and telecommunications, meanwhile, small-scale growth companies are taking advantage of market openings in the European Union. Regional airlines such as Britain's Cityflyer Express Ltd. are taking off now that Europe is allowing full-fledged competition in air travel across the Continent. The trend to outsourcing in the industry is also providing opportunities for small airlines such as Air Atlanta Icelandic. Its sales soared some 20% last year, to more than $100 million, as it expanded its business of providing capacity to other airlines on a temporary basis. Among other gigs, Air Atlanta Icelandic flies groups of pilgrims to Mecca for several carriers. The company has seen its fleet grow to 17 planes and its workforce jump to 700 people since it started 12 years ago.

In telecom, Finland's Elcoteq Network has taken a similar route to success. When 51-year-old CEO Antti Piippo led a management buyout of the struggling flat-panel-display maker in 1991, Elcoteq employed 170 people and had sales of $13.6 million. Spotting an opportunity to apply its expertise to mobile-phone manufacturing, Piippo began supplying Nordic phone giants Nokia Corp. and L.M. Ericsson. Last year, they accounted for 70% of Elcoteq's $303 million in revenues. It now employs 1,800 people.

Many European growth companies are scoring simply by answering consumers' demands for better service. Just four years ago, Euro-Med opened a hotel, fitness center, beauty spa, and medical clinic near Nuremberg aimed at Europeans who want first-class health and leisure facilities at prices not much higher than those of conventional hospitals. After turning an operating profit of $5 million on sales of $29.5 million in 1997, Euro-Med plans to double its staff of doctors, to 100, by 2000, says President and co-founder Wolf-Michael Wunsche.

Such successes offer a glimmer of hope for the Continent. It will take lower taxes and more relaxed work rules to really create an environment where entrepreneurs thrive and unemployment dwindles. But Europe may be finally waking up to the fact that small companies are the key to growth and prosperity.