Europe's Hot Growth Companies
Who would have thought a tiny start-up in the foothills of the Alps would now dominate a key technology used by global chip giants like IBM (IBM ), Royal Philips Electronics (PHG ), and Advanced Micro Devices (AMD )? Ten years ago, when André-Jacques Auberton-Hervé and Jean-Michel Lamure founded Soitec in a small town near Grenoble, France, they were sure that an esoteric technology they had developed to boost the performance of microchips would be a winner -- if only they could get it to work on a mass scale. "We knew silicon-on-insulator technology could bring real value to the industry," says Auberton-Hervé.
Even though it took almost a decade to work out the kinks, the patience has paid off. Soitec now supplies 80% of the SOI wafers used by chipmakers around the world, while licensees provide an additional 10%. AMD's popular 64-bit Athlon and Opteron processors, which are giving Intel Corp. (INTC ) the jitters, rely on Soitec wafers. So do Apple Computer's (AAPL ) hot-selling laptops and the upcoming Sony (SNE ) PlayStation 3 and the next-generation Microsoft (MSFT ) Xbox. Soitec's revenues in the year ending Mar. 31, 2005, will likely top €135 million, triple the top line of four years ago.
Think Europe is inhospitable to small businesses? Think again. Auberton-Hervé, Lamure, and thousands of other entrepreneurs behind small, fast-growing companies are showing that good ideas, energy, and luck can overcome typically European burdens on entrepreneurship such as high taxation and heavy regulation. Smaller companies such as Soitec are responsible for 70% of all private jobs in Europe's €9.3 trillion economy, according to the European Commission. And while many big outfits like Germany's Siemens (SI ) and French consumer electronics group Thomson (TMS ) are reducing employment at home as they offshore operations to Asia and Eastern Europe, the Continent's 19 million smaller companies, those with fewer than 250 employees, are providing a steady stream of new jobs (chart).
Most small companies, in fact, stay small. But those that can grow deliver not only jobs but also vitality to the overall economy. Both are badly needed in today's euro zone, where average growth this year will be 2.2% and unemployment is stuck at 9%. In the U.S., the crucial role of small companies has been understood since the early 1980s, when pioneering studies by David Birch, an economist at the Massachusetts Institute of Technology, dispelled long-standing economic notions that big companies led job growth and economic dynamism.
Birch found that fast-growing, mostly smaller companies -- "gazelles" is what he called them -- provide the biggest share of new jobs. Though that is also true in Europe, recent studies suggest that successful companies in the region grow less swiftly than in the U.S. "If we were to make business conditions more favorable for firms to grow and prosper, then clearly we could sustain much higher growth in Europe," says Olivier Blanchard, a leading French economist at MIT and a member of a French government commission looking at ways to boost growth.
THE WILL TO GROW
BusinessWeek and the Brussels-based organization Europe's Entrepreneurs for Growth, which calls its ranking Europe's 500, have identified the fleetest of these European gazelles. We've ranked their job creating power by Birch's index, a way of measuring job creation by company size. These companies are as diverse as Europe itself -- Europastry, a Spanish frozen pastry group; Arup, a British engineering group active in 32 countries; and Formula Servizi, an Italian cleaning cooperative. But all share essential features of high-growth companies: an ability to spot opportunities and exploit them quickly, constant attention to improving efficiency and productivity, and a will to grow.
All of those qualities are present in a company like Germany's United Internet, although less than one-quarter of the 500 companies are high tech. When United Internet lost its single big customer -- Germany's Deutsche Telekom (DT ) -- in 1996, founder Ralph Dommermuth didn't roll over. Instead he went on the offensive and began challenging Deutsche Telekom's monopoly position as an Internet service provider. Now he is expanding in the U.S., Britain, and Austria. It's the same story at City Refrigeration Holdings Ltd., based in Glasgow. Starting with a €100,000 investment, Willie and Susan Haughey built a business-services group that has profited from the British impulse to outsource everything from refrigeration and cleaning to pest control and security. Revenues this year will hit €360 million and the company has more than 10,000 employees.
Entrepreneurs like Dommermuth and the Haugheys would probably prosper no matter the administrative, fiscal, and cultural obstacles thrown their way. But for the first time European governments -- from pro-business Netherlands and Ireland to even the more state-heavy economies of France and Germany -- are starting to think seriously about how to unshackle the potential of these kinds of growth companies. For example, Germany's Saarland, a hilly region bordering France that is dotted with abandoned coal mines and foundries, is encouraging local university scientists to commercialize their discoveries by providing cheap office space, access to lab equipment, and crash courses in business fundamentals.
France has dramatically cut down the time and red tape it takes to start a business, and is giving tax breaks to jeunes entrepreneurs indépendents. It's the same story in Britain, where Chancellor of the Exchequer Gordon Brown has cut corporate taxes for small business to 19% from 23%. "We want as strong and deep an enterprise culture as the U.S.," said Brown recently.
These changes are starting to alter the very way business is done in Europe -- so much so that a recently released World Bank report on the costs of doing business in 145 countries shows that European countries are making reforms the fastest. Of the report's 10 top reformers last year, fully seven were European: Slovakia, Belgium, Finland, Lithuania, Poland, Portugal, and Spain. At the same time, not a single euro zone member made it into the top 10 in the category of countries where business is most easily done. "The climate in Europe is really changing fast, but we are still far from the entrepreneur-friendly society we need to be," says Brussels-based Denis Payre, whose fast-growing parcel delivery service Kiala is the latest in a series of startups he has founded or financed.
Still, governments are helping. Germany, for example, markedly increased state aid available for startups beginning in the late 1990s. The fruits of that policy are starting to be seen today. A benefactor is Kristina Schmidt, one of three founders of Graffinity Pharmaceuticals, a German biotech firm developing compounds for the treatment of thrombosis and diabetes. A government-owned bank, now part of Germany's Kreditanstalt für Wiederaufbau, matched the 1.5 million euros the founders raised in venture capital in 1998, and later supplied another 1 million euros. Now known as Santher Pharmaceuticals following a merger with a Basel-based biotech firm, the company has 70 employees and is on track to begin marketing medications in 2007, a normal development period in biotech. "It would have been possible [without the government help], but the growth of the company would have been much slower," says Schmidt.
Even with all the changes, Europe has much catching up to do. For one, entrepreneurship is not a cultural norm: There are only half the number of companies in Europe as in the U.S. relative to the population, according to the Global Entrepreneurship Monitor, a research consortium including Babson College and the London Business School. "Young people in Europe don't get encouragement from family and friends if they want to become entrepreneurs," says Paul Reynolds, an economist at Florida State University and a prominent member of the consortium. "And even if a family wants to help, they don't know anyone who has been an entrepreneur. There just aren't many examples."
And bureaucratic hurdles still exist. At fast-growing and profitable Paris-based Internet software group Netonomy, CEO John Ball must comply with the Code du Travail, a thick red book whose 2,501 pages govern everything from vacation time to how France's mandatory 35-hour week should be enforced. "This increases the risks for startups, because when you have to make decisions based on developments in the market, you need flexibility," complains Ball, a 36 year-old Indiana native who founded the company four years ago.
Entrepreneur Payre in Brussels agrees. His parcel delivery group Kiala is now expanding throughout Europe, recently setting up alliances with Hewlett-Packard Co. (HPQ ) and French retailer 3 Suisses, and is well on the way to becoming a new gazelle. "The problem is that Europe has forgotten the role of entrepreneurs in society," says Payre. "We need to remember that this Continent is one of the wealthiest regions in the world today thanks not to governments, but to Renaults, Agnellis, and Michelins." As the success of growth companies in the Europe's 500 list demonstrates, that tradition can yet be revived.
By John Rossant in Paris. Correspondents Laura Cohn, Jack Ewing, Carol Matlack, Stanley Reed, Andy Reinhardt, William Boston, Maureen Kline, Ariane Sains and Rachel Tiplady contributed to this report