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If There's a Tech Bubble, It's Not in Europe

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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The European tech market is finally coming of age, according to a report published by Atomico, the venture capital company of Skype founder Niklas Zennstroem. The industry is maturing just as problems are emerging in the U.S. model for funding tech companies, and perhaps the lag will save the Europeans from the same pitfalls.

The tech industry in Europe is now a powerful network, with 1.6 million professional developers, 71,497 of them in London, the biggest hub. San Francisco has 83,262, so the numbers are comparable. Europe has more professional mobile application developers (237,437) than the U.S. (186,602). That numerical advantage could have been bigger, because Europe produces twice as many graduates in math and tech-related sciences as the U.S., but cultural norms have stemmed their flow into startups: Working for a new company has been considered less socially acceptable than toiling for an established company. Atomico's survey shows that this barrier is being overcome and even older Europeans consider tech entrepreneurship an honorable line of business.

European entrepreneurs are concentrated in five major tech hubs -- London, Stockholm, Berlin, Paris and Moscow, which receive half the continent's venture funding -- and 62 percent of founders said they would choose the same city if they had a chance to start over. Only 12 percent would move to the Bay Area. One reason is that the average salary cost of a 17-member outfit in San Francisco is 50 percent higher than in London, an expensive city by European standards.

European tech firms got an impressive $10 billion in venture capital this year. Yet a big financing gap remains between the U.S. and European tech scenes. It is especially pronounced in the later funding stages:

Dow Jones VentureSource, Slush & Atomico

To Zennstroem and his European colleagues, that's a problem. But the funding gap also may be keeping the European industry healthier. 

The U.S. payment company Square will go public with a value of only about $6 billion -- one-third less than it promised investors in an October 2014 funding round. When the information on the price range became public, Square's former chief operating officer Keith Rabois tweeted:

According to Rabois, it's gotten a lot harder to get late-round funding in the U.S. In a recent Financial Times article, Leslie Hook explained that the "unicorns'" and other privately funded tech firms' valuations are not so much inflated as overstated. The funding rounds that provide these valuations come with conditions that couldn't be part of an initial public offering. As a rule, investors demand a fixed minimum return. If they do not get it in an "exit event," they are promised more shares at the expense of founders and earlier investors. Founders like the deals because the enormous valuations they produce -- $50 billion for chronically loss-making Uber or $15 billion for Snapchat, which is still looking for a monetization model -- help anchor potential IPO investors' expectations, even if reality starts biting soon after the first trading day. Besides, the private money just keeps coming to the tech leaders, allowing them to put off the "exit event" seemingly indefinitely.

That may be part of the reason European startups have raised more money than U.S. ones at IPO for the last two years:

Slush & Atomico

IPO valuations and subsequent market capitalizations are a more realistic measure of how much companies are worth than the opaque private deals burdened with additional terms. That means "underfunded" European tech companies are probably priced more fairly than U.S. ones. If there's a bubble, it's not in Europe. That all the $10 billion-plus tech companies are elsewhere may not mean that Europeans are unable to come up with great ideas or effectively scale the ones they have. In fact, of the 35 European "unicorns," only a few are exclusively aimed at the domestic market, compared with 81 percent of Asian $1-billion companies and 23 percent of U.S. ones.

U.S. tech gurus may view the European scene with a bit of condescension, but in two or three years, it may well turn out that the old continent is producing just as many billion-dollar software companies as the U.S. and that they have more staying power in the public markets. The Silicon Valley advantage could soon be seen as a handicap if Rabois is right about the end of the "steroid era."

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor responsible for this story:
Max Berley at mberley@bloomberg.net