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12 December 2021

Unicorns everywhere

Last week, Apple’s stock market capitalisation approached $3 trillion. This was more than the entire German stock market that day. The digital revolution was an American one. When the Europeans were perfecting the fax machine and the diesel engine, the rest of the world moved on. Austerity, and the ensuing loss of investment, did the rest.

But there is something afoot. And it seems to have started in the pandemic. The Europeans are now challenging the US in venture capital and high-tech business start-ups. You might think this is boring, especially if your perspective is macroeconomic or political. But today’s start-up are tomorrow’s sources of growth, and that’s true in times of fast technological change.

As the venture capital firm Atomico wrote in the annual report on the state of the industry, European venture capital took off in the last year. The European pipeline of promising small company start-ups now rivals Silicon Valley for the first time. Total venture capital investments rose from $22bn in 2017, to $121bn this year.

But there is a catch. This is mostly a UK story. It accounts for cumulative investments of almost $75bn, compared to less than $30bn for Germany and $25bn for France. Sweden, interestingly comes fourth, an astonishing success for a relatively small economy.

What's also troubling is that this boom reflects Europe’s north-south divide. Spain is hanging on in there, behind the Netherlands, and ahead of Switzerland. Italy is not even on the list of the top ten. The UK accounts for the same share as Germany, France and Sweden combined. And this year the gap widened further in favour of the UK.

So this not an EU-wide phenomenon, and certainly a not a euro area phenomenon, but a British and Northern European one. There are tons more statistics in the report, about the biggest VC deals, the biggest VC exits, and many more. In the jargon of the VC industry, VC start-ups valued at $1bn or more are called unicorns.

One in five of Europe’s unicorns are in the fintech sector. Hence the prominence of the UK, and especially London, as favourite locations for European VC. Payment services, financial services passporting, and open banking stand for this innovation. I would expect crypto-finance to be the next big sector to attract investment. This, too, will be a UK story first and foremost. Other sectors that attract investments are semiconductors and online commerce.

You may say, this is all well and good, but Europe is a $20 trillion economy. $100bn is neither here nor there. Except that some of these companies stand a good chance of becoming the Apples and Amazons of tomorrow. Europe doesn’t have tech giants today because it did not have a high number of high-tech startups in the 1980s and 1990s. Emmanuel Macron said he wanted 10 European tech giants valued at over $100bn by 2030. On current trends, this is a feasible goal, though I find it strange to define a strategic goal in terms of a round headline number. Furthermore, some or most of those ten companies could be from the UK, which is probably not what he had in mind.

And this where I see the unicorn in the room. One of the reasons for the UK’s market leadership is the presence of deep and mature capital markets. The EU has not got anything like this. Atomico writes European capital markets were maturing. I am not sure this is true at all. As one of the experts quoted in the report noted, the number of high tech starts have grown exponentially during the pandemic. But this was not true for funding. There is still a real dearth of dedicated funds and endowments investing in high tech start ups in Europe.

So for all the gloom out there, the high tech start-ups are probably the most positive economic news in Europe right now. The seeds are planted. I am moderately optimistic for Germany where start-up investments have grown from a very small basis. The new coalition is intent to raise private sector environmental and high tech investments, both in the state and the private sector. What the EU will need to do to succeed is complete the capital market union, and its ugly twin sister, the banking union. These two projects are stalling right now.

The EU should be careful that the VC success story does not turn into an advertisement for Brexit. Many of these start ups trade in data, a category that is certainly not captured by macro trade models.

What happened in the UK is that the lockdown has turned a lot of people into entrepreneurs. This did not happen in Germany, where jobs were much better protected. The main thing about start-ups is starting up.

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