U.S. Entrepreneurs Can Learn A Few Things From Their European Colleagues

European entrepreneurs and venture investors are doing very well. Investment in Europe has continue to grow rapidly over the last three years (see chart below), while U.S. investment has plateaued, and returns from European venture investments now compare favorably to U.S. returns.

GP Bullhound, a European investment bank that advises start-ups, recently published a report on European unicorns. Bullhound compiled data for European tech companies now worth over $1 billion that were founded since 2000. This is a broader definition than other unicorn counts, because it includes companies that are now public or acquired (e.g., Skype) in addition to currently-private companies. But it's a good indication of what European entrepreneurs have achieved.

Bullhound found systematic differences between unicorns in Europe and the U.S.:

• Unicorn valuations as measured by market cap/revenue are much higher in the U.S. than Europe: 46x versus 18x. And Europe has yet to produce a "decacorn" (valued above $10 billion) while the U.S. has produced several.
• But, European unicorns have 2.5x higher average revenue than U.S. unicorns: $315 million versus $129 million. Put another way, European unicorns offer more steak and less sizzle than their U.S. counterparts.
• Two-thirds of European unicorns are profitable. I could not find this data for U.S. unicorns, but I believe the profitable fraction is much smaller, as most U.S. unicorns have laser-focused on growth and subordinated the goal of achieving profitability.
• And European unicorns have raised about half as much capital on average.

So, European entrepreneurs have learned how to build real companies that have 2.5x more revenue and are mostly profitable with half the capital. How do they do this? Pretty much the old-fashioned way. They focus on perfecting their products and theb getting to profitability, so that further growth is self-funding. Spending is typically more moderate versus U.S. counterparts.

European start-ups mostly focus on products, versus platforms. Europeans have a tradition of product excellence, and many European countries have high levels of R&D investment that fosters product innovation. They express frustration that they do not yet have a Google or Facebook, but this product oriented strategy enables earlier profitability because there is less need to spend lavishly to pre-empt a platform market by locking up all the customers early. Product businesses have less upside than platforms, but they can deliver solid results.

Within Europe, the Nordic region outperforms the rest dramatically. With 3% of Europe's population, the Nordic countries attract 15% of venture capital investment and have delivered 21% of the unicorns and 32% of unicorn value. The Nordic countries have levels of R&D investment equalled only by Israel and South Korea, which are also innovation powerhouses. Their home markets are stable but quite small, so they deeply understand the imperative to think globally from the beginning.

Europe's approach to innovation is mainly a back to basics strategy, reminiscent of Silicon Valley before the year 2000 tech bubble. Later stage venture capital is very scarce in Europe, so entrepreneurs have had to find ways to build great businesses with less funding, and they have succeeded. As later stage funding gets tighter in the U.S., American entrepreneurs here can benefit from using some of the strategies employed by their European colleagues.