The reason that I like to keep an eye on how this is developing is that over the past year or so I have increasingly noticed that it isn't just the big vendors that are analysing the start-up scene with their acquisition hats on. Now when I speak to CIOs or digital buyers they are wanting to discuss how they can introduce start-up technology and innovation via SMEs into their portfolio – more often than not they say that this isn't just to tick an 'SME box', but it is because they recognise that their biggest suppliers aren't giving them the solutions they need quickly enough to remain innovative in their fast changing, competitive markets.
I have been to numerous events recently and had plenty of discussions with some of the biggest retailers, government departments, and financial institutions, all of which are discussing some interesting start-up they are working with in the East End of London, or Berlin, or Tel-Aviv, because they recognise that this is going to help them stay competitive.
There has been a lot of debate over the past couple of years about which tech hub in Europe is going to grow to become 'the next Silicon Valley', a lot of it pointless and empty, but the European Commission's ranking is worth a look over.
Germany, the UK and France take the trophies
The report states that most of Europe's activity takes place in 34 regions across 12 countries (take a look at the report for all the detail) and the Commission found that the “key ingredients to success” include access to top Universities and research centres and funding opportunities, such as venture capital. An online infographic 'Atlas' has been put together, which can be found here. It found that tech thriving regions:
- are mostly long standing industrial areas
- have high-standard educational institutions and other key innovation players
- have long-term policies on research and innovation
- have enjoyed historical opportunities (such as being the political national capitals)
- tend to cluster together (half of the 34 hubs ranked are neighbouring regions)
So who came out on top? Well, the study ranked first tier hubs with a score between 81 and 100, with Munich taking the lead of the table with a perfect score of 100. London came in second place with a score of 97 and Paris in third with a score of 95. Here is the full table:
The scores were largely based on three main activities: ICT research & development, bringing innovation to market and business activity. The European Commission believes that success is based on a 'high and balanced performance' in all three areas, where for example, Munich ranks 1st in ICT R&D, 3rd in ICT innovation and 4th in business activity. Whereas London ranks 5th in R&D, 9th in innovation, but 1st in business activity. This graph gives a nice picture of how diverse the hubs are:
European Commission Vice-President Neelie Kroes, whom is in charge of a lot of the EC's digital agenda, said:
"This is proof that digital success comes through a willingness to invest, an open mindset for innovation and planning. Europe needs to build these values today to be a global leader in technology."
I thought it best to give my take on this from a UK perspective, given that I've been following the start-up scene in London quite closely for a few years now and it is the area that I have the most experience with. Since Prime Minister David Cameron announced Tech City in the East End of London as a new 'hub' for start-ups (despite the area having been developing independently for a number of years) there has been a lot more mainstream media attention on how it is growing and whether or not it will compete with US giants.
One of the things that the report picked up on as a big factor for an area having success as a digital hub, is the proximity to vertical industries. This is something that I've noticed in London with the close access start-up firms have to the financial giants in the city – financial technology seems to be one of the areas smaller firms are receiving the most funding for, with a number of accelerator programmes focusing in on it as a niche. I think this is sort of activity is vital because it gives cities an opportunity to hone in on a specialism and develop technologies that they can then export – it's exactly what Israel has done with retail technology.
However, if Europe is hoping for a Silicon Valley to spring up on its shores in the next few years it is largely wishful thinking. Although there have been some exciting companies springing up in the region (e.g. Spotify, Summly, Deeza, Mind Candy etc) there are still a number of barriers facing start-ups in Europe: funding, access to skills, appetite for risk, market size. All of the things that the US on the West Coast has plenty of. In fact, on the funding front, the US accounted for 70% of all venture capital deals in 2013, with Europe only making up 14%, according to VentureSource.
According to CEO of Essentia Analytics, a fintech start-up in London, this is a big problem for the number 2 tech hub in Europe. Clare Flynn-Levy said at a recent event on the issue:
“Capital for early stage companies is still too scarce, and rents too high. Tax breaks such as EIS and R&D tax credits definitely help, and the UK government is making excellent strides to support entrepreneurship. But the fact remains that there aren’t enough early-stage investors in London.
“London doesn't even have that many VCs, but the few there are have a different risk appetite to those in the US. UK fintech companies that have made it past the seed stage but aren’t yet scaling face a vacuum when it comes to capital. This is unfortunate, and it's preventing London from creating some of the world’s top fintech companies."
This is likely to be true of a lot of the other tech hubs across Europe.
However, I think collaboration across tech hubs is key here. As we saw recently with a government-backed plan in the UK to get Israel start-ups in London pitching to some of the country's top retailers, there is scope to start selling to those in nearby regions. Although the US is always going to be an attractive market, the tech hubs in Europe need to start recognising their individual strengths and working closely to tap into their individual pools, instead of trying to build a new Silicon Valley in one city. I think that if this starts happening to a greater extent, then Europe as a whole has a chance of becoming a tech powerhouse of the West – but we are a long way off yet.