This is a guest post by Erik Bovee, a founder and partner in SpeedInvest, an early stage venture fund focusing on Central Europe.
I woke up the other day to find that some of the worst regimes in the Middle East were on the verge of collapse, and Vienna had a startup scene. I don’t want to overuse the ‘Arab Spring’ metaphor, so I will stop right here and never, ever mention it again. It might all have come as a surprise for Americans who, paying intermittent attention to their inadequate news media (pro-tip: BBC World), have had little more than a vague impression that ‘things are pretty complicated over there.’
While you where sleeping…
But the seeds of the sudden blossoming in tech entrepreneurship in Central and Eastern Europe (CEE) were sown long ago, and they fell on ground that few realized was so fertile. Like a lot of important historical phenomena, the whole thing started with a deep sense of inadequacy: Europeans have been scratching their heads for decades trying (badly) to recreate the economic engine of Silicon Valley. Planned scientific/technical communities like Sophia Antipolis in France fail even to come close. Chamber of Commerce initiatives hoping to foster ‘innovation exchange’ or ‘to seed the ecosystem’ usually amount to nothing more than a handful of Euros and a 12-week lease on a grubby cubicle in Sunnyvale. Although, I have to admit the Danish Chamber of Commerce program doesn’t look too bad, like the best item on the menu of a tourist trap restaurant on Mariahilfestrasse.
Looking at the history of Silicon Valley doesn’t really provide any clues on how it should be done today, in a small cluster of countries whose rich technical achievements of the past two centuries are often overlooked. What worked for Cupertino in 1976 probably wouldn’t work for Budapest today. But one doesn’t have to go too far back into the recent past to a time when Budapest and Vienna where the cosmopolitan centres of a dominant European empire that produced a surplus of great mathematicians, engineers and technicians. Something of that culture is alive now, and it is taking little to revive it quickly.
Silicon Valley had Stanford, and research and development flourished there that bridged the tricky cultural gap between industry and the academy. Frederick Terman helped establish the Stanford Industrial Park in 1954 to help stave off Stanford’s financial problems, and to retain graduates who might otherwise have headed back to New York to look for real jobs (Stanford was surrounded by farmland at the time). The next thirty or so years look nothing like the development of technical innovation centres now (unless you focus only on China). Back then it was all about the hardware. Large scale investment in industrial laboratories, fabs and warehouses humming with mainframes (AT&T Bell, Intel, Fairchild, etc.) drove innovation at a costly and glacial pace by today’s standards. The history and current indicators that make Silicon Valley such a success don’t necessarily play a role in the creation of other tech hotspots.
Anything you can do, I can do better!
So what are the primary factors driving economic growth and innovation in Silicon Valley today? And can we compare them to what is happening in Europe to help understand what the future holds for CEE?
First, in Silicon Valley, the human resources needs are met by immigrants (and, in fact, immigrants drive economic growth and investment in new companies – they founded 25% of US venture backed public companies: http://bit.ly/lGtPqB). When I ran mobile messaging at VeriSign, 60% of my team were from India., with a few Israelis and Europeans sprinkled in. When I look at friends with startups (or even university labs in the US) I see a very large proportion of foreign talent. European secondary education beats the US, hands down: young Europeans are better educated in math and science than their US counterparts, and they maintain their lead. European Union (EU) enrolments in university mathematics, science and technology programs (under- and postgraduate) as a percentage of total enrolment hover at around 25%. In the US that number is 17%. And in strange places like Finland, Germany and Austria, the numbers are 35%, 30% and 26%, respectively (http://bit.ly/nd0HYC). The engineering talent pool is proportionately larger, and better in many respects.
‘OK, sure, but Silicon Valley has the money…’
Not for long. The offices might be on Sand Hill Road, but the capital is global. Funds will go were the opportunities are, and European private investment is recovering faster than that in the US. Large venture funds are beginning to take a serious interest in CEE technology sectors, and new funds (such as ours at SpeedInvest) are popping up quickly. EU VC/private equity investment (including buyout, replacement, rescue, growth, late-stage, venture, startup and seed capital) grew, or recovered, 92% from 2009-2010, with the largest change in growth capital and buyout investment (http://bit.ly/qBfome). It’s not entirely comparing apples to apples, but US venture investment recovered only 21% in the same timeframe (http://bit.ly/nEhG0R). European private investment growth exceeds the US rate over the last two years in nearly all categories.
‘…But US Engineering schools, like Stanford, still have the best industry ties’
You don’t need 8 years and 100 million dollars to create an industrial research lab in order to drive significant innovation anymore. The tools are open source, and the hardware is commoditized. And platforms like Ruby on Rails mean that services are easier to build, easier to deploy, easier to maintain. Small teams can do a lot, and most importantly, there are no more geographic restrictions. Incubators and ‘hacker spaces’ provide equipment, ideas and community, and they have sprung up like wildflowers since 2008 in places like Vienna, Budapest and Prague (not to speak of Berlin or the UK, which now have many 100s). Additionally, university programs across Europe are modernising. I was at Oxford for the inception of its first MBA class. Now Oxford, Cambridge and even Technische Universität Wien (TU) not only have world class MBA programs, they have technology management and entrepreneurship tracks. (Seriously, look – http://bit.ly/qokzGW) And academic institutions throughout Europe have significantly dropped barriers to spin-offs. TU has dedicated, transitional entrepreneurship programs to support its graduates.
But probably most interesting is the emergence of organizations like STARTeurope (www.starteurope.at) that have rightly taken the leadership from the clumsy Chamber of Commerce initiatives of 3 years ago. STARTeurope provides a large number of events and platforms that bring entrepreneurs together in CEE, and provide access to ideas, capital and human resources. And the organization’s growth is a strong indicator of things to come: in the space of a year they have gone from sponsoring meetups and events that attracted hundreds of participants and a few dozen startup teams, to the recent Vienna STARTup Week 2011 with TechCrunch, my venture fund SpeedInvest, and local consultancy i5invest – which is chronicled in Wired: 1,300 participants, 400 startup teams, standing room only and speakers like Esther Dyson and Morten Lund (Skype). More broadly, the explosive growth of incubator and support platforms has generated speculation of a European incubator bubble (although interviewees remain quite optimistic) – http://eu.beta.techcrunch.com/2011/06/24/is-there-a-european-tech-incubator-bubble/
Despite former TechCrunch writer Paul Carr complaining that everything in Europe sucks (http://tgr.ph/fvPkPN) indicators point toward growth that is not only accelerating the size and productivity of tech hubs like Berlin, London and even Vienna, but also to a phenomenon that could reach the sort of critical mass to create a self-sustaining nexus of innovation centres to compete on equal terms with Silicon Valley. Carr’s metaphor of recording artists and music production is a good one: he argues that Europe has produced nothing but small copycats (he calls them “tribute bands”) and that comparisons to Silicon Valley are premature and vastly optimistic. But bands like The Rolling Stones, or The Beatles of 1961 were nothing but pale imitations of American sounds until they quickly found their own voices and created a phenomenon at least as large as the first wave of US rock and roll, but also unique in significant ways. Within four years, the entire world had Merseybeat coming out its ears, and the whole thing happened fast, because the precedent had been set, the audience was there and a successful model was available to build upon, and to adapt. It doesn’t matter if Europe hasn’t produced a Google yet. It will. Among the founders and investors of our fund, SpeedInvest, if you only count the Austrians, we have had nearly 1 billion dollars in exits since 2005. Growth of incubators, investment in engineering grads, growth of university support programs for entrepreneurs, an inflow of venture capital investments; all of these things are at least keeping pace with, and in most cases beating, US growth rates. It’s happening fast and one morning central Europeans are going to wake up to see their society has been transformed, like the young activists in Egypt who recently… Oh, f***k.