Can European startups crack the code?

2015

THINK ACTBEYOND MAINSTREAM

October

Can European start-ups crack the code?How to realize the old continent's digital vision

T H E B I G

32 THINK ACT

Digital start-ups

PLUSROLAND BERGER'S VISION OF A DIGITAL EUROPE P. 16

USD 110 bnis the cumulative value of Europe's unicorns –

start-ups with a value of more than USD 1 billion each at the start of 2015.

Page 8

USD 6.9 bnhas been raised in the first 6 months of 2015 – an

increase of 86% compared to the same period in 2014. Page 4

400%more accelerators and incubators populate the European

start-up ecosystem today than did so in 2007. Page 12

THINK ACTDigital start-ups

3

It's time to break freefrom the US role model. Europe's start-ups can crack the code, provided they make good use of their own strengths.

It has become rather fashionable to be part of the Eu-ropean digital start-up scene in recent years. A remark-able turn of events, given that cyberspace is largely dominated by American giants on the one hand and fast-growing Chinese players on the other. Over the past four decades, Silicon Valley has carved out an im-posing position for itself as the only digital hub model worth talking about. What Silicon Valley excels in is convincing the world's entrepreneurs that, if they are serious about success, they have no alternative but to come here. Yet genuine avant-garde start-ups are well advised not to worry too much about the success pat-terns of the past. No one is talking about "silicon" any-more anyway: The new building material is data.

MORE THAN JUST A RACE TO CATCH UPEurope can do a lot better than simply try to catch up with the US. The important thing is for it to find its own digital path. New conditions are changing the game and spawning new models. The framework is already

in place: The digital revolution is entering a new phase thanks to a new wave of technological disruption brought about by big data and cloud computing, 3D printing, advanced robotics and the internet of things. Embedded sensors, the practice of implanting proces-sors, software and connectivity (read: computers) in products, the existence of a cloud in which product data is stored and analyzed and certain applications are run… All these developments are driving dramatic improvements in product functionality and perfor-mance. And this new phase is reshuffling the pack across the world's various digital hotspots. Now is therefore the ideal opportunity for Europe to claim its fair share of the world's digital economy. A B Rather than copy American recipes for success, Europe can now play its own trump cards, building on what has always made it successful: industrial expertise, di-versity and internationalization.

This is happening already, and European digital ecosystems have visibly been maturing. The first sign


4

seeking to stake their claim in terms of European dig-ital start-up competency. Take Google, for example: The Mountain View-based giant has opened half a dozen research centers in Europe. Amazon is likewise getting in on the act, having launched a brand new development center in Berlin in 2015.

Strong digital ecosystems do not consist only of self-organizing business communities, however. They are also heavily dependent on the regulatory frame-work, and intensive discussions on the European digi-tal market show that this issue is being addressed. Reg-ulators in Europe are increasingly aware of the challenge, and the recent debate triggered by Uber and Airbnb in many European countries has both high-lighted the difficulties and enhanced awareness.

A NEW SPECIES OF EUROPEAN ENTREPRENEUR IS BORNNew aspects have lately been added to the general un-derstanding of what constitutes entrepreneurial success in Europe. Traditionally, "true entrepreneurs" were ex-pected to build a company, earn their living from the returns and spend the rest of their life caring for it. The second wave of entrepreneurs that followed – founding companies, realizing fast growth and selling up after a few years – has now also become an accepted model. In addition, many young graduates have acquired new tastes. For them, building a career no longer means join-ing investment banks or consultancies, as many prefer instead to become entrepreneurs. Those who do so sev-eral times over are treated like stars and are eager to share their experience. In France, for instance, individu-als such as Pierre Kosciusko-Morizet, founder of Price-Minister, Marc Simoncini (Meetic), Xavier Niel (Free), Jacques-Antoine Granjon (vente-privée) and oth-ers are busily investing in start-ups and infrastructures. Xavier Niel is currently converting the Halle Freyssinet in Paris with the aim of making it the world's largest in-cubator – populated by 1,000 start-ups – in 2016. In Ger-many, the Samwer brothers established Rocket Internet in 2007. This Berlin-based start-up incubator has al-ready helped launch around 80 companies, including leading regional online retailers such as Zalando (Eu-rope), Lamoda (CIS), Lazada (Southeast Asia), Dafiti (Latin America) and Jumia (Africa).

It is small wonder that successful initial public of-ferings, mergers and acquisitions are swelling liquid-ity in Europe. Zalando's EUR 5.3 billion IPO in Sep-

of this change is, of course, the vitality of the start-up scene. For some months now, not a day has gone by without news of yet more significant funds being raised for European start-ups. In the first half of 2015 Euro- pean start-ups raised USD 6.9 bn – 86% more than in the same period in 2014. C Most successful were OneWeb (UK), which raised USD 500 million, Spotify (Sweden, USD 526 million) and Delivery Hero (Germa-ny, USD 730 million). In France, internet of things spe-cialist Sigfox raised USD 115 million and automotive player BlaBlaCar USD 100 million.

Other players are also beginning to enter the Europe-an digital fray. Realizing the importance of digitiza-tion, corporate players are pouring money into ven-ture capital funds – or creating venture capital funds of their own. In Germany, Tengelmann Ventures in-vests in young companies in the e-commerce, social commerce and internet-enabling technology sectors. Telecoms incumbent Deutsche Telekom has created Deutsche Telekom Capital Partners, which is en-dowed with EUR 500 million, while Siemens launched a new USD 100 million venture capital fund – the In-dustry of the Future Fund – at the beginning of 2014. The latter fund is dedicated to early-stage industrial start-ups. In France, SNCF, Orange and Total have set up Ecomobility Ventures as an investment fund to support innovative mobility development by enhanc-ing cooperation between start-ups and larger groups. Air Liquide and Michelin also signed up in 2015. French telecom provider Orange together with com-munications and consulting firm Publicis Groupe also created a venture fund in 2012.

These and a series of further significant invest-ments proves that big digital corporates are actively

"Nobody can build another Silicon Valley. Europe's chance is to score with diversity."

Stefan Glänzer, a German serial entrepreneur and one of the founders of Passion Capital


5

FOUR OF THE TOP TWENTY START-UP ECOSYSTEMS Berlin, London and Amsterdam climb higher, Paris holds its ground [ranking]

THE WINNER TAKES… ALMOST 50%! Berlin sheds its non-exit stigma[share of exit volume in the top twenty, 2013 & 2014]

A

RANKING

Silicon Valley Silicon Valley1

Los Angeles Los Angeles3

2Boston

Boston

4

3Tel Aviv

Tel Aviv

5

1London

London

6

3Chicago Chicago7

4Seattle

Seattle

8

6Berlin

Berlin

9

7Singapore

Singapore

10

Paris Paris11

1São Paulo

São Paulo

12

1Moscow

Moscow

13

NEWAustin

Austin

14

4Bangalore

Bangalore

15

4Sydney

Sydney

16

9Toronto Toronto17

9Vancouver

Vancouver

18

NEWAmsterdam

Amsterdam

19

NEWMontreal

Montreal

20

New York City

New York City

32

47.3%

6.6%

5.7%

6.5%

10.2%

4.5%

2.1%

6.1%

0.8%

1.2%

0.3%

0.1%

1.2%

0.2%

0.1%

0.2%

0.5%

2.5%

0.3%

3.6%

THE EUROPEAN START-UPLANDSCAPE REVISITEDRankings, exit growth and financing

Source: Compass


6

HYPER-GROWTH MADE IN EUROPE Berlin – fueled by Rocket and Zalando IPO – leads the field

A QUESTION OF MONEY European start-ups open the pockets of venture capitalists

B

C

Scandinavia Germany, Austria,

Switzerland

UK France Scandinavia Germany, Austria,

Switzerland

UK France

Source: Les Echos/whogotfunded/clipperton analysis

1.0

0.6

2.5

0.8

1.8

1.0 1.0

0.64744

81

56

154

129

159

103

First half of 2014Value [USD bn] :First half of 2014Number:

Hyper-growth = at least two times average growth

First half of 2015 First half of 2015

BERLIN

20XBANGALORE

5X

AMSTERDAM

4X

LONDON

3X

TEL AVIV2X

Source: Compass

How hubs relate to average growth: Berlin startups lead the field – fueled by Rocket and Zalando IPO – 20 times faster than their peers.

A year-over-year comparison. While the number of French start-ups who opened the pockets of venture capitalists increased significantly, in Germany, Austria and Switzerland's entrepreneurs managed to harvest the largest volume increase.


7

market: The number of internet users has multiplied by a factor of ten, spiraling from 300 million in 2000 to more than three billion in 2015. And this time, the companies' success is built on returns and not only on rising stock prices.

The first wave of IT, when computers took the stage in the 1960s and 1970s, can be referred to as the "hard-ware era". The internet triggered the second wave – the "software and network" era – with its inexpensive and ubiquitous connectivity in the 1980s and 1990s. Today, we find ourselves in the middle of the third wave, in which IT has become an integral part of the product itself. Digital is now everywhere. It is no longer an end in itself but has become an enabling technology. Com-panies need digital "solutions", i.e. technology that can be leveraged for this industry or that application. Com-puting power keeps accelerating, and producing soft-ware has become comparatively straightforward. The power of the software is no longer what sets innova-tions apart: Putting together intelligence (matching supply and demand, fostering understanding) and data is what makes winners, because it drives transac-tions and efficiency.

The opportunity is thus there for Europeans to break free of the American "software monopoly". Com-panies like BlaBlaCar and Criteo have already shown that success is all about data. At first glance, Europe's digital start-up activities in the B2C environment still appear to be poles apart from its traditional champi-ons in the B2B environment. But a closer look reveals that the gap may be smaller than we think. Forging smart links between the two worlds can be the making of Europe's future. In the future, B2B and B2C will be much more closely aligned than they are today. Added value will be found in big data algorithms, product de-sign, marketing, manufacturing and after-sales service of any kind, where non-digital traditional European businesses and players possess a wealth of knowledge, strong brands, very large customer bases, sectoral ex-pertise and robust supplier networks.

In November 2013, Aileen Lee – founder of Cowboy Ventures – first used the term "unicorn" to denote start-ups that have reached a market value of over USD 1 billion. The Bay Area, and especially San Francisco, is still giving birth to most of them. That said, we note that unicorns now appear able to flourish and grow in other ecosystems besides. You may even see some of this nascent breed on your travels in Europe!

tember 2014 and Rocket Internet's EUR 6.5 billion flotation the following month both went extremely well. At the same time, the number of very successful non-public exits that go under the radar is likewise increasing. One example was the USD 219 million ac-quisition of Berlin-based restaurant reservation ser-vice Quandoo by Japan’s Recruit. Another was Micro-soft's USD 100-200 million purchase of German start-up 6Wunderkinder. Both transactions went through in 2015. Meanwhile, German sports equip-ment brand Adidas has bought Runastic for EUR 240 million, while Berlin-based data specialist Socioman-tic was snapped up by Tesco subsidiary Dunnhumby (UK) in 2014 for EUR 150 million. These examples show how large corporate incumbents are increasing-ly gaining a foothold in the digital business. One wel-come side-effect is that these mergers have boosted the prestige of the European start-up scene.

NEW BUBBLE? OR NEW GAME?Some observers fear that history – specifically, the bursting of the internet bubble in the 2000s – could repeat itself. And indeed, some signals are pointing in this direction. Low interest rates, for example, are forc-ing investors to seek new sources of return. Yet the business models of today's European start-ups have much firmer foundations than their counterparts from the start of the millennium. This time, there is a real

"Legislation will always create a context for

growth […] but the real value comes from

connections between people and a focus and

real desire on solving real human problems."Duncan Lamb, design director

at Transferwise.com


8

The European system of start-up hubs is unique. It is very different from Silicon Valley and is plotting its own development trajectory. One of the most obvious characteristics is its vast geographical spread, with the UK, Germany, France, the Netherlands and Scandina-via standing out as the top European regions. Of partic-ular note are the start-up hubs in Berlin, Paris, London, Amsterdam and Stockholm. E In today's glocalized world, the decentralized nature of the European start-up system is a definite advantage.

Admittedly, Europe is still a dwarf in terms of size and the number of exits. While the cumulative value of US unicorns is estimated at about USD 700 billion, the European species is worth only around USD 110 billion in total. Moreover, not even half of Europe's unicorns have reached the IPO stage, compared to about two thirds in the United States. Even so, there are good rea-sons to be optimistic about the future of European

start-up development. Most of the recent news ema-nating from the unicorn club has been nothing short of spectacular: In 2014, seven companies completed suc-cessful IPOs, and their ranks are growing fast. In 2015 alone, the number of members increased by 30 per-cent. D Size is not everything, however, and there are positive signs in other areas besides. The future game could, for example, make qualities such as diversity and smart collaboration skills more important than ever. Maybe these qualities will even outweigh some of the disadvantages in terms of the total value added. In the future, we expect to see many mid-sized hidden champion start-ups, just as we saw similar success sto-ries in Germany's fabled "Mittelstand" in the days be-fore the digital economy. Think of German start-ups such as Sociomantics and Rhode-Codes: There may be more sexy companies out there, but their business models plug important gaps in the market.

Can unicorns flourish in Europe? We revisit four myths about European digital start-ups and reveal insights into an exciting new species.


9

D

WELCOME TO THE CLUBThe 30 European digital unicorns1 (independent players or IPOs/acquisitions in 2014 or later)

COMPANY CURRENT HQ INDUSTRY STATUSAdyenAO WorldBlaBlaCarDelivery Hero Farfetch Funding Circle Home24 Just Eat King.com Klarna KobaltMarkitMojangPowa TechnologiesRocket InternetRovio EntertainmentShazamSkrillSkyscannerSoundCloudSpotifySupercellTransferWiseVe Interactivevente-priveeWongaWoogaZalando2

ZendeskZoopla

Netherlands

UK

France

Germany

UK

UK

Germany

UK

Sweden/Ireland

Sweden

Sweden

UK

Sweden

UK

Germany

Finland

UK

UK

Scotland

Germany

Sweden

Finland

Estonia, UK

UK

France

UK

Germany

Germany

Denmark

UK

Financial services

E-commerce

Travel

Food delivery

E-commerce

Financial services

E-commerce

Food delivery

Gaming

Financial services

Music

Data services

Gaming

Software

Incubator

Gaming

Music

Financial services

Travel

Music

Music

Gaming

Financial services

Software

E-commerce

Financial services

Gaming

E-commerce

Software

Real estate

IPO in 2014

IPO in 2014

IPO in 2014

IPO in 2014

Acquired by Microsoft in 2014

IPO in 2014

Sold to CVC in 2015

Majority-owned by SoftBank

IPO in 2014

IPO in 2014

IPO in 2014

Source: Bullhound, Atomico, Roland Berger 1 Market value over USD 1 bn 2 Incubated by Rocket Internet


10

E

AN OLD CONTINENT DOTTED WITH YOUNG DIGITAL START-UPSThe geographic spread is broad and so is the range of innovations: Top hubs and runners-up form a unique pattern in Europe

LONDONOld money meets fintech

Strength: Home to most leading European venture capital

firms (including Balderton Capital, Index Ventures and DFJ Esprit), English-speaking environment,

traditionally international and diverse cityWeakness:

Cramped and expensiveFocus:

Advertising, finance and healthcareExamples:

Mind Candy, Wonga, Funding Circle

PARISFrom museum to digital

seeding groundStrength:

Strong government support via the "tech visa" and public investment funds, Parisian venture capital firms among the top three investors in

Europe in the first quarter of 2015Weakness:

Struggling to shake off a reputation of having lost its innovative spirit

Focus: Software

Examples: Sigfox, BlaBlaCar,

Criteo

Runners-up

Front runners

Dublin

Brussels

MadridBarcelona

Amsterdam

Source: Compass, Wired, Roland Berger


11

BERLIN"Poor but sexy"

Strength: Plenty free space, good value for money,

an almost Mediterranean lifestyle, a living laboratory, an inspiring urban environment

Weakness: A lack of industry

Focus: E-commerce and big data

Examples: Rocket Internet, Zalando,

SoundCloudRome

Copenhagen

Oslo

Milan

Helsinki

Tallinn

Warsaw

STOCKHOLMHigh innovation density

Strength: Strong tradition of innovation, early adopters of diverse developments, highest per capita

start-up activity rate

Weakness: Has lost momentum in recent years

Focus: ICT, fintech

Examples: Unomaly (software), 13th Lab (mapping),

MAG Interactive (gaming), Spotify (music)


11


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However, Europe is gradually gaining traction. The number of European companies successfully raising seed-stage funding has increased by 600 percent since 2009. The median size of first-stage rounds is also steadily increasing. According to a study conducted be-tween April 2014 and April 2015, European digital groups completed 46 "large" fund-raising rounds (real-izing USD 30 million or more) worth a combined total of USD 5.7 billion in this period. This compares with 30 large fund-raising rounds worth a total of USD 2.9 bil-lion in the preceding year.

Aside from the numbers, a whole range of structur-al changes are taking place in the financing environ-ment. First, setting up a company has become aston-ishingly cheap. Many of the traditional upfront costs for technical infrastructure have decreased dramatical-ly as new developments such as the cloud, open source software and open source development hubs like GitHub have become available.

Furthermore, start-up financing in Europe is ma-turing and gaining visibility. The European capitals are the home base for VC players such as German Startups Group (Berlin), Octopus Ventures (London), Balderton Capital (London), Northzone (Oslo, Stockholm) and Creandum (Stockholm).

Financing is currently benefiting from a wave of li-quidity caused by numerous exits. This is important, because it is fueling the appetite of VCs within the eco-system. It is also serving as a catalyst for other kinds of network effects, as more and more successful entrepre-neurs team up with members of older firms to create new funds.

One peculiarity of the European scene is the vast amount of accelerators and incubators in the market. Between 2007 and 2013, their numbers rose by nearly 400 percent. Apart from facilitating the sharing of expe-rience and contacts with lawyers and financing part-ners, these organizations have lowered the barriers to launching a company, especially in the digital arena. On a per capita basis, Europe has roughly as many ac-celerators as the US – or perhaps even more.

What is also important, in terms of structural changes, is that European start-ups are well on the way to successfully tapping sources of offshore funding too: in the US, but also in China. Between 2010 and 2014, non-EU private equity managers invested a total of EUR 6 billion in European businesses. By diversify-ing their portfolios in this way, they are making a pow-

REVISITING FOUR MYTHS ABOUT THE EUROPEAN DIGITAL START-UP SCENE

MYTH 1: Europe is not attractive to start-up entrepreneursDefinitely not trueLarge European ecosystems with a respectable tradi-tion are already well established. London is a prime example, with most European start-ups tending to con-gregate in large, dynamic urban environments.

Each of these environments has its own specific characteristics and growth mechanisms. In the words of former Berlin mayor Klaus Wowereit, the German capital is "poor but sexy": It boasts neither big indus-tries nor DAX-listed corporate HQs. However, it seems that precisely this kind of environment has unleashed enormous creative forces. At the same time, Berlin has become more international than any other German city. Its streets are buzzing with foreign languages and it attracts entrepreneurs from all over the world. At the other extreme, Paris is the economic engine of a whole country. No fewer than 12,000 start-ups are based here, if you include the suburbs. The French start-up hub benefits from an excellent talent base, especially in en-gineering. Yet it is not only the front-running cities that deserve a mention. Europe is also home to a group of "runners-up" that includes the likes of Amsterdam, Barcelona, Brussels, Copenhagen, Dublin, Helsinki, Istanbul, Madrid, Milan, Oslo, Rome, Stockholm, Tal-linn and Warsaw. Due to their geographical and politi-cal distance to Europe, we included neither Moscow nor Tel Aviv nor Istanbul in our analysis, although all of them also have vibrant digital start-up scenes.

MYTH 2: Europe lacks capitalStill true, but changing rapidlyAccess to capital – or lack of it – has always been seen as a critical competitive flaw in the European start-up scene. And there is no denying that European compa-nies still raise less funding at each stage than their US peers. Most significant is the gap in the initial phase. Only two years ago, European start-ups trying to secure their second round of investment netted an average of USD 8 million from US backers. By com-parison, start-ups that attracted only European inves-tors at the same time raised a median amount of only USD 3 million.


13

F

GOOD VALUE FOR START-UP MONEYCost comparison of Silicon Valley and European hubs

YEARLY SALARY OF A SENIOR SOFTWARE ENGINEER [USD '000]

OFFICE RENTAL 2014[EUR per sqm per month]

Source: BNP Paribas, Cushman Wakefield, Roland Berger

Silicon Valley

Europe minimum

Europe maximum

127.5

42.5

170

San Francisco, prime

location

Paris, prime

location

Berlin, prime

location

Mountain View

77.0

65.0

22.5

95.0Average

compensation for tech workers in Silicon Valley

is USD 195,000 p.a., with San Mateo County

the highest at USD 291,000.


14

make it possible for them to contribute on a regular basis from the kitchen table at home. On the conti-nent, business partners are seldom more than a two-hour flight away, and everyone works in almost the same time zone. Going forward, it will be crucial to further strengthen the skills base in terms of digital and entrepreneurial talent and, ultimately, to intelli-gently unite both aspects.

1. DIGITAL TALENTThe UK government – to take just one example – has implemented a series of measures to promote educa-tion to develop digital talent. Some of these measures include a computing curriculum introduced in Sep-tember 2014; the Digital Business Academy introduced by Tech City UK; apprenticeships for digital skills; short courses in digital skills (available since April 2015); a National College for Digital Skills; an indepen-dent review of computer science degree accreditations; the Tier 1 Exceptional Talent Visa for technology; and the Entrepreneur Visa, which helps companies attract overseas talent from outside the EU.

Sometimes, the more pressing challenge is to dis-tribute digital talent more evenly. Berlin is experienc-ing strong demand for programmers, for example, while Spain has a plentiful and highly qualified supply. Europe is currently seeking to facilitate mobility for students and programmers working in digital disci-plines across Europe in order to attenuate this geo-graphical skill mismatch.

2. ENTREPRENEURIAL TALENTThe good news is that Europe has extraordinary busi-ness schools all over the continent. Examples include the WHU in Germany, the HEC in France, the London Business School, the IESE and the ESCP, which has campuses throughout Europe. Each of these schools has its own venture lab and "playground" for would-be entrepreneurs. While all of them used to operate more or less in isolation from each other, we are at last seeing initiatives to break free from traditional structures.

The new initiative Ecole 42 in Paris, set up by Xavier Niels in 2013, takes a counterintuitive approach. Ecole 42 departs from traditional (and especially ingrained French) ideas about how to educate a business elite. No special graduation is required to study here. There is no academic faculty and there are no lectures, no books and no grades. Learning by doing is the guiding

erful and positive contribution to the European start-up scene. Since 2012, inflows into Europe from both private equity and venture capital firms based outside Europe have increased significantly.

MYTH 3: The most talented people shun the European start-up sceneOn the contrary!It is true that Europe's start-up environment used to be a workplace that was often difficult to access from the out-side. Labor mobility works quite well within the EU, but highly qualified people from India or Eastern Europe have to overcome language barriers at the very least. Pub-lic sector documents, for instance, are not always provid-ed in English. Prohibitive work permit rules – in Germa-ny, for example – still represent a stumbling block for digital talents who would like to be active in Europe.

It is an ill wind that blows nobody any good, however. And the crisis that has swept Europe in recent years has achieved something no policy could have done: It has created an urgent need for change in the economic model and revealed to the working population that be-ing employed by a big firm does not mean your job is secure. As the ecosystem matures, it is thus now offer-ing excellent opportunities for young talents. It is also clearly sufficiently inspiring to bring entrepreneurial thinkers back from abroad. Numerous Germans edu-cated at Oxbridge or in the Ivy League universities are returning to Berlin, Munich or Paris to found start-ups. Cloud technologies and telecommuting contracts

"To attract the best, most talented, most capable and most committed people,

a creative ecosystem needs to command the

local center stage."Matt Cohler of Benchmark, a leading Silicon

Valley venture capital firm that has invested in ResearchGate and other firms in

Germany's capital


15

principle. Entrepreneurial case studies are made avail-able on the intranet. Candidates can decide for them-selves when they feel creative and fresh enough to tack-le them. Demand for access to the school is over- whelming, with 70,000 applicants reportedly fighting for 900 places.

MYTH 4: Europe's business environment is not start-up friendlyHas changed a lot in recent yearsAlthough the single European digital market is still not reality, Europe can nevertheless count on a decent dig-ital infrastructure in the individual markets. Broad-band penetration in the hubs is good and Europe has a high standard of data security.

Conditions in the offline world create several further advantages. First and foremost, Europe boasts an im-pressive breadth of market leaders in a variety of techni-cally complex fields of business – witness its strong au-tomotive and mechanical engineering sectors, for instance. The digital transformation is permeating ev-ery link in the industrial value chain, from logistics through production to service provision. An under-standing of how to integrate B2B and B2C competencies will therefore be a key advantage in the future. European digital start-ups can be enablers that set traditional companies on the way to making money in the digital world. This is indeed one of the main reasons why Euro-peans would do well to adopt what have been termed "blue ocean strategies", creating their own opportuni-ties away from the beaten track of the US role model.

Although conventional wisdom has it that red tape is one of Europe's downsides, it is surprising to find that starting a business in many European coun-tries is actually easier than in the US. Having said that, especially in Germany there is still room for im-provement. G

European cost structures too play into the hands of young entrepreneurs. Overall average annual com-pensation for digital workers in Silicon Valley totals USD 195,000, rising as high as USD 291,000 in San Mateo County. In Europe, the top line levels off at the equivalent of USD 127,000. Another positive factor is the net rent per square meter of office space, which is comparatively cheap at around EUR 13.00. Thanks to these lower overall costs, European start-ups can get by with less early-stage money. F

G

Source: World Bank

RANK 2014

Germany

Austria

US

Spain

Czech Republic

France

Norway

Ireland

Latvia

United Kingdom

Greece

Finland

Netherlands

Belgium

Sweden

114

101

110

46

74

28

22

19

36

45

52

27

21

14

32

OUTLIER GERMANYEase of starting a business in the majority of European countries better than conventional wisdom


16

The digital Europeanstart-up ecosystem needs a shared vision. We stake out some common ground – and outline how this vision can be realized.

A potent European digital start-up landscape creates important new businesses for consumers, satisfying their needs more quickly, more cost efficiently and with superior quality. Even more important, however, is the impact these start-ups have on the European business sector. Their very existence helps traditional enterprises enter the digital race – and vice versa – creating a healthy symbiosis that is essential if Euro-pean companies are to win the global competitive battle. Regarding the role of European start-ups in the digital world of tomorrow, our vision rests on three pillars. We also show how the vision can be-come reality.

1. BREEDING GAME CHANGERSInnovative digital start-ups working hand in hand with traditional industry Outstanding innovation, and not just company size, will be crucial to Europe's future. European digital firms have the potential to market products that add a great deal of value, as this sort of innovative strength is already at the core of Europe's digital landscape. At the moment, this phenomenon can only be observed indi-rectly: in the appreciation that US giants show for Eu-ropean innovators. Skype, for example, was bought by Microsoft. Google purchased British artificial intelli-gence start-up DeepMind, and London-based 3D print-


17

er maker botObjects was snapped up by US-based 3D printing giant 3D Systems. The next stage, however, must be for European companies to apply themselves to building the digital future of their own continent. Drawing strength from their historic roots, they will develop a distinctive trait: becoming world leaders in collaborating with industry to take the latter's business forward to the digital level (Industry 4.0). The key lever will be their B2B competency. By developing and apply-ing this skill, they will be able to drive the advance of digital and industrial companies alike. Moreover, since their digital expertise is deeply rooted in collaboration, it will be difficult for others to copy – giving European digital companies a genuine competitive advantage.

HOW CAN WE GET THERE?→ Enlist the backing of the EU, governments and in-

dustry associations for innovative ecosystems (e.g. by supporting digital clusters and enhancing tech-nology transfer from universities to companies)

→ Solicit the support of the EU, governments and in-dustry associations for digital innovation in the form of direct financial assistance or easier access to ven-ture capital for innovative start-ups – not only at the seed stage, but also in the start-up phase

→ In particular, be "innovative from the core", leverag-ing European digital companies' inherent innova-tion advantage in fields such as embedded software for industry and supporting related areas of applica-tion such as embedded software in wearables

→ Build bridges. Talk to traditional companies. Help them become more open to ideas from the start-up scene. Help them embrace new ways of "thinking digital" (with the support of agile and flexible digi-tal start-ups). Above all, keep your ears open for the latest ideas of young entrepreneurs, and help them dovetail their ideas with the challenges faced by tra-ditional businesses

→ Enhance the digital infrastructure (bandwidth) to fa-cilitate collaboration between digital companies and traditional industry

2. MAKING THE RULES The capability to orchestrate the digital game Creating and disseminating the norms that lend structure to industrial innovation on the market has always been one of Europe's strengths. Also, Europe-an entrepreneurs have a keenly international mindset

TURNING TERRA INCOGNITA INTO TERRA NUMERATA

To address the challenges of digitization as fully as possible, we created the concept of Terra Numerata™, an initiative and platform to foster a European digital ecosystem.

→ Digitization can drive significant change in any industry. One main goal of Terra Numerata is to bring to life new firms with disruptive business models.

→ The initiative leverages the strengths needed to drive digital transformation in an innovative and efficient way.

→ In particular, the platform seeks to bring innovators, venture capital and talent together as the three key ingredients of successful digital platforms.

→ The idea is to open up new opportunities for all players in the digital economy in the shape of alliances, joint ventures, partnerships and events to facilitate reciprocal learning and dialog.

→ Given the importance of networked thinking, Terra Numerata could also become a virtual

"marketplace for digital resources and experts".

from the day they open for business. It is time for Eu-rope to play this hand again and define the rules of tomorrow's digital game. Europe should develop the best ideas for internationally accepted norms in the relevant areas – areas such as data security, data gov-ernance and payment models, but also frameworks for consumer rights in the digital marketplace, for example. Doing so defines the conditions for gaining a market of significant size and can make us world leaders in internationalization. We have already prov-en that we have the creativity and the capability to do so. One need only think of GSM, a technical standard for mobile communication services, which was creat-ed in Europe and exported worldwide.


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HOW CAN WE GET THERE?→ Encourage debate across think tanks, political orga-

nizations and industry about how digital technolo-gies, organizations and infrastructures can be rooted in European values

→ Foster dialog surrounding this question with Europe-an leaders in governments, industry, start-ups and other organizations

→ Initiate a comprehensive campaign involving public opinion

→ Rapidly adopt the EU's General Data Protection Reg-ulation

These are lofty ambitions. We are advocating nothing less than establishing Europe as a third center of grav-ity, alongside the US and China. However, recent devel-opments in the start-up environment indicate that the battle will not be won by companies playing the me-too game, flexing their muscles and simply striving to be-come bigger than their rivals.

Instead, Europe must draw on its own competencies, find the right niches, come up with smarter answers and discover blue oceans that no one has ever explored. Only if start-up entrepreneurs and the leaders of tradi-tional firms, governments and political organizations in Europe make a concerted push in this direction and share a common belief will Europe's answer to the challenges of the digital transformation be unique and sustainable. Joining forces is worth the effort, because the prize at stake is a new, digital future for our so-called Old Continent.

HOW CAN WE GET THERE?→ Define the most urgent normative questions of the

digital era, set up task forces to find answers and campaign for consensus in politics and industry

→ Endorse industry-driven rules and standards for data security and data governance in order to nurture trust and confidence

→ Raise awareness of cyber-security issues in the corpo-rate community

→ Strengthen the EU's position in international stan-dardization

→ Support the internationalization of digital start-ups by supplying them with information about foreign markets and helping them become established and do business in those markets

→ Intelligently connect prospering – but still isolated – entrepreneurial hubs

→ Strike the right balance between centralized and de-centralized actions, between competition and com-plementarity, and between initiatives driven by the public and private sectors

3. FILLING THE GAPTaking the political lead via the digital ecosystemLeadership is not merely a question of facilitating the business of start-ups and established multinationals. We also need to be aware of the relevant political power ram-ifications. Europe must position itself and take a clear stand. In the political arena, US companies, for example, currently play the digital card far more astutely than Eu-rope does. Giants like Facebook and Twitter have posi-tioned themselves as the platforms on which democracy can be lived out if the political environment fails to allow freedom of speech (think of the Arab Spring movement and, more recently, developments in Ukraine).

While this is good news in itself, the lack of demo-cratic control over these organizations should make us vigilant. The dark side of political influence-monger-ing assumes even greater importance when one con-siders the National Security Agency's data collection practices in the US and internet censorship in China. Evidently, there is a gap where Europe could position itself in a way that is hard to imitate. To do so, it must find valid answers to one fundamental question: How can we create a digital ecosystem in which customers, businesses, entrepreneurs and employees all feel safe because they can rely on European values such as free-dom, equality, democracy and the rule of law?

"The original writer is not he who refrains from imitating others,

but he who can be imitated by none."

François-René, Vicomte de Chateaubriand

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19THINK ACTDigital start-ups

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AUTOMOTIVE 4.0Disruption and new reality?

New technologies, new players and new consumer needs are fundamentally changing the automotive industry. With a focus on the U.S. market we look at numerous trends in this study — everything from powertrain electrification to retail concepts without dealerships. Those require the industry to respond — but it's the confluence of connectivity, shared mobility and automated driving that we believe will truly put the industry as we know it to the test.

THE DIGITAL TRANSFORMATION OF INDUSTRY

Digitization is a key innovation that will determine whether European industry remains competitive in the future. If we succeed in realizing the potential of connected, more efficient production and new business models, Europe could see its manufacturing industry add gross value worth 1.25 trillion euros by 2025. But if European industry misses out on the digital transformation, the sum of 605 billion euros could be at risk in the years ahead.

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PublisherRBI – Roland Berger InstituteROLAND BERGER GMBHSederanger 180538 MunichGermany+49 89 9230-0www.rolandberger.com

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Editors

ANNE [email protected]

DR. CORNELIA [email protected]

DR. CHRISTIAN [email protected]

CHARLES-EDOUARD BOUÉECEO+33 1 [email protected]

NICOLAS TEISSEYREPartner and Head of the Telecommunications, Media & Technology Practice+33 1 [email protected]

PHILIPP LEUTIGERPartner, Digital CC+49 89 [email protected]

Can European startups crack the code?

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