Healthtech/Coronavirus/Opinion/ Time to double down on Europe With global tensions mounting, is it time for European startups to forget going global and focus on their home market (or continent)? Prague. Credit: Fredy Martinez, Unsplash Prague. Credit: Fredy Martinez, Unsplash \Public & Academic How can connectivity solve world problems? 5 takeaways from Act for Impact Day Barcelona By Poppy Koronka 26 August 2021 Healthtech/Coronavirus/Opinion/ Time to double down on Europe With global tensions mounting, is it time for European startups to forget going global and focus on their home market (or continent)? By Nicolas Colin Wednesday 3 June 2020 By Nicolas Colin Wednesday 3 June 2020 We all grew up in a globalised world in which capital, goods, ideas and, to a certain extent, people moved freely across borders. Yet lately, several macro trends have been at work and leading us into a very different world — one that’s fragmenting at an accelerated pace and across many dimensions. There’s the growing divide between the US and China, which the recent clamp down on Hong Kong will only accelerate. Another gap is the one widening between the two sides of the Atlantic. The Trump administration has brought transatlantic trade negotiations to a halt and escalated tensions with several European leaders. The US and Europe have been quarrelling over numerous topics, and Covid-19 has only aggravated the situation: it’s now clear that the US has renounced its long-standing role as leader of the “free world” and that Europe has to learn to make do without America. We’re only starting to grapple with the consequences of that shift, both from security and economic perspectives. Then Europe itself is fragmenting. In the context of Covid-19, a hard Brexit seems the most likely outcome of the current negotiations. But that’s only one problem among many. There are tensions all across Europe: between east and west, north and south, even Germany and France — despite the recent agreement on fiscal measures to try and counter the Covid-19 crisis. So what about tech? In this context, what will become of European tech companies? There’s this ethos that because tech is about software and the related increasing returns to scale, startups should think global from Day One. Yet the reality in Europe has been more about regional expansion at best, with more and more founders deciding to focus on their domestic market and enlarge the scope of their value proposition rather than the scale of their operations. Zenjob, a German startup that just raised $30m to grow its staffing business, is a telling example of a founding team that’s determined to stay focused on their domestic market rather than pursuing international expansion. At the same time, there are precedents of well-funded startups that have scaled back their global ambitions, the most recent being the British neobank Monzo, which gave up on expanding in the US and replaced its chief executive in the process. “There will be less room for startups to scale up beyond their domestic market.” The “Great Fragmentation” will only make things worse. With trade barriers, more frictions in travel and more frequent cultural misunderstandings across the world, there will be less room for startups to scale up beyond their domestic market. It’s also likely that cross-border investment will slow down. There are three trends that could curb US-based investors deploying capital in Europe post-Covid. First, the bad mood at the political level will likely deter the interest of these investors for what’s happening in Europe. Second, software eating the world is now accelerating in the US because of the pandemic, providing more opportunities for investing at home. Finally, with the rise of remote work, US investors could end up viewing Europe only as a talent pool and not as a place to build startups. “With the rise of remote work, US investors could end up viewing Europe only as a talent pool and not as a place to build startups.” In addition, national governments will emerge stronger from the Covid-19 crisis and will likely use their increased power to enact regulations that will inevitably differ from one country to another. Byrne Hobart recently remarked in his newsletter The Diff that in the context of the pandemic, France has hastened the pace of imposing strict content rules for social media companies and implementing the project of a digital tax targeting US tech companies. Now imagine every national government coming up with similar new (conflicting, backward-looking, complex) rules in areas as diverse as taxation, privacy, speech,and industrial regulations, and you’ll realise how difficult it will become, even for tech companies, to do business across borders. Doubling down on Europe For European entrepreneurs, it leads to a paradox. On one hand, they might have to learn to live without the rest of the world — with less foreign capital flowing in, Silicon Valley becoming less of an inspiration and cross-Atlantic interactions becoming as scarce as they are today between Europe and tech ecosystems in Asia. On the other hand, US and Asian tech companies focusing on their (large and, in some cases, fast-growing) domestic markets means that European startups will have free rein on their own local markets, discovering their own, Europe-centric models in the process. Some of those will end up becoming ubiquitous on their domestic market; some might become continental giants. “European startups focused on smaller markets could become more attractive to a broader range of investors.” Some will ask if European markets are big enough, if backing less ambitious startups will still be attractive for investors. But those with capital to deploy are seeing that tech entrepreneurs are now founding startups in more tangible industries (mobility, real estate) and in more regulated markets (healthcare, financial services). Because scalability is harder in such cases, tech investors are learning to cope with less impressive returns, while investors from outside the tech world are starting to get interested in backing startups whose risk-adjusted returns they recognise as more familiar. And so, in a world where software is eating more difficult industries, European startups focused on smaller markets could become more attractive to a broader range of investors, particularly relative to other options. As the lockdown period gradually ends, now is the time to seize this opportunity to find a uniquely European path in a fragmenting world. Founders, and the investors who back them, need to be ready to move forward. And governments need to be ready to help whenever they can. Related Articles Investors in European startups need a clearer path to exit By Nicolas Colin Click here to read more It takes a thriving ecosystem for entrepreneurs to fail safely By Nicolas Colin Click here to read more The fragmentation of venture capital By Nicolas Colin Click here to read more Most Read 1 \Healthtech Is Daniel Ek’s new body scanner worth the hype? 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