Europe lacks the dynamism required to produce the 'next Google'

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Europe’s business environment lacks the dynamism required to produce the next ‘Google’, according to a new report published by the National Endowment for Science, Technology and the Arts (NESTA) and FORA, which compared the business climate in Europe with that of the US, as well as Canada and New Zealand.

Based on detailed analysis of the growth characteristics of six million businesses in total between 2002 and 2005 across each region, the report titled ‘Growth Dynamics’ found that European firms grow and shrink at a slower pace than their American counterparts.

“This lack of dynamic movement in Europe means that innovative, high growth businesses find it harder to penetrate the market whilst companies which stop innovating continue to exist”, notes the report.


Specifically, the key patterns of firm expansion and contraction across Europe and the US reveal that:

  • Europe has fewer high growth firms than the US (4.3% vs. 5.9%). The three-year employment growth rate of a firm at the 95th percentile of the growth distribution (i.e. a business that grows faster than 95% of businesses in its country) is 86% in the US, compared to only 71% in the average European country.
  • The shortfall is not limited to only the fastest growing firms. The share of medium-growth firms in European countries is also lower. Firms at the 75th percentile of the distribution grow 19% faster in the US than in Europe (18% vs. 15%).
  • There are more steady-state businesses in Europe. Almost half of European firms with ten or more employees are effectively stable (46% of all surviving companies), neither growing nor shrinking. This compares with 37% in the US.
  • Greater dynamism also means more failure. US firms at the 25th percentile of the growth distribution shrink 27 per cent faster than in Europe (-24% vs. -19%). The analysis also shows that the faster the firms at the top grow the faster firms at the bottom shrink.

This lack of dynamism has implications for both innovation and productivity since “a more dynamic business landscape allows for experimentation, new products, services, and processes to rise to prominence, and for resources to be relocated from less to more productive businesses”, warns the report.

On that note, Jonathan Kestenbaum, Chief Executive of NESTA, comments: “Zara, Autonomy and Skype demonstrate the power of European ingenuity but if we want to see more of these businesses then we have to make sure that we have the right environment to allow them to flourish.”


What’s required, says the report, is to combine an improved venture capital climate to support high growth firms with “reforms to encourage competition, entrepreneurship and labour market flexibility”. Europe will also need to “remove barriers to entry, expansion and contraction; and remove barriers that stop businesses, especially in service industries, operating across borders.”

Policymakers across Europe take note.

  • Leon Crutchley

    Will also need a big cultural shift to help Europe succeed. Even in UK half the people I know think I’m crazy for leaving corporate world to found a startup. In California, people are much more sheepish to admit working for a corporate rather than a startup..

    • Steve O'Hear

      In that regard, you are spot on. But culture is something that governments and regulators are hard pressed to change. If it were easy, lots of things could improve.

      • Alan Cabrera

        Interesting, it’s up to your governments and regulators to change your culture. How European.

        That comment is more telling than all the stats listed above.

  • Paul Walsh

    Skype was successful for the same reasons it’s more difficult for European countries to scale as quickly as US companies; ‘boarders’.

    Skype worked in Europe because it solved a real problem with the cost of roaming and making international calls to other European countries. Skype wouldn’t have launched and scaled in the US where they don’t have the same problem.

    Boarders, number of potential customers, cultural differences etc. are all contributing factors that go against Europe.

    Furthermore, producing a report that’s based on data which is over 5 years old is silly – the world has changed so much since 2005.

  • azeem

    Steve I did a reply to this–pretty lengthy, and it’s here:

    • Steve O'Hear

      Interesting insight.

  • Iqbal Gandham

    Azeem great post, it comes down to capital.

    Steve, we do lack the dynamism of the valley, but that is across the board.

    1. The people backing the startups with money and time

    2. The entrepreneurs themselves ( I would say too a lesser extent)

    3. The companies which act as early adopters for the products

    All three lack in various forms. I do feel the sooner we stop harping on about silicon valley, the next valley, lets build hubs, and copy Google, the better we will become.

    Why can’t we just be the UK, or just London, and do it our way. I don’t want to start a flame war about them and us, but why are we trying to copy…and if we want to copy, why do we copy only certain elements, why do we not copy the one single factor which is more important than any other….BALLS!!.
    They have them in reserve, they take a risk, in the UK we do not.

    Their investors are made up from teams of people who have been there done it, ours are front lined from investment banks, and MBA 101’s (I realise not all are like this…but). By having this they, realise the difference between revenue and a vision. Hence they can share the vision, and make the same leaps of faith the entrepreneur does.

    This is not to say, back all ideas, but as any investor in the US will tell you, it is a numbers game.

    Everyone talks about bootstrapping, lean startups etc, but even if you are really lean, you still have to eat, and pay some bills, somewhere. Once you do the maths, and realise that companies can take anywhere from 12mnths upwards to go from idea and a couple of pivots to something worth backing, you are looking at say 60k upwards for a couple of people….where will that come from.

    1. We need more REAL seedfunding. Not the pseudo “We do seed, but by that we mean we will wait until you have some customers”

    2. We need to talk to investors who have built companies. We need more like Mr Hoberman et al, as opposed to someone who has never been through the pain of having to decide between having lunch and paying the bills.

    3. We need the government to help 1 and 2 to back their money with government funds, to grow the pool and reduce the risk

    4. We need to stop looking across the pond

    5. We need to ‘ramp’ the UK startups in PR just as well as the US guys ramp theirs. The FT needs to talk about UK startups, like Wall Street does theirs

    6. Everytime techcrunch (UK) writes about a US based company, it should list ALL those UK based clones

    7. We need to STOP creating more and more events/forums/hubs etc, most of these are about personal fame, not about helping. Unless there are real differentiators between events e.g BootLaw very different, has a tight focus, why can’t we just join them up.

    8. We need to get startups to stop working in silo’s and in secret, and to use each others products. There must be 5000+ startup types (techies, mentors, founders etc etc) within London alone. Each one should help the other, use their products, give them feedback, be each others early adopters, NOT just beta testers.

    9. The list above must have contacts to just about every company in every industry within the UK, how do we leverage each others contacts…please do not say Linkedin, it does not work, we need a open exchange, i.e does not matter if I know who you are, if you are part of the X club (I know no new forums) then I will help you in your business, no questions asked.

    10. I had no point 10, but 10 is a nice number, hence repeat 1 to 9 :-)

    Iqbal Gandham

    • Steve O'Hear

      I like point 10 best!

      No, seriously, I agree that having the can-do or “balls” is an important factor but that also has to be supported by infrastructure (capital, engineering talent etc.), which the valley has.

  • JohannQ

    Well… Since the main thing, in general, is the DIRECTION, before the dynamism, right now I see it actually more likely for the next Google to come out of certain European countries like my own (Germany), which are developing nicely, despite of the crisis, then out of the Busting States of America.
    American startups were usually just good internationalisers, because of the strength of their home market, which allowed them to overcome their problems due to a certain introverted market-orientation. General international competitiveness of US firms is actually quite low…

    • CynthiaDenver

      I do not know where you take your knowledge from, but you sound indeed pathetic.

      The points you raised do not make sense. Name five European internet startups which made it to penetrate the world and I will name 200 U.S. startups. Apart form the likes of Skype, there is no visible European internet startup worth mentioning.

  • Chris

    I had some thoughts on this subject a while ago, which I published at

    It is certainly a fascinating subject, and I enjoyed Steve’s post.

  • Iqbal Gandham

    @steve. The engineers are here, there is office space, what else do we need in terms of infrastructure ?

    Are we really saying that we do not have the talent.

    Also as I write this post I came across a tweet about a company called stippleit. This is a case in point, over 20 months ago there was a team in the UK which started to build this very tech + platform, BUT would they have raised money here… $2m from KP, for an idea which has a huge competitor like pixazza (backed by google ventures).

    Investors in the UK would have run for cover…and did. Will stipple succeed, who knows, do they have competition, of course, do they have investors with some vision, seems like it….and do they now have enough capital to pivot and learn…yes.


    P.S Get all the US angels on a plane, and give them massive tax incentives on investment + exit to invest in UK companies

    • Steve O'Hear

      I wasn’t saying we don’t have the talent, I meant more the VC/angel investment to encourage startups to go for big ideas. But all of these are generalisations.

      My point about engineering talent was more in relation that Silicon Valleys attracts people from all over the U.S. and the rest of the world, has the Universities churning out people who gravitate there. I’ve heard many people here complain that they can’t find engineers who go to the city instead.

      I made a documentary that went In Search of the Valley and virtually nobody I met was originally from the valley.

  • Rupert Baines

    I think there are some good points here. I’d agree with amny of you (and I liked Azeem’s blog).

    Coincidentally, I was speaking at a seminar on “The F-word: Funding Silicon Startups” this morning. A lot of the same points came up, and I quoted this NESTA study. They were present.

    One aspect you have not touched on too much though is exits. Unless you want to build a life-style business, then there needs to be an exit, and the UK (or European) tech IPO market is dire.

    The US markets have recovered nicely. There have been 40 IPOs this year, and even if you restrict to technology IPOs there have been 19 in last threee years with valuations above $1bn — eg RackSpace ($3.3B market cap); RealPage ($1.8B); GreenDot ($2.2B); Ancestry ($1.1B).

    Can you see anything similar here? Any prospect of that?

    There is a degree that without the big exits then there is no return, so why should we expect anyone to invest? Early stage is risky: the only reason to do it is to get a return.

    Given that it takes $50-100M to fund a chip company (btw if we compare to Silicon Valley then lets at least remember silicon!!), then that implies proportionate exits.

    An article about the seminar is here:

  • Rupert Baines


    While I’m on the subject: Picochip made a couple of announcements on growth and expansion this week.

    We’ve moved to a new headquarters; acquired a test lab in Cambridge; and doubled in size in Beijing.

    We also raised $9M debt from Silicon Valley Bank to fund growth and working capital .

    As well as equity funding, debt is really important (well, it certainly is for chip or hardware companies who must fund inventory), and that is equally hard to get hold of.

    SVB were mentioned in David Cameron’s speech re TechCity, and they’ve been really good: it’s nice to have a bank who understands technology.

  • Nocomments

    Can you pls tell me why this site still doesn’t use verified login credentials. It’s 2010 and people should not be allowed to leave anonymous comments. You talk about technology but never seem to use it.

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