by Andy Hayler

Different States of mind

Feb 22, 2010
IT LeadershipIT StrategyMobile Apps

Some years ago I was invited to join an EU-sponsored panel looking at the structural barriers to growing high-tech companies in Europe. The issue was real enough: how many billion-dollar software companies grew up in Europe? There is SAP from Germany, and there was Business Objects from France (now part of SAP) and the British accounting software firm Sage. There is also Dutch digital security solutions provider Gemalto, and Software AG, the German database supplier. A grand total of five out of 57 companies with over $1bn of revenue in 2009 according to Software Magazine’s Software 500 list (this list oddly includes assorted consultancy and outsourcing firms, so strictly there are perhaps 39 true software companies, but five out of 39 is still nothing to brag about). Given that the European economy, in aggregate, is larger than that of the US, this seems an anomaly. There are a number of plausible reasons for this situation, of which the most obvious is perhaps the sheer size of the natural home market for a US software vendor. As a European software company grows it has to consider multiple language versions and deal with the complexity of setting up subsidiaries in assorted legal jurisdictions. As someone who has experienced the joy of establishing a corporation in France, I can assure you that the bureaucracy and labour laws in Europe present non-trivial barriers to growing companies. One argument sometimes put forward is the lack of venture capital available in Europe compared to the US. I am less sure whether this is really a major factor. Certainly the situation varies greatly from country to country, and I imagine that getting startup capital for a promising software venture in, say, Spain or Bulgaria would be a lot trickier that for one starting in California. However there is a reasonably large venture capital industry based in London, and there is certainly decent coverage in most northern European countries. If you have a promising young software company in, say, the UK or Sweden, then it should not be impossible to raise the money you need for expansion. Perhaps European venture capitalists are more cautious in the size of the financing rounds, but that may be no bad thing anyway. Education hardly seems an obvious culprit. While many of the world’s top universities are in the US, there are plenty of highly regarded European institutions: Cambridge, Oxford, Imperial and UCL are in the top 30 of most accepted worldwide rankings, for instance. The US also scores relatively poorly in international comparisons of numeracy.

It is fair to say that there is a clustering effect. Silicon Valley is the most famous example, but there are other hi-tech clusters around Boston and Austin. This has the effect of producing a large pool of people with relevant industry experience, which is helpful when growing a software company. For example, I recalled struggling when at Kalido to find UK staff with software product management and product marketing experience, whereas in Silicon Valley or Boston you can throw a stick and hit a software product marketer. The nearest European equivalent clusters around Eindhoven, Cambridge and Munich are pale imitations. I also think that different cultural behaviour may play a significant part. The American Dream is a powerful and enduring myth that inspires many young people to believe that they can achieve great things. I recall attending an event a few years ago at the British Museum, where young entrepreneurs from both US and UK universities presented to an audience of venture capitalists. It was pretty embarrassing if you were a Brit; the UK students mumbled through a list of technology features, whereas the US students confidently talked about the markets they were going to dominate. Of course, presentation skills aren’t everything, but I found the gulf between the nationalities telling. As an analyst I spend a lot of time listening to software companies pitch their wares, and one thing I have observed again and again is the different behaviours of software companies depending on their country of origin. US companies seem consistently stronger in their marketing, usually both having a better idea of the customers they are aiming at and clearer in their articulation of customer benefits. Many European software companies seem much more engineering-driven, often having very advanced products but sometimes with little idea about the markets they are going to tackle. The old joke that US companies market a product and then build it once they have paying customers has an element of truth to me. When I look down the Software 500 list in 10 years’ time, I don’t expect there to be a step change in the preponderance of US versus European companies. I wish I could say otherwise.