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MBA Entrepreneurship: Europe's Start-Up Scene Still Far Behind Silicon Valley

Europe’s entrepreneurial scene is far short of Silicon Valley's offering. Tech City in the UK offers MBAs some hope, but a lack of venture capital funding is hampering Europe's development.

Mon May 26 2014

Europe’s entrepreneurial scene is not always a happy place. In April, when the Eurozone recovery was being trumpeted, one serial European entrepreneur felt compelled to ruffle a few feathers.

Sina Afra, CEO of Turkish flash sales site Markafoni, has been hoping for change for years. But every time he visits Silicon Valley, his dreams are dashed.

“Every time I visit… I recognize how little of a role Europe plays,” says Sina. “Europe has big potential… but the biggest challenges for Europe are a lack of an entrepreneurial ecosystem and a strong investment infrastructure,” he continues.

Sina, who co-founded Markafoni in 2008, believes Europe sits below the United States and even Asia in the entrepreneurial pecking order. His company, based in Istanbul, was the first Turkish internet company to expand outside of the country. The site has six million customers and employs more than 35,000 people.

Critics argue that a lack of venture capital and a subsequently weak ecosystem have hampered Europe’s development. The US’s Silicon Valley is the preferred start-up destination, particularly for technology companies.

Sina shares this view. A few months ago, he took lunch at one of the big venture capital firms in San Francisco. It was a relatively mundane affair until a guest stood up and announced a new Turkish micro fund, of about $80 million.

“I was realizing that the entire early-stage venture capital [market] in Turkey is about $100 million,” says Sina. “At this lunch, one guy was just sharing that he has raised 80% of the entire Turkish venture capital [market] in two weeks.”

He adds: “Europe in general is missing a strong investment infrastructure.”

The UK and Germany have a notably bigger finance offering than Turkey. “But compared to Silicon Valley, they are also still small,” says Sina.

Most believe that the stronger the VC industry in Europe is, the stronger European start-ups will become.

A bevy of US venture capital firms have since moved to European shores. Atomico, Lakestar and White Star Capital have beefed-up the amount of capital available. Yet start-ups in the US still receive significantly more funding than those in Europe.

“[The] entrepreneurial ecosystem is one big white spot in Europe,” says Sina. He adds: “[It] is still small and not visible that much in the society around it.”

Some City of London workers were in uproar. Heron Tower, one of London’s tallest skyscrapers on Bishopsgate in the City, had just been renamed the Salesforce Tower London.

But it represented a milestone in London’s and the City’s transition into tech. Salesforce, the cloud computing company headed in Silicon Valley, snapped up 50,000 sq ft of the Tower to expand into the European market.

London’s Tech City is set to become one of the dominant European start-up hubs. MBA graduates already see it as the region’s answer to the States.

Tech City’s latest report claimed that between 2009 and 2012, East London’s tech sector accounted for 40% of all job growth in the industry in Britain. It counted more than 88,000 digital businesses in the capital.

“There is incredible momentum in the UK tech and digital sector. The Government has created a policy landscape that’s transformed the UK’s start-up scene,” said Joanna Shields, the former CEO of Tech City UK who stepped down in January this year.

It is a different approach to the US, however, where the state takes more of a hands-off approach.

But investment in the zone has flooded in, led by tech giants Google and Microsoft. In 2012, the UK government pledged £50 million in funding to build Europe's largest workspace for tech start-ups.

Yet commentators say property prices have soared as a result. Many Brits have since taken flight, attracted by Silicon Valley's relatively low costs. The problem is a particular concern for business school graduates, many of whom are saddled with thousands of dollars of debt.

“Many countries have tried and failed to reproduce Silicon Valley’s unique combination of energy and excitement about technological development, a seemingly endless supply of talent, and apparently easy availability of venture capital,” says Jim Hall, executive director of the Entrepreneurship Centre at Oxford Saïd Business School.

David Zelniker was of a similar mind when he visited Silicon Valley earlier this year. The Canadian-born Oxford MBA candidate claims the area is the best place for entrepreneurial graduates.

“It wouldn’t be unusual for me and my fellow Oxford MBAs to meet with a 25 person start-up in the morning, a VC firm for lunch and a behemoth like Google in the afternoon. The ideas are here, the builders are here, and most importantly – the money is here,” says David.

Other North American MBAs echoed these comments. Karl Loo says VCs in the Valley are more likely to take a punt on wild start-up ideas.

“The [business] schools in the Valley are tightly wound into the ecosystem and provide a steady supply of talent into the local businesses,” adds Karl, also an Oxford MBA student. “While many study in Oxford, relatively few remain after graduation, instead branching out to take on challenges and opportunities in all parts of the world.”

Other tech entrepreneurs in the UK have lambasted the internet offering in Tech City. First revealed by The Sunday Times, slower broadband connections were not their only concern. Broadband providers have been accused of prices that are prohibitively costly.

The areas local MP (UK Member of Parliament) said: “Some connections to premises are not economic… because the return is too small. That’s why businesses are quoted high prices, and for start-ups this is a huge cost.”

Matthias Ummenhofer had just flown into London from Luxemburg. The head of venture capital at the European Investment Fund had come to convince the capital that Europe was open for start-up business.

Last year alone, they committed €1.5 billion into more than 60 VC funds. Yet that is seemingly not enough. Eyebrows are still raised at the prospect of start-up funding – lambasted as “Mickey Mouse funds” – in Europe. Matthias’s pitch smacked of defeat.

“Unfortunately in Europe still, in many cases, if we wouldn't be the cornerstone investor in a fund… funds don't happen,” he deadpanned. “People have a very hard time raising money.”

He suggested some funds are “not really financially sustainable” and went further: “It will be very tricky for these guys [entrepreneurs] to actually be successful.”

But he added that Europe’s VC industry was on a par with the US, despite concerns that the region has fallen woefully behind.

Other MBA entrepreneurs, however, see London as a viable start-up hub. “It’s the best ecosystem at least in Europe and maybe the world for a start-up like ours,” says Bernhard Niesner, an IE Business School MBA graduate and CEO and co-founder of London-based start-up Busuu.

The online learning community started as an MBA project. Since its foundation in Spain in 2007, it has grown into a 25 million user base, figures from 2012 show.

The company recently moved to Tech City. “There is a big talent pool [in London] and a lot of people with similar experience in what we are trying to do,” says Bernhard.

Bennie Johnston, head of APIs at the tech arm of Just Eat, says being near other start-ups in Tech City makes doing business easier. Just Eat floated on the London Stock Exchange last month at a valuation of £1.5 billion.

The business is expanding and the tech arm is on a hiring drive. Bennie says it is easier to find talent in the East London area. “It’s a growing company and we’re struggling to find good people in the market.”

Meanwhile, Markafoni boss Sina remains unconvinced. His business raised more than $7 million in funding, and was valued at $200 million when multimedia juggernaut Naspers bought a 70% stake in the company in 2011.

But he remains part of the minority. The overwhelming voice of entrepreneurs is that Tech City and Europe needs to up its game to compete with the Valley.

“Entrepreneurs are creating jobs, they drive innovation and they change old structures,” says Sina. “Whenever Europe will have a stronger entrepreneurial ecosystem and a stronger financial investment infrastructure, it will reach the next level.”