What economic downturn? European tech start-ups flourish in the storm
Victor Henning, co-founder of Mendeley, an online service that helps academic researchers organise and share the mounds of documents they collect, hardly looked up from his computer screen when Lehman Brothers collapsed in 2008. He was immersed in the day-to-day routines of his start-up, including getting more users and securing the next round of venture capital.
We didn’t feel the effects of the financial crisis,” Henning says now. “Basically, if you have a great product and a great team and you can show that you have market traction, then you will always be able to find investment.
That comment comes from a 32-year-old entrepreneur in London – not Los Angeles. Despite the economic aftershocks of the 2008 financial market crash, which included a sharp decline in venture capital investment, Europe’s ability to innovate has not been choked off. In fact, it’s gaining momentum. In 2010, Europe produced a record crop of spin-offs from life sciences to information technology, according to an annual survey released in April 2012 by ProTon, the European Knowledge Transfer Association. And the trend line is up.
The total number of spin-off companies launched in Europe in 2010 with the help of knowledge-transfer organisations (KTOs) was 579. That’s a 436 per cent increase from the 108 new ventures recorded in ProTon’s first survey in 2004. Now in its seventh year, the survey analyzes extensive data from 300 to 400 KTOs at universities and research institutes across Europe.
In the three economically tumultuous years since 2008, the number of spin-offs created at the European KTOs who participated in the survey rose on average by 6.9 percent a year, and the number of active spin-offs jumped by an average 7.5 percent per year.
Better funding and mentoring
That data may mark a turning point. Europe has long suffered from a syndrome of producing great basic research but failing to commercialise it. Now, despite Europe’s risk-averse culture, spin-offs like Mendeley, which was founded in Germany, seem to be multiplying – giving rise to hope that Europe can create the companies and jobs it needs to compete in a global knowledge economy.
“More and more spin-off companies are being generated by academia and other research institutes all over Europe. They are learning the game – and not only in the most advanced European countries,” says ProTon board member Andrea Piccaluga, a professor of innovation management at the Scuola Superiore Sant’Anna in Pisa.
The Swiss Federal Institute of Technology Zurich (ETH Zurich) produced 22 spin-offs in 2011 and a record 110 over the past five years. “I think we’ve come to a point where we have reached critical mass,” says Marjan Kraak, business development manager in biotech, medtech and diagnostics at ETH Zurich’s tech transfer office. “Despite the economic and financial crisis, we continue to see so many start-ups forming.”
What’s driving change? It took a decade or more of learning, but Europe is becoming more effective at nurturing entrepreneurs. Not only are European research universities and institutes developing better funding and mentoring programmes, they are now linking with local and regional government offices and business angels to create more complete networked innovation ecosystems, Piccaluga says. Of course, the depressed markets may also increase the allure of starting a new venture in Europe, since jobs are scarce anyway. “In difficult economic times, people are much more obliged to think out of the box,” says Alex Brabers, who chairs the venture capital platform for the European Private Equity and Venture Capital Association.
ETH Zurich’s Kraak concurs, but says government and university programmes are now helping make entrepreneurship a “manageable risk”. The alma mater of Albert Einstein, ETH Zurich is one of Europe’s leading spin-off hotspots, along with the Karolinska Institutet, Aalto University, Imperial College London, and the University of Cambridge.
Each has devoted significant resources to supporting new ventures and hiring experts well versed in entrepreneurial best practice. Their programmes coach and fund company founders from lab to market, connecting them with both investors and industry – a far cry from Europe’s incubators of the 1980s and 1990s, which mainly provided free office space and a bit of business-plan advice.
Some universities even have developed specific entrepreneurship degrees, such as Karolinska Institutet’s Master’s in Bioentrepreneurship, and Aalto University’s new Ventures Program, which will offer a minor in entrepreneurship for students in economics, architecture and engineering this autumn. The University of Cambridge runs entrepreneurship modules for graduates and undergraduates at its Centre for Entrepreneurial Learning, launched in 2003.
Though many hotspots have been warming up for a decade or more – especially those in the UK and Switzerland – others have built critical mass surprisingly quickly. When the Technical University of Berlin launched its Centre for Entrepreneurship in 2007, spin-offs (recorded from 2000) were averaging 15.8 per year. That number has since doubled to an average 32.3 a year (2008 to 2010). “We’ve reached a point of strong growth,” says Agnes von Matuschka, director of the centre at TU Berlin, noting that a small core of promising companies have received international financing.
Creating the right ecosystem
Berlin’s start-up scene has come of age thanks to this networked community, says Brabers, a 22-year veteran of the venture industry. “In order to flourish, start-ups need good ecosystems. These consist not just of VCs and entrepreneurs, but service providers, role models, developers, analysts, headhunters and corporations. If you bring all these together, the chances of success increase substantially.”
Targeted government programmes are an important part of that ecosystem. In Germany they include monthly stipends of up to €2,500 for researchers interested in commercialising their technology, an accelerator programme to help start-ups establish US subsidiaries and apply for US patents, and a matching-funds programme for business angels. Under this scheme, Germany offers each angel €250,000 over five years, allowing the investor carte blanche to match up to 50 per cent of his or her angel investment in a particular start-up with the government funds.
Finland’s Aalto University is also off to a quick start. Though it opened in 2010, when three Helsinki universities specialising in engineering, business and design were merged, it already has produced more than 25 spin-offs. Finnish start-ups are becoming “more and more robust”, says Will Cardwell, director of Aalto’s Center for Entrepreneurship and a former US investment banker and venture capitalist, adding that coaching is vital.
As Aalto’s three founding universities were merging, a student-led grassroots entrepreneurship society already was building links to Silicon Valley, sending its best student entrepreneurs there for stints of up to six months and sponsoring internships at hot US start-ups. Last year, Aalto’s Center for Entrepreneurship inked a three-year partnership with Stanford University’s Technology Ventures Program.
All that networking is helping raise the profile of Europe’s new spin-offs. Two-year-old Finnish mobile start-up Blaast, which was founded in part by Aalto researchers, raised €2.6 million last year in a seed capital round led by Ambient Sound Investments, a company launched by four of Skype's founding engineers. Silicon Valley start-up guru Steve Blank and a group of Finnish business angels also invested in Blaast.
Tapping global networks
Aalto’s award-winning Startup Sauna “open source seed accelerator” programme supports entrepreneurship throughout the Nordic region. It helped Tampere University of Technology spin-out Ovelin raise €1 million from Silicon Valley-based True Ventures. Cardwell says that there are more announcements in the pipeline.
The speed and ease of connecting in a globally networked economy helps European start-ups. The Technology and Knowledge Transfer Office at the Budapest University of Technology told researcher Tamas Haidegger in 2010 that his technology to scan hands for infection was crying out for commercialisation. Encouraged, Haidegger founded his own company, Clariton, won a grant from Contact Singapore, a Singapore government agency helping people relocate to the island and conducted his first clinical trials of his hand disinfection monitoring system there. Clariton CEO Haidegger won the 2012 Science|Business Academic Enterprise award for young entrepreneurs.
The effort by European universities and governments to connect students and professors with entrepreneurial meccas in the US, Israel and Asia is accelerating the creation of start-ups. The exchanges, which run from two weeks to a year, create a viral learning environment, giving European start-ups three critical elements they lacked in the past: instant validation for cutting-edge technology, role models and bridges to dense networks of investors.
Survival rate is key
Europe’s start-up scene still has a long way to go to match California’s. In the US, large tech companies nurture the start-up ecosystem by quickly adopting new technologies, creating a virtuous circle nurturing start-ups.
The real test, of course, is how many of Europe’s promising tech spin-offs will grow into globally competitive companies. The overall survival trend in Europe is too recent to judge, says ProTon’s Piccaluga. He figures that for every 100 spin-offs, there will be only ten success stories. “That is not a failure,” he says. “That is the price we have to pay to produce ten stars.”
At ETH Zurich, which has been compiling data for over a decade, the aggregate survival rate for spin-offs created between 1998 and 2007 is 88.5 per cent (115 out of 130 spin-offs have endured). One survivor launched in 2008 is Optotune, which has invented adjustable optical lenses based on elastic polymers – a breakthrough that lowers the cost and increases the quality of lenses used for mobile-phone cameras, machine vision, microscopes and other optical devices. While financial markets were crashing, Optotune’s co-founders inked a contract with a US telecommunications supplier worth several million dollars to develop lenses for mobile-phone cameras. The four-year-old company now employs 30 and funds its own growth.
Indeed, ETH Zurich’s spin-off dynamic is already producing enviable economic dividends. The 130 spin-offs tracked in its 10-year survey have created more than 900 direct jobs and in 2007 alone paid an estimated 18 million Swiss francs in tax revenues to local and federal government on estimated pre-tax income of 43 million Swiss francs. That’s a strong incentive to keep working on building a better climate for Europe’s entrepreneurs.
This article was originally published in Issue 10 of the Futures Magazine.