WSJ Article: A Different Tech Model in Europe



Where is Europe’s Silicon Valley? This is the inevitable opening question the U.S.- tech media has for a European venture capitalist. The same question also haunts every technology conference in Europe with different panelists, speakers and participants attempting to cobble together coherent rebuttals to this loaded question. One New Year’s resolution that I am still clinging to is not to walk into the trap of answering this question head-on again.

Yes, Europe doesn’t yet have a tech company the scale of Google, Facebook, Amazon or Apple. Nor does it have a pool of capital as deep and free-flowing as Silicon Valley has. However the outlook for European technology has never been more positive. There are increasing signs that a different model is emerging in Europe that can produce tech companies that will compete and succeed on a global scale.

What underpins this optimism is the rapid reconfiguration of the European startup ecosystem around a handful of key tech clusters or hubs. When I started in venture capital in 1999, technology entrepreneurs in Europe were rare and spread diffusely over the continent. There were relatively few events or forums where ideas could be exchanged and tested. Recruiting young developers and marketers into a startup was challenging against the strong gravitational attraction of Europe’s then- booming financial capitals.  Fast-forward 15 years and the well-documented emergence of thriving technology clusters in London, Berlin, Stockholm and Helsinki has transformed the landscape. Graduates are beating a path to work in startups and tech events are oversubscribed and ever more bullish in tone. Rival clusters are also forming in Paris, Copenhagen and Tel Aviv.

There are various factors and trends that have fostered the development and continue to drive the growth of these tech hubs in Europe. Mobility of labor has definitely played a part. The free movement of labor laws enacted by the EU, and extended to Eastern Europe over the last decade, have meant cities like London can attract ambitious founding teams from across Europe.

Government support has also definitely been helpful. Though the UK government did not spark the creation of London’s “Silicon Roundabout,” their active sponsorship of the tech city initiative has definitely legitimized and raised the international profile of what started as very local phenomenon. It is notable at tech events like Slush in Finland, the Prime Minister Jyrki Katainen was an engaged attendee. Similarly David Cameron, the UK Prime Minister has attended Founders Forum events in London and enthusiastically championed the role tech can play in driving the economy.

Most countries in Europe have made the wise decision to stop short of running large state-sponsored direct investment programs. These typically crowd out private sector capital. Instead governments have opted for tax incentives to stimulate investing in startups such as the UK’s Enterprise Investment Scheme (EIS) or co-investment funds like Finland’s TEKES program, which both complement private sector investment.

Beyond supportive government and a thriving event scene, another factor that is critical for the sustainable growth of tech hubs are marquee companies. These generate wealth for founding teams, employees and their venture capital backers. Much of this wealth gets recycled into seed and angel investor activity.

In many of the European tech hubs, notably London and Berlin, there is a vibrant angel investing scene often fuelled by the wealth generated from exits. Both London and Stockholm lay claim to Skype*, which was one of the first major exits for a European tech company when it was acquired by eBay in 2005. Paris had its first major success since Business Objects, when Criteo* listed on the Nasdaq last year. Criteo’s invention of the smart advertising banner and their global leadership in this ad format was further validation that European tech companies could become global leaders. Their Paris office is very much the epicenter of the city’s emerging tech scene.

In the Nordics, Stockholm seemed to be the winning tech cluster, where Spotify is the clear global leader in music streaming and Klarna, an innovative payments company, has reached major scale and attracted capital from Sequoia Capital of the US. However in the last couple of years, Helsinki has burst onto the scene as major global hub for mobile gaming. First the success of Rovio with its Angry Birds franchise and now Supercell*, the company behind Clash of Clans and Hay Day, that is 2013 was part-acquired by Softbank in a transaction which valued the Company at $3 billion. From the ashes of Nokia, Helsinki has emerged as a thriving tech ecosystem which is now home to more than 50 mobile gaming startups.

Of all the technology clusters in Europe, London is the most developed and has recently cemented its position with two major IPOs. First there was King*, the London-based company behind Candy Crush which listed for more than $6 billion on NYSE. Just Eat*, a global leader in online and mobile food ordering, soon followed when it was the first company to list on the newly formed High Growth Segment of London Stock Exchange, where it was valued at £1.5 billion.

While Berlin may not yet have had the billion dollar exits of other European startup hubs, it has some very promising emerging winners. Zalando is now one of Europe’s biggest ecommerce companies. It was founded by the Samwer brothers, legendary in Germany for a string of successful tech exits. Germany is also home to SoundCloud*, the world’s largest online archive of recorded sound and music. The company’s founders left Sweden to become one of the pivotal companies behind Berlin’s growing startup scene and succeeded in attracting multiple rounds of investment from leading European and US venture capital firms.

Beyond a growing roster of very successful tech companies another aspect of Europe’s more federated tech ecosystem has been that distinct clusters have often developed a unique vertical specialization. While Helsinki has great talent and multiple success stories in mobile gaming, London is leveraging its status as a world financial center to create an exciting crop of financial services startups.

London even has its own dedicated incubator, Level39, exclusively devoted to supporting entrepreneurs developing disruptive financial services companies. At the edge of Europe, Tel Aviv in Israel has also had some successful exits and many promising emerging companies focused around software security and mobile security, such as Lacoon* and Adallom*.

How long it takes for European’s startup clusters to produce winners to match Silicon Valley’s biggest companies is hard to predict. However in its emerging model of distinct regional tech hubs, each with their own unique vibrant startup atmosphere and areas of specialization, Europe’s startup culture is rapidly changing for the better. Most importantly entrepreneurs need no longer be lonely in Europe. In Europe’s tech clusters, they are sharing their journey and sharing experience with bigger and tighter networks of founders and investors.

With each successful exit, the ambitions of European founders are also step-wise elevating toward those of Silicon Valley founders.

Mr.Holmes is a general partner at Index Ventures in London. He focuses primarily on Internet and games sectors.

*= Index Ventures investment

This article originally appeared in the WSJ Print and Online -



A special day for @indexventures

Delighted to see Index Ventures companies (Supercell and King) filling the 1,2,3,4,5 top grossing positions in Android Charts today. Also Swiftkey holding up strong in the paid charts.

You hear people say it’s pot luck which apps make it to the top of the chart. Maybe there is a repeatable formula for creating winning apps and at least a little science to finding and backing winning companies…

Index Mobile

How Shapeways landed a landmark $30m financing round

Delighted to report that today Shapeways announced a $30m fundraising led by Andreesen Horowitz. You can read more about it here >> (Shapeways, New York Times, AllthingsD, Wired, GigaOm, Venturebeat). Index Ventures first invested in Shapeways in October 2010 after many months of negotiations to spin out of Philips. The Company was based in Eindhoven in the Netherlands and had low revenues and a small but committed customer base comprised of a pioneering bunch of 3d modellers. The business model at the time is in essence the same business model that exists today. Firstly Shapeways offers a 3D printing service for 3d modellers who want to realise their own designs. Secondly Shapeways operates a marketplace where any consumer can browse and customise existing 3d designs and get them printed. In this case the original designer earns money on the designs they have contributed to the Shapeways marketplace.


Since 2010 a lot has changed both for the Company and more broadly in the 3D printing industry. Firstly 3d printing has received enormous attention and coverage in the media as people wake up to the fact that 3d printing is no longer science fiction but a very practical technology for a broad range of applications from healthcare to fashion. The Company has also made great strides over the last two years. The HQ has moved to New York, the team has grown substantially and the Company has also invested in its own manufacturing facilities which are now up and running in New York and Eindhoven. Over this period the Company raised additional financing both from inside investors and Lux Capital. This round however is a landmark financing for a private company in the 3d printing space and a very substantial venture round for any company at this stage. There are lots of compelling reasons to like Shapeways but for Index Ventures there were three key factors which underpinned our desire to invest again:


  • Emerging Leadership in high potential industry. By any measure we could look at, whether it was number of models uploaded, production volume or overall size of community, Shapeways was emerging as the clear leader in consumer 3d printing. As with any marketplace business model, the bigger the marketplace becomes the greater the gravitational pull it exerts on new buyers and sellers. In addition to network effects there are also substantial scale effects in 3d printing as machine utilisation increases, materials costs fall and more experience is gained on optimising production processes. Cheaper production can feed into lower prices which makes for happier customers.
  • Exemplary cohort and customer acquisition dynamics. At Index Ventures we always have a strong bias towards businesses that can attract consumers with little or no marketing. If a business is dependent on acquiring customers all the time through paid acquisition, however profitable this might be there is always the risk (or in most cases a likelihood) that at some future point in time, customer acquisition costs shoot up making it impossible for further profitable growth. The vast majority of Shapeways growth is driven by events, PR and the Shapeways community itself that operates globally though meetups. Also when you look at how customers behave over time through cohort analysis, there is a very steady pattern of spend over time with no sign of deceleration. In other words Shapeways effectively becomes a utility for its customers as sites such as Amazon have become.
  • Passionate and multi-talented team. Growing Shapeways has required an unusually broad range of skills compared to the typical tech startup. To galvanise the consumer 3d printing industry has required the Shapeways team to be evangelists, educators and visionaries. In addition there is a highly complex production and logistics operation where the Company has had to apply lean manufacturing methods to relatively immature and fast-changing production technologies. Lastly the company has had to develop and rapidly scale the online community and eCommerce operation. There have certainly been many challenges and setbacks, but each one has been approached head-on and dealt with by an exceptionally committed and creative team.
Congratulations to Peter, Marleen and everyone at Shapeways and welcome onboard to our new investors.


The Economics of Freemium games

Economics is occasionally derided as a phony science. Frankly I struggled with it at school and university so to me this description really resonates. How can the graphs and formulae in the textbooks ever really capture the behavior of complex organizations and impulsive consumers?

However, exposure over the last few years — first to the social gaming phenomenon and now to the exploding mobile-gaming industry has made me realize that maybe those dusty textbooks might contain some valid insights.

If you study the Android and iOS app-stores a few things become apparent. Games rather than productivity or other apps dominate the free, paid and top-grossing charts. This is entirely consistent with the behaviour you will observe on any bus or train. Playing games on the latest generation of phones and tablets is the dominant use case, accounting for approximately 60% of all hours spent on these devices.

A second observation is that a disproportionate share of the top-performing games are developed by European rather than U.S. companies. That is an interesting topic in itself and I may return to that in another post. Lastly and perhaps counter-intuitively, the games which consistently make the most revenue are all freemium. That is, they have no upfront download fee, but various optional in-game purchase options.

Why has freemium become the winning business model? To understand, we need to rewind a few years to when the games industry was dominated by high-priced content distributed on DVDs through retail channels. In this world, consumers would read reviews and then decide which games to invest their money and time in, much like how they would decide which film to watch.

Subsequently, some consumers are delighted by the game and perhaps with hindsight would have been willing to pay much more than the box price. Others would be annoyed and resent having paid so much. An important third group, many of whom might have been prepared to something but not the full price, would not engage with the game at all.

In economic terms, the game company only exploits a portion of the overall demand curve for their product. Also most consumers either pay too little or too much based on their own perception of the product.

Freemium games by contrast are an almost unique case where companies can perfectly price-discriminate down to the level of the individual consumer. Customers are not confronted with any upfront price barrier. On mobile devices, downloading and trying a game for the first time can now be an almost frictionless process.

Afterwards, the games company can extract an increasing amount of revenue from customers, according to each customer’s specific willingness to pay. Even those who choose not to pay anything play a crucial role in the success of a title by helping to spread awareness of the game and boost its ranking and visibility in the app stores.

Does this model exploit consumers? Some argue that it does, but the more compelling arguments support the opposite view. By offering many consumers a free gaming experience, a much broader audience who might never pay for a game get to experience the product. Every paying player also knows precisely what utility is provided by paying, and can make a much more informed decision about whether and how much to spend. Since spend perfectly matches the derived utility, both consumer and company are happy.

Beyond just allowing consumers to set the price, the best games also offer consumers the ability to craft the game around their own preferences. A whole new vocabulary has emerged to describe the different kinds of virtual products and services which game developers deploy to make their games appeal to different segments. Decorative objects appeal to those who take pride in how their avatar or game environment looks.

Purchasing more energy to play further in a game appeals to those who are time-constrained and unable to wait for their energy to refill. For those with more time to play and a competitive instinct, a greater portion of spending may be invested in performance enhancers. This category itself subdivides into durable items which persist, such as weapons or buildings, and potions which give a short-lived performance advantage at some vital stage in a game.

So freemium games represent an economics experiment in its purest form. Companies allow consumers to set the price and even determine the precise characteristics of the product. The amount that consumers pay precisely matches the utility they derive. By achieving this perfect economic balance, freemium mobile games are transforming the entertainment landscape and proving that perhaps occasionally the field of economics does have some helpful insights.

This post first appeared on the Wall Street Journal’s Accelerators section -