Definitely a perpetual conversation amongst peers and management of investee companies...
Jonathan, you are correct, Europe and the UK have fantastic grants and seed funding programmes, sponsored by both public and private capital, and tax incentives. The risk-reward for EIS/SEIS in the UK, for example, is remarkable for persuading angels to invest excess personal capital. And even without that asymmetry, the risk-reward doesn't need much explaining when the buy-in valuation is so low.
UK Venture Capital Financial Returns 2024 | British Business Bank
Access-EIS-white-paper.pdf
However, by the time the Series A or B rolls around, the valuation is, say, ten times more expensive. Moreover, this next set of investors is institutional and aiming for exits 10 to 15 times of their buy-in valuation. Growing a company's revenues to high double digit millions of revenue is hard! The US is such a big market by itself, it is easier to convince an investor there that kind of growth is possible. Outside the US, investors are more conservative because they know market fragmentation is hard to overcome. Also, the US venture investor space is far more mature; the experience of history really changes risk acceptance and, hence, risk appetite.
But maybe with data, there is some hope of overcoming the prejudices inherent in geographies:
Breaking Network Barriers in the Era of Data-Driven Venture Capitalists by Melissa Crumling :: SSRN
With caveats, training on the past risks losing the novel winners that are going to be totally new (unknown unknown risk):
Data-driven Investors by Maxime Bonelli :: SSRN
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Kara K.W. Byun
Head of Fintech
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Original Message:
Sent: 13-03-2025 15:20
From: Jonathan Philp
Subject: Scaling Technology firms in the US and Europe
Why do the UK and Europe lag the US in firms achieving scale in the Technology sector?
I joined an IEA event today in which Dr Ricardo Reis of LSE presented an overview of his forthcoming research on Firm Migration in the Path to Scaling.
Dr Reis focused on the relative outperformance of the US economy over the UK and EU in productivity, and explored the contribution of the IT sector to this effect. He noted the tendency of young companies to scale faster in the US and the pattern of young companies moving to the US as a means of accelerating growth. Relative market size and the skills base are found to make little contribution to this effect, with managerial expertise specifically in the rapid scale-up phase and especially access to growth capital much more significant.
While Europe keeps pace in terms of the rate of propagation of start-ups and the availability of seed capital, access to capital for the scaling phase >$100M is seen to be markedly superior in the US. One reason cited for this is corporate governance and the legal framework, with investors in the US better able to control founders and direct corporate strategy. Founders often step away as the companies grow through this phase and focus and the next innovation, creating an efficient division of labour between entrepreneurs and corporate management specialists.
This was just a brief overview of what promises to be some very interesting research, the details of which will appear in due course, It's very relevant in the UK where there is continued angst at the steady flow of growth firms choosing to raise capital in the US.
https://www.lse.ac.uk/economics/people/faculty/ricardo-reis
Does that seem a compelling argument? Or are other factors more significant?
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Jonathan Philp, CFA
Principal Specialist , Banking & Financial Markets Practice, NTT DATA
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