Yankee Sabra Limey

Over the past two months, I’ve noticed a puzzling phenomenon: the more deeply technical a start-up is, the more likely that start-up is to originate in a non-hub city in Europe. If the five major tech hubs of Europe are London, Berlin, Stockholm, Paris, and Dublin – why is it that some of the most interesting enterprise and tech-driven start-ups I’ve met lately have been from Sheffield, Slovenia, Belgrade, Bulgaria, Innsbruck, Vienna, Greece, Luxembourg, and the Italian Riviera (yes, the land of squid-ink pasta and coastal vineyards. No, I am not making this up.) This is not to say there isn’t killer technology in the five main hubs, but the distribution is not what I would have expected.

So three questions: (1) Why is this happening? (2) Is it a good thing? (3) What’s a VC to do?

Why is this happening?

I think the main reason for this distribution relates closely to something I blogged about recently and something that was the subject of considerable discussion at TechCrunch Berlin: There is a growing recognition that close ties to the US tech scene, customer universe, and exit landscape are highly correlated with generating big exits – and, more importantly, that this is specifically true for enterprise or “deep tech” companies. Companies that know they need to eventually sell to US corporates, partner with major US tech companies, or evangelize to key developer communities know that they may eventually want to establish a presence in the US. Founders, therefore, know that relocation to the US is likely to be in their future. The more commercially savvy a founder is, the more she realizes that relocation to the US is likely to be in her future, and – consequently – the less likely she is to want to move to one of the five tech hubs of Europe because that’s likely to be an interim step. European consumer-oriented companies have a lot to gain from relocating to one of the five hubs (access to talent, press coverage, customers, and investors), but I think these location-based benefits might be slightly less tangible for deeply innovative tech-driven companies in the very early stages – when everyone is heads down on product and perhaps the first handful of key accounts.

Specifically on talent, it’s often the case early on that only a handful of technical ninjas are the real driving force behind the technology in a tech-driven startup. That killer technical co-founder may want to move to London or Berlin. But she may prefer to live close to home in Sofia or Innsbruck – and if she can hire 4-5 trusted and skilled developers at low cost close to home, the appeal of relocating to a different tech hub is not necessarily greater than the appeal of building a tech team right at home. The model of a development center in the “home country” and a commercial center in a commercial hub like London, NY, or San Francisco can often work – and it has advantages. It can be easier and cheaper, and it can keep a company truer to its founding DNA while exposing it to global customers and market forces. (This hybrid approach is something that I think European start-ups can learn from their Israeli counterparts.)

Is this distribution a good thing?

Yes and no. Yes because it means tech companies are sprouting up everywhere, and creating jobs and positive knock-on effects throughout Europe. It also reflects the fact that Europe is really one tech eco-system – and the more we think like that, the better. I’m looking at two potential investments right now that involve VCs from two countries, investing in a startup from a third country – and I think we’ll see more of that, not less, as more and more European startups and VCs start to think about global leadership.

On the other hand, the news isn’t all good. There are real benefits to being in a technology hub in terms of the serendipitous networking and the easy flow of ideas from one company to the next, one founder to another. Start-ups that insist on setting up shop in a “non-hub” need to work harder to be part of the global tech conversation, need to stay current, and need to be willing to move to wherever makes the most sense for the business at the right time.

What’s a VC to do?

As with everything, the answer is that we VCs need to stay focused and work harder to source great opportunities. It means a few more flights, a lot more Skype calls, and the trust-building necessary to work well in a distributed way. The good news is that leading global companies can be started from anywhere, but if the goal is a big VC-style exit – the mindset must be the same regardless of location: achieving and maintaining leadership, and accessing customers globally. If entrepreneur can do that, it doesn’t really matter what her starting address is, or where her development center is located.

One more thing. You might have noticed that I didn’t list Tel Aviv as one of the five major tech hubs in Europe. Tel Aviv is, in fact, the sixth great tech hub of Europe – right alongside Berlin, Dublin, London, Paris, and Stockholm. Three billion dollar VC-backed exits this past summer alone are testament to that. One thing, however, sets Tel Aviv apart: good entrepreneurs in Tel Aviv never harbor the illusion that they can grow to massive scale without going global and – usually – relocating at least part of the team overseas. I’ll blog in the future about how European entrepreneurs can leverage the amazing Tel Aviv tech scene – but that’s a big enough topic that it deserves its own post.