After years spent lamenting their local technology scene, Europe’s startups and their venture capital backers are finally bullish about building businesses on their home continent. They just don’t want to list their shares there.
Instead, companies including Irish communications software developer Openet and Prague-based antivirus firm Avast Software are headed for initial public offerings in New York, spurred in part by mounting investor interest in Facebook’s $5 billion share sale. “Ten years ago, we would have expected that the majority of the companies we backed would go public in Europe, with a minority in the U.S.,” says Barry Maloney, founding partner of London-based venture capital firm Balderton Capital. “It’s been completely the reverse.”
Last year four European technology companies, led by Russian search engine Yandex, raised a record $1.8 billion in New York IPOs, according to data compiled by Bloomberg. The companies are fleeing their domestic bourses as U.S. markets, less affected by Europe’s debt crisis, offer higher valuations and greater liquidity. The average ratio of price-to-book value for companies in the MSCI U.S. Information Technology Index is 3.7, compared with 2.3 for tech companies in the Stoxx Europe 600 Index, as of April 4. The investing public in the U.S. “understands the sector better and is more willing to pay for growth,” says Craig Coben, the London-based head of equity capital markets for Europe, the Middle East, and Africa at Bank of America (BAC).
The value of tech IPOs in the U.S. last year was $4.5 billion, compared with $389 million in Europe, according to data compiled by Bloomberg. Zynga (ZNGA), the biggest developer of games for Facebook, raised $1 billion in December and has seen its shares climb 23 percent as of April 3. LinkedIn (LNKD) raised $389 million in its May IPO. The last large-scale Internet IPO in Europe was in 2010, when Russia’s Mail.ru Group raised $912 million in London.
Even with some successes, such as online jukebox Spotify, Europe’s tech industry continues to lag the U.S. Total venture capital investment in the third quarter of 2011 in the U.S. outstripped that in Europe by almost eight times, according to the European Private Equity and Venture Capital Association and the National Venture Capital Association. Only one of the 10 largest global technology companies by market value, Germany’s SAP (SAP), is European. The value of tech companies in the U.S. is $3 trillion, according to Bloomberg data, almost nine times the $351 billion in Western Europe.
To close the gap, Europe’s governments have been trying to encourage the growth of technology businesses. In the U.K., Prime Minister David Cameron has voiced support for plans to turn a gritty stretch of East London into “Tech City,” a European rival to Silicon Valley. In France, President Nicolas Sarkozy’s government has pledged its support for projects such as the European School for Internet Professions, which offers a three-year program for aspiring Web entrepreneurs.
For now, U.S. markets continue to offer distinct advantages, says Mike Chalfen, a general partner at London’s Advent Venture Partners, which has backed startups including Paris-based video-sharing site Dailymotion. In the U.S., he says, “investors are experienced, there’s a lot more capital for technology, and it’s easier to tell your story. If you have the choice right now, why wouldn’t you go there?”