Europe's Crop of 'Billion-Dollar Babies'

Not long ago, you could count the number of European tech startups that went on to become giants on one hand. Now all that is beginning to change

by Jennifer L. Schenker

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Heidelberger Druckmaschinen (HDDG.F), a German printing press manufacturer with annual revenues north of €4 billion ($5.9 billion) and operations in over 175 locations, is based just 12 miles from the Walldorf headquarters of German software giant SAP (SAP). The companies' board members often meet on the golf course. Not surprisingly, Heidelberger is a long-time SAP customer.

Until now, that is. Heidelberger is experimenting with rival products from a Swedish upstart called Qliktech that makes business intelligence software—tools to help companies analyze and interpret information stored in corporate databases. Heidelberger tried out Qliktech's software first in Eastern Europe and the U.S., and the results were so good that Michael Neff, the company's chief information officer, is undertaking a companywide rollout.

A startup kicking out SAP? A few years ago that would have been unthinkable. But Qliktech's rapid rise is symbolic of the maturation of Europe's tech sector and a new, more vigorous environment for newcomers with the chops to become global players. A decade ago you could count the number of European tech startups that went on to become industry giants on one hand; now they're popping up from Sweden to Spain.

Equally important, a growing number of startups are managing to achieve valuations of a billion dollars or more, whether by going public or in acquisitions by other companies. From Internet telephony wunderkind Skype, which was bought for $2.6 billion in 2005 by eBay, (EBAY) to Dutch mapping outfit Tele Atlas (TA.AS), which is in the process of being acquired by navigation specialist TomTom (TOM2.AS) for $4.3 billion, European companies are at last hitting the kinds of numbers that investors have long seen in Silicon Valley.

Serial Entrepreneurs

To be sure, the number of venture-backed companies with U.S. exits of $1 billion or more outstripped those in Europe by four to one in 2007, according to market tracker VentureOne. But European companies are closing the gap, thanks to an improved venture capital network and the emergence of better managers—including a crop of so-called serial entrepreneurs who are launching their second or third companies.

Expect Europe's billion-dollar club to get bigger. Index Ventures, a Geneva venture capital firm that backed two of Europe's highest-profile exits—Skype and MySQL, an open-source database company sold to Sun Microsystems (JAVA) in January for $1 billion—is launching a new high growth fund in Europe aimed at helping more companies turn into huge success stories.

Giuseppe Zocco, a co-founder of Index Ventures and one of the leaders of the new $590 million growth fund, argues that Europe now has a "critical mass" of startups with the potential to become global market leaders. "There are a lot of European companies founded in the past 5 to 10 years that can, with the right support, become billion-dollar companies," he says.

The new Index fund aims to fill a gap between investments focusing on seed and early-stage companies and the growing number of late-stage investors moving into larger technology and life-sciences deals. It expects to make placements of between $30 million and $74 million in European-based startups.