Venture Capital/Opinion/

Can the European tech ecosystem withstand the inevitable downturn?

Public stocks are turning bearish and interest rates will likely rise. So how would Europe's tech ecosystem handle a downturn?

Tech firms listed on the Nasdaq saw their valuations plummet in 2000
Nicolas Colin

By Nicolas Colin

You hear that? That’s the sound of the tech funding market slowly cooling down.

Public stock markets are turning bearish, which always correlates with lower returns from tech startups. Interest rates will likely soon rise given central bankers’ worries about inflation. Venture capitalists sound lost when it comes to putting a price on a funding round, which is always a bad sign.

And startups themselves might have too much capital on their hands, which comes with a whole range of problems: lower quality when it comes to hiring talent, and less focus when it comes to strategy.

A downturn doesn’t mean that everyone loses, obviously. The recent bull run has provided an opportunity for some players to improve their strategic positioning and gain market share.

Among the winners that look like they’re here to stay are funding behemoth Tiger Global and top VC firms, such as Andreessen Horowitz and Europe’s Index Ventures. Global accelerator Y Combinator also has surfed the growth wave effectively, announcing this week they would invest as much as $500k in each startup joining their programme from now on.

But what really makes for greatness is the ability to survive the adversity of a downturn, and even thrive in it. It’s true on every side of an entrepreneurial ecosystem.

Turning adversity into resilience

Many successful tech companies went through a near-death experience when the dotcom bubble burst in 2000. Amazon survived because it managed to issue bonds to continue funding operations as their stock was plummeting. Google survived because they had raised so much money at the peak of the bubble that they had several years of runway to fund their search for a profitable business model (which they found only after launching AdWords in 2000). Like these two, the key for startups is turning any downturn into an opportunity to become even more resilient and even more ambitious. 

The same is true for venture capital firms. Doug Leone of Sequoia likes to tell the story of how he and his team withstood the shock of the bubble bursting in 2000. Confronted with the entire ecosystem collapsing around them, they decided that they wouldn’t lose money on any of their investments. They rolled up their sleeves and got to work, finding an acquirer for some companies, organising a bridge round for others, weighing on top management in each so that tough decisions were made as quickly as possible.

Sequoia is now impregnated with a culture of resilience and hard work forged during the downturn of 2000-01; it’s exactly what makes it such a successful VC firm today.

Finally, entire entrepreneurial ecosystems need to be resilient in the context of a bubble bursting. The price to pay in such adverse circumstances is that some investors lose money and many employees end up losing their jobs. However, from an ecosystem perspective, it’s critical that both impoverished investors and jobless employees are able to rebound quickly.

This is precisely where the strength of Silicon Valley lies. After the dotcom bubble burst, many in the Bay Area chose resilience against all odds, continuing to found startups, to invest in them, and to seek jobs in the tech industry.

Meanwhile, other parts of the world were traumatised and relinquished all interest in the nascent digital economy. That post-bubble behaviour explains most of Silicon Valley’s competitive edge over other ecosystems, including Europe’s, up to this day.

Why a dotcom bubble repeat is unlikely

All that being said, should we be expecting a crash comparable to what the tech world experienced 22 years ago? It’s unlikely, for two reasons. First, the internet is more widespread than ever; the size and growth of this segment of the economy makes it unlikely that all investors will retreat overnight and bring on a long funding winter lasting several years, as happened the last time.

Second, the tech world is much less centralised than it was at the end of the previous century. In 1999-2000, all decisions were concentrated between the San Francisco Bay Area and financial institutions in New York. In such a confined environment, it was enough for just a handful of people to express fear to see many players turn their backs on tech altogether.

But these days, the tech world is spread across many different geographies and entrepreneurial ecosystems, spaces that are not 100% in sync with each other. The end result is that our experience of the inevitable downturn will be less of a bubble bursting than of a gradual slowing down and deflation of funding rounds at all stages.

Our experience of the inevitable downturn will be less of a bubble bursting than of a gradual slowing down and deflation of funding rounds at all stages

Can the current European ecosystem withstand such a downturn — and turn it into an opportunity to become more resilient? It will take the efforts of all for the industry to stay afloat: founders that fight tooth and nail to grow their startup even with strong headwinds; venture capitalists who, just like Doug Leone in 2000, make a point of not losing one dime on most of the lines in their portfolio; skilled operators who continue to flock to tech rather than joining industries such as consulting and financial services; policymakers that keep on supporting the growth of the European ecosystem even in the absence of hype; and institutional investors that recognise that tech is here to stay and still deserves an ever-growing share in their allocation strategy.

That’s a lot of moving pieces, but the past 20 years have been fruitful in terms of building institutional, cultural, and financial capital within the European entrepreneurial ecosystem. Now we’re about to see if this ecosystem is mature and resilient enough to withstand the imminent shock, thriving in adversity as much as in prosperity.

Nicolas Colin is cofounder of VC firm The Family. He writes a regular column for Sifted.

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