KKR: Digitization in Europe - Unlocking Europe's Entrepreneurial Potential

KKR Global Institute Report • November 2013

Digitization in Europe
– Unlocking Europe’s
Entrepreneurial Potential
By Philipp Freise
KKR Member, Private Equity,
Head of KKR’s European Media Industry Team
and Lucian Schoenefelder
KKR Principal, Private Equity


4

Europe’s Key Advantages

9

Europe’s Key Disadvantages

12

Attractive Opportunities

14

Unlocking Europe’s Digital Potential

Philipp Freise

3

16 Outlook

Member, Private Equity
Head of KKR’s European Media
Industry Team

Lucian Schoenefelder
Principal, Private Equity

Main Office
Kohlberg Kravis Roberts & Co. L.P.
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Photo Credits
Chapter 2: Photos courtesy of Mapics - Fotolia, Photocreo - Fotolia,
Timages - Fotolia, Prescott - Fotolia

2.

Chapter 3: Photo courtesy of Marqs - Fotolia

3.
© 2013 Kohlberg Kravis Roberts & Co. L.P.
All Rights Reserved.

1.

Chapter 3: Nasdaq, Photos courtesy - Sean Pavone - Shutterstock

4.

Chapter 6: Photo courtesy of Richard Semik - Shutterstock

The wave of digitization — a series of trends that have transformed
how we shop, consume media and drive efficiencies in all aspects
of doing business — is well advanced in Europe in our view.
The European Union alone boasts approximately 368 million online
users and 193 million Facebook users1 versus 245 million online
users and 166 million Facebook users in the U.S.,2 and a broadband
penetration rate of 72 percent3 (vs. 70 percent in the U.S.).4 In 2012,
European business-to-consumer (B2C) e-commerce grew by 19
percent to reach €311.6 billion,5 according to Ecommerce Europe.
In fact, the United Kingdom (UK) has the highest e-commerce
penetration globally with 87 percent of the UK’s Internet population
having bought a product or service online versus 43 percent in
the U.S.6 Mobile adoption has also been rapid, with smartphone
penetration in the UK and parts of Northern Europe already being
higher than in the U.S.7

growth capital may be playing. We will also discuss an emerging
“funding chain” that is developing around a complex international
eco-system, which will hopefully help Europe to unlock its full
digital potential, and in which private equity can play an important
role. Finally, we will look at the potential of large exits to energize
the European digital landscape and reinject capital into the next
generation of startups.

So if European consumers and businesses have so fully embraced
the digital economy, why is it essentially dominated by U.S.
companies like Google, Amazon, Facebook and others?8 Why is the
“digital balance of trade” so skewed toward the U.S. with Europe
being a large “net importer” of digital services and technology from
the U.S.? Is this imbalance changing and what could be the potential
drivers behind such a change?
The following analysis explores these questions, drawing on KKR’s
insights as well as interviews with leading entrepreneurs, investors
and officials from across Europe. We will discuss the key structural
advantages that are underpinning Europe’s digitization. In addition,
we will explore the key reasons why Europe is lagging behind the
U.S. in the creation of successful global digital powerhouses. In
particular, this paper will examine the role that limited access to

1 Internet World Stats, European Union. Retrieved 22 October 2013.
2 Internet World Stats, European Union. Retrieved 22 October 2013.
3 Eurostat News Release. “Internet access and use in 2012.” Eurostat
Commission 2012. Available at: http://europa.eu/rapid/press-release_STAT12-185_en.htm
4 Pew Internet. “Home Broadband 2013.” Pew Internet, 2013. Available at:
http://pewinternet.org/Reports/2013/Broadband/Findings.aspx
5 Ecommerce Europe. “European E-commerce to reach 312 billion in 2012.”
Ecommerce Europe, 2013. Available at: http://www.ecommerce-europe.eu/
press/2013/05/press-release-european-e-commerce-to-reach-312-billion-in2012-19-growth
6 Digital Strategy Consulting. “Global ecommerce penetration by country:
2013.” Digital Strategy Consulting, 2013. Available at: http://www.
digitalstrategyconsulting.com/intelligence/2013/08/global_ecommerce_
penetration_by_country_2013.php
7 Google. “Our Mobile Planet.” Google, 2013. Available at: http://www.
thinkwithgoogle.com/mobileplanet/en/graph/?country=no&country=se&count
ry=uk&country=us&category=DETAILS&topic=Q00&stat=Q00_1&wave=2013
&age=all&gender=all&chart_type=&active=stat
8 See “Most visited website per Country” visualization created by the
Information Geographies department at the Oxford Internet Institute.
Available at: http://geography.oii.ox.ac.uk/

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Digitization in Europe – Unlocking Europe’s Entrepreneurial Potential

Europe’s Key Advantages:
Multiple Hubs of Innovation,
Great Talent and Experience
with Internationalization

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a) Regional “Mini-Silicon Valleys” with
High Quality Talent Drive Innovation

created various tax incentives for investments in startups and
boasts a lower corporate tax rate than the U.S. and most European
countries.

We believe Europe’s digital economy is differentiated by several
structural advantages. This has resulted in the creation of market
leaders such as Skype, Spotify and Fotolia that seem to have had a
disruptive impact on industries ranging from telecoms to music to
stock photography.
Europe’s diversity of cultures and languages has led to the creation
of several regional “mini-Silicon Valleys,” each with its own unique
fabric specific to the local culture, policies and innovation climate.
These tech hubs seem to benefit from access to strong research
institutions and talent at reasonable prices, as well as an improving
ecosystem of local angels, venture capital firms and incubators.
While each hub is a distinct entity, there is significant interplay
among them. A startup with a Swedish founder may be based in
Berlin, find capital in London and employ Spanish developers.

Stockholm has also become a thriving digital hub. Despite a
population of only 9.6 million as of August 2013,11 Sweden boasts
a disproportionate number of high-quality success stories like
the music-streaming site, Spotify, the online payments company,
Klarna, and the online advertising company, Tradedoubler. Although
Swedish start-ups may face the disadvantage of a small home
market and high cost of living, they benefit from a population of
early adopters. Together, with access to high-quality engineering
and design talent, this makes for an excellent “test market,” from
which companies with global aspirations can expand to the rest of
Europe or the U.S.
Berlin has similarly emerged as a serious digital media hub,
although it has not seen yet the quality success stories that London

N E W B U S I N E S S E S L AU NC H E D A N N UA L LY I N B E R L I N ( 1 9 9 7 – 2 0 1 2 )

50

Number in 1,000

45

42.7

4 1.9

4 1.1
3 9.3

40

44.5

44.2

20 1 1

20 1 2

4 0 .1

3 9.4
36.7

3 5 3 2 .9
3 1.1

3 0 .1

30

32.0
2 8 .3
2 5 .9

2 7.5

25
20
1997

1998

1999

2000

2001

2002

20 0 3

20 0 4

20 0 5

20 0 6

20 0 7

20 0 8

20 0 9

20 1 0

Source: Office for Statistics Berlin - Brandenburg

In London’s “Silicon Roundabout,” some 1,300-1,400 digital and
media startups are creating new jobs and have transformed East
London into a global entrepreneurial hub.9 The UK attracted $656
million in venture capital in the first half of 2013, which compares to
$1.8 billion for all of Europe.10 London is benefitting from its role as
the financial and media capital of Europe and is able to attract talent
from all over the world. The British government has, moreover,
9 Bloomberg. “Hipsters Flocking to Silicon Roundabout as Bankers Fade.”
Bloomberg, May 13, 2013. Available at: http://www.bloomberg.com/
news/2013-05-14/hipsters-flocking-to-silicon-roundabout-as-bankers-fade.
html
10 DFJ Esprit. “Scarcity of follow-on start-up funding exposed…” DFJ Esprit,
July 22, 2013. Available at: http://www.dfjesprit.com/news/scarcity-offollow-on-start-up-funding-exposed-in-first-half-of-2013-as-uk-surrenderslead-to-france-in-european-venture-deals-over-usd-5million/

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and Stockholm can showcase. In the first half of 2013, Germanspeaking countries including Germany, Austria and Switzerland
collectively captured $343 million of the total invested in venture
deals.12 Berlin offers a combination of low rents, a highly creative
and trendy culture, affordable talent and an advanced network
of accelerators and incubators. The city boasts thriving digital
companies such as SoundCloud, founded by two Swedes who
relocated to be near Berlin’s thriving music scene, as well as the
scientific-research network, ResearchGate.
The “Silicon Sentier” in Paris is powered by high-quality
11 Statistics Sweden. Population Statistics accessed October 22, 2013.
Available at: http://www.scb.se/Pages/Product____25799.aspx
12 DFJ Esprit Op cit.


engineering talent from France’s “Grande Ecoles.” Talent in Paris
is competitively priced relative to Silicon Valley and other markets.
Equity pools to attract key employees are often lower in France
than in the U.S., where startups typically hand over 10 to 20 percent
of their equity to employees.13 Cyrille Vincey, CEO and founder
of Paris-based data visualization startup Qunb, says such pools
typically represent 3 to 5 percent in France, in his experience.
Investors and entrepreneurs, however, have recently been rattled by
the French government’s intervention in the attempts of Dailymotion
to sell a controlling stake to Yahoo!
Berlin is also the European capital of incubators. Rocket Internet,
which calls itself “the world’s largest Internet incubator” on its
website, is a prominent global player. Incubators like Project A
Ventures (funded by German Otto Group and the media company
Axel Springer) or EPIC (funded by the German media company
ProSiebenSat.1) are more focused on Germany and Europe.
Incubators either develop and execute business models by
themselves or help entrepreneurs to fund and execute their
ideas. In the latter case, incubators not only provide funding to
entrepreneurs, they also give access to an in-house backbone
of operational support services such as online marketing, data
warehousing, web development and sales. While entrepreneurs
usually have to give up a larger share of their ownership in an
incubator-funded model, they can benefit from an operational
machine that potentially de-risks their execution.

market.”15
This inborn “roll-out DNA” is becoming more and more valuable
as the relative share of the U.S. in the digital marketplace is
decreasing and truly global online economies are formed. In 1996,
two-thirds of global Internet users lived in the U.S. Sixteen years
later, U.S. users represented only 13 percent of the global total, an
indication of how much of the world has gone online, according to a
recent digital trends report by comScore.16
We believe European companies are well positioned in the cyber
“land-grab” that is currently unfolding in many online verticals to
penetrate these high-growth markets. Rocket Internet, for example,
has been rapidly rolling out its incubator business to Latin America,
Eastern Europe, Africa and Asia. It now boasts seven offices in
Latin America, five in Asia and four in Africa, which have been set
up to roll out attractive business models globally. The company
intends to invest a significant portion of the more than $500
million-plus it raised in July 2013 into emerging markets such as
Latin America, Asia and Africa.17

Finally, Helsinki, Finland is associated with the successes of the
mobile phone maker Nokia and “Angry Birds” maker Rovio. While
Nokia is struggling with the transition to smartphones, we believe
it has provided Finland with strong experience in developing
mobile apps and platforms. Supercell, the company behind the no.1
mobile game hit Clash of Clans, is just the most recent example of
Finland’s mobile development prowess. The company was founded
in June 2010 and announced the sale of a 51 percent stake to
SoftBank for $1.5 billion in October 2013.14
Other notable hubs in Europe include Barcelona, Amsterdam,
Moscow and Tallinn.

b) Differentiated Experience with
International Roll-outs
Next to the regional diversity of its startup scene and the supply
of great talent at reasonable rates, in our view, European
entrepreneurs also have differentiated experience with rolling out
business models across different countries. Given the relatively
small size of each individual European market, European digital
companies were historically often forced to look beyond their own
borders much earlier than their U.S. peers. As Skype co-founder,
Niklas Zennström, noted in 2011 of entrepreneurs in European
markets, “We didn’t think about one market — the world is our
13 Perkins Cole. “Back to Basics: Consider the Number of Shares to be Issued
When You Form Your Startups.” Startuppercolator.com. May 16, 2012.
Available at: http://www.startuppercolator.com/back-to-basics-consider-thenumber-of-shares-to-be-issued-when-you-form-your-startup-05-16-2012/
14 Reuters. “SoftBank buy $1.5 billion stake in Finnish mobile games
maker Supercell” Oct. 21, 2013. Available at: http://www.reuters.com/
article/2013/10/21/net-us-softbank-acquisition-idUSBRE99E0ID20131021

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“
We didn’t think about one market
— the world is our market.
“
Niklas Zennström
Skype co-founder, in The Wall Street Journal

15 The Wall Street Journal. “Skype Founder to Students: Don’t Follow the
Obvious Path.” WSJ.com, March 11, 2011. Available at: http://blogs.wsj.com/
venturecapital/2011/03/11/skype-founder-to-students-don%E2%80%99tfollow-the-obvious-path/
16 comScore. “State of the Internet Q1 2012”. comScore.
17 The Wall Street Journal. “Rocket Internet Raises $1 Billion in a Year.”
WSJ.com. July 16, 2013. Available at: http://blogs.wsj.com/techeurope/2013/07/16/rocket-internet-raises-1-billion-in-a-year/


Berlin

Germany

Soundcloud

Wooga

Madvertise

Eyeem

Activity

Activity

Music streaming and
sharing

Online games

Activity

Activity

Founded

Founded

2009

2007

Funding total

Funding total

$32.2 million

$63.3 million

Founders

Founders

Jens Begemann, Philipp
Moeser, Patrick Paulisch

Alexander Ljung, Eric
Wahlforss
key backers

Doughty Hanson Technology
Ventures, Union Square
Ventures, Index Ventures,
Kleiner Perkins Caufield &
Byers, GGV Capital

Founded

2008

key backers

HV Holtzbrinck Ventures,
Balderton Capital,Highland
Capital Partners, Tenaya
Capital

Helsinki

Online Advertising

Funding total

$10 million
Founders

Carsten Frien
key backers

Point Nine Capital, Earlybird
Venture Capital, Blumberg
Capital, Felicis Ventures

Photo sharing app
Founded

2011
Funding total

$6 million
Founders

Florian Meissner, Lorenz
Aschoff, Ramzi Rizk, Gen
Sadakane
key backers

Earlybird Venture Capital,
Wellington Partners,
Passion Capital

Supercell
activity

finland

Online games

Rovio Entertainment

(Angry Birds)
activity

Online games
founded

2003
funding total

$42 million
co-founder

Niklas Hed

founded

2010
funding total

$272 million
founders

Visa Forsten, Lassi
Leppinen, Petri Styrman,
Mikko Kodisoja, Ilkka
Paananen
key backers

Bitbar

Applifier

activity

activity

IOS and Android app
developer

Online games

founded

2008

1995
funding total

$3 million
founder

Marko Kaasila

founded
funding total

$6 million
founder

Jussi Laakkonen
key backers

Lifeline Ventures, MHS
Capital, PROfounders
C
apital, Webb Investment
Network, Tekes

Accel Partners, London
venture Partners, Index Ventures, Atomico, Institutional
Venture Partners, Initial
Capital, Lifeline Ventures,
Cerval Investments

key backers

Badoo

Shazam

Mind Candy

Hailo

activity

activity

activity

activity

Online games

Mobile taxi app

founded

founded

2003

2010

funding total

funding total

$10 million

$50.6 million

founder

founders

Michael Acton Smith

Russell Hall, Gary Jackson,
Terry Runham, Jay Bregman,
Caspar Woolley, Ron Zeghibe

key backers

Accel Partners, Atomico,
Felicis Ventures

Finnvera Venture Capital,
Creathor Venture
M
anagement, DFJ Esprit,
Qualcomm Ventures, Draper
Fisher Jurvetson (DFJ)

London

united kingdom

Social Network
founded

2006
funding total

$30.6 million
key backer

FINAM Global

Music identification
technology
founded

2002
funding total

$72 million
founders

Avery Wang, Dhiraj
Mukherjee
key backers

Kleiner Perkins Caufield
Byers, Institutional Venture

Partners, DN Capital,
América Móvil

key backers

Index Ventures, Accel
Partners, Spark Ventures

key backers

Accel Partners, Atomico,
Wellington Partners, Red
Swan, Union Square
Ventures, KDDI, Richard
Branson, Felicis Ventures

Paris

france

Criteo

Jolicloud

activity

Online advertising
founded

2005

Deezer

Viadeo

activity

activity

activity

Cloud management
platform

founded

Music streaming

founded

founded

2006

2009

funding total

funding total

$149 million

(IPO October 2013)

$4.2 million

founder

founders

founders

Daniel Marhely

Tariq Krim, Romain Huet

key backers

funding total

$63.4 million

Jean-Baptiste Rudelle,
Franck Le Ouay
key backers

IDInvest Partners, Elaia
Partners, Index Ventures,
Bessemer Venture Partners,
SoftBank Capital

Stockholm

activity

Music streaming

and sharing
founded

2006
funding total

$288 million
founders

Daniel Ek, Martin Lorentzon
key backers

Creandum, Northzone,
Horizons Ventures,
Wellington Partners, Sean
Parker, Founders Fund,
Kleiner Perkins Caufield
Byers, Accel Partners,
Digital Sky Technologies,
Goldman Sachs, Li Ka-shing

funding total

$50.2 million
founders

Dan Serfaty, Thierry Lunati
key backers

Atomico, Mangrove Capital
Partners

Access Industries, IDInvest
Partners, CM-CIC apital
C
Prive, Xavier Niel, Dotcorp
Asset Management,
Business Angels

Narrative

Klarna

Tictail

activity

activity

Online payment solution

Ecommerce

founded

founded

2005

2012

funding total

funding total

$166 million

$1.57 million

founders

founders

Sebastian Siemiatkowski,
Victor Jacobsson,

Carl Waldekranz,
Siavash Ghorbani,
Kaj Drobin, Birk Nilson

key backers

(formerly Memoto)
activity

Life-logging camera
founded

2012
funding total

$3 million
founders

Martin Källström, Oskar
Kalmaru
key backers

True Ventures

Niklas Adalberth
key backers

Investment AB Oresund,
Sequoia Capital, General

Atlantic, Digital Sky
Technologies

Tallinn

IDInvest Partners, Ventech
Capital, Fonds trategique
S
d’Investissement

key backers

Balderton Capital,
Klaus Hommel, Gustav
Söderström, Fredrik
Nylander, Gustaf Alstromer

Grabcad

(Development
team in Tallinn,
headquartered in
Cambridge, Mass.)

estonia

Transferwise

(Headquartered in London)
activity

Online payment solution
founded

2010
funding total

$7.37 million

Fits.me
activity

Virtual fitting room
founded

2010
funding total

$8.95 million
founder

founders

Heikki Haldre

Taavet Hinrikus, Kristo
Kaarmann

key backers

key backers

IA Ventures, Index Ventures,
Kima Ventures, V Angel,
S
Valar Ventures, Seedcamp

KKR

2004

Spotify

sweden

8

Professional social network

SmartCap, Conor Venture
Partners, Fostergate
Holdings, Entrepreneurs
Fund, Estonian Development

Fund


activity

Engineering design
collaboration tool

Erply
activity

Point of sale software nd
a
inventory system
founded

founded

2009

2009

funding total

funding total

$4.22 million

$13.6 million

founders

co-founder

Hardi Meybaum

Kristian Hilemaa, Kristjan
Randma, Kris Hiiemaa

key backers

key backers

Matrix Partners, Atlas Venture, Charles River Ventures,

NextView Ventures, David
Sacks, John McEleney, Alex
Ott, Angus Davis, Jon Stevenson, Seedcamp, Techstars

Seedcamp, Redpoint Ventures, Index Ventures, Marten
Mickos, Kenny Van Zant, Zack
Urlocker, he Accelerator
T
Group, 500 Startups, Felicis
V
entures, Dave McClure

Europe’s Key Disadvantages:
No Uniform Home Market, Stigma
of Failure and Limited Access to
Growth Capital

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Despite these differentiating factors, we believe Europe is suffering
from three important structural issues that have put European
companies at a disadvantage to their U.S. peers.

a) No Large, Uniform Home Market
While European companies tend to think relatively early about
“the world as their home market” due to the small size of the
national markets, this dynamic can also put European firms at a
disadvantage with respect to the time that is required to bring a
business to scale.

U.S. competitors on the other hand can gain scale faster,
accumulate capital and can then challenge European players in
their home markets, or alternatively simply buy them out. Examples
include Groupon’s acquisition of MyCityDeal or eBay’s acquisition of
various local listing sites in Europe. This phenomenon of strategic
take-outs of local European players by U.S. companies is one of the
key reasons why the digital balance of trade is so skewed towards
the U.S.

b) Stigma of Failure

U.S. companies benefit from having a large domestic market with a
common language, culture, media, political and regulatory system.
A successful product can thus go viral and be rolled out in the U.S.
market relatively quickly. Despite increasing integration through the
EU, Europe on the other hand is still fairly fragmented. It usually
takes more time and effort to roll-out a business model across the
different European language zones.
There is also the risk that once a business model turns out to be
successful, domestic local language copycats pop up fast. Given
that many online business models benefit from strong firstmover advantages, local first movers can sometimes be difficult
to unseat by new market entrants. In particular in less technology
heavy business models, this pattern can prevent the creation of
a European player of size, and results in a fragmented landscape
of national champions. The online classified industry is a good
example of this phenomenon.

Culture and regulatory factors may also be constraining the growth
of European companies in the digital space.
Historically, the stigma attached to failure in a business or
bankruptcy has been more pronounced in Europe than in the U.S.
A 2012 poll by the European Commission, for instance, found that
roughly half of EU respondents said the risk of failure would deter
them from starting their own businesses. The aversion to failure
tends to vary by country, ranging from 66 percent of respondents in
Portugal to 52 percent in Germany, and from 48 percent in Sweden
to 38 percent in the UK.18 By comparison, 2012 polls by the group,
Global Entrepreneurship Monitor, found that fear of failure would
deter only 32 percent of respondents in the U.S.
In addition, bankruptcy laws in European countries have historically
often resulted in full liquidation despite protracted proceedings,
forming another deterrent to risk-taking startups. Until a recent
change in the bankruptcy code, Italian bankruptcy proceedings,

FUNDRAISING, INVESTMENTS DIVESTMENTS BY EUROPEAN PE AND VC FUNDS (2000 - 2012)

1 20

112

100
80

€ billion

80

72

80
73

71

55

60
48

47
40

35

40

37
28 28

24
20

9

43

13

2 7 29
11

30

27
14

33

47
37

31

27

20

42

14

19

25

22

24

20

22

12

0
2000

2001

2002

2003

2004

20 0 5

Funds Raised

20 0 6
Investments

20 0 7

20 0 8

20 0 9

20 1 0

20 1 1

20 1 2

Divestments

Source: Thomson Reuters / EVCA (2000 - 2006) EVCA / PEREP_Analytics (2007 - 2012)

18 European Commission. “Entrepreneurship in the EU and Beyond.” EC. May
23, 2013. Available at: http://ec.europa.eu/public_opinion/flash/fl_354_en.pdf

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for example could last a decade. But several countries including
France, Germany, Spain and Italy have now adopted laws similar
to Chapter 11 in the U.S., which may afford companies some
protections. In Germany, for example, companies can now more
easily convert debt to equity and attract new investors.19
We also believe a shift in attitudes is taking place in Europe, with
“entrepreneur” becoming an increasingly viable and desirable
career choice, especially as traditional industries, including
financial services, have declined since the financial crisis began in
2007.

c) Access to Growth Capital
Finally, European companies often get less ample funding than
their U.S. peers. In the second quarter of 2013, the amount invested
in the European tech sector was just shy of $1 billion, according
to Dow Jones VentureSource. This amount was dwarfed by the
investments in the U.S. tech sector, which equaled almost $4.7
billion in the same period.20 While it looks like 2013 will be the best
year for venture capital funding in Europe since the pre-crisis days
of 2007, the financial landscape remains much more uneven than
in the U.S, with the supply of capital varying significantly across
different phases of the funding cycle.

Seed and Early-Stage Funding – Good Capital
Supply
In this first funding phase, startups usually get seed funding of up
to €1 million. Despite the reputation of European investors as risk
averse, there is actually healthy appetite by local angel investors to
fund early rounds.21 There are also various attractive government
incentive schemes. In the UK, the Seed Enterprise Investment
Scheme (SEIS) offers tax relief on investments up to £100,000, and
allows 100 percent write-offs in failed companies. In Germany, KfW,
a quasi-governmental development bank, is lending up to €500,000
to start-ups at a low interest rate of 0.65% per annum. In France,
high earners can deduct up to €1.5 million from their wealth tax if
they invest in local startups or funds.
Seed funding from venture capital has remained relatively static,
but other investment vehicles such as Rocket Internet, EPIC and
Project A have a growing impact. These incubators are often
backed by money from media companies (e.g. EPIC/ProSiebenSat.1;
Project A/Axel Springer) or family groups with an affinity to online
models (Rocket Internet/Kinnevik; Project A/Otto Group).

19 Global Entrepreneurship Monitor Fear of Failure data. Available at: http://
www.gemconsortium.org/visualizations
20 The Wall Street Journal. “Europe Builds Own Chapter 11.” WSJ.com, April 5,
2013. Available at: http://online.wsj.com/news/articles/SB1000142412788732
3296504578398612178796882
21 British Venture Capital Association. “European Venture Capital:
Myths and Facts.” BVCA. January 2013. Available at: http://
www.bvca.co.uk/ResearchPublications/ResearchReports/
EuropeanVentureCapitalMythsandFacts.aspx

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First and Second Round - Lack of Capital Supply
The second phase is the funding for Series A and B. This phase
of funding has been a more challenging area for European
entrepreneurs. It provides the crucial capital that helps companies
grow from conception and initial start to economic viability. Less
than 25 percent of venture capital invested in Europe in the second
quarter of 2013 was for second funding rounds, compared with
almost 70 percent in the U.S.22
This is mostly a capital supply issue, as there are far fewer funds
that are able to lead a $5 million investment in a single company.
There were about 200 companies that had deals of $5 million or
more during the first half of 2013, compared with 1,000 in the U.S.,
according to London venture capital firm, DFJ Esprit LLP.23 While
capital is increasingly international, this is more often the case in
later stages.
The second underlying issue is one of higher risk aversion by
institutional investors, in Europe as elsewhere. Dörte Höppner,
Secretary-General of the European Private Equity and Venture
Capital Association, says that some European institutional investors
are still in the process of getting comfortable with venture risk.
Nevertheless, these investors need to generate high returns to
meet their liabilities and for this reason will turn to venture capital
once again. Currently, there are a significant number of promising
companies in the portfolio of European Venture capitalists with
the capacity for growth. These companies, once sold, will generate
significant returns for their investors.

IPOs – Illiquid Capital Markets for Tech and Online
Companies
Europe is clearly lagging behind the U.S. when it comes to a liquid
IPO market that can fund growth through primary capital or allows
entrepreneurs to exit their investments. According to Dealogic,
there have been 33 tech IPOs with a combined market capitalization
of $4.7 billion in the U.S. over the last 12 months, while London,
Paris and Frankfurt together saw only 3 IPOs with a combined
market capitalization of less than $500 million.24 Capital markets in
Europe are generally not as liquid as in the U.S., which is an issue
for smaller listings. Investors are also less familiar with digital
business models, and there is thus no equivalent of the NASDAQ
Stock Market in Europe.
The resulting higher valuations in the U.S. are attracting European
companies to list in the U.S. rather than in Europe. As a case in
point, French online advertising firm, Criteo, listed on NASDAQ on
October 30, 2013, in what was widely considered to be a successful
IPO, with an initial market capitalization of approximately $2.3
billion. Criteo’s venture backers, including Index Ventures, Idinvest
Partners, Elaia Partners and Bessemer Venture Partners, are
expected to profit from the deal.
22 The Wall Street Journal. “Venture Capital in the U.S. and Europe
Compared.” WSJ.com. July 31, 2013. Available at: http://blogs.wsj.com/techeurope/2013/07/31/venture-capital-in-the-u-s-and-europe-compared/
23 DFJ Esprit. Op cit.
24 Dealogic estimates.


Undersupply of Capital Creates
Attractive Opportunities

12

KKR


If one combines the high level of digital adoption by European
consumers and businesses with the quality of talent, creativity and
diversity of its multiple tech hubs, one would think that Europe
offers a good supply of investment opportunities. On the other hand,
capital supply, in particular in the critical growth stage of a startup,
is scarcer than in the U.S. and capital markets are often not an
option to raise capital or exit a company.
This supply/demand imbalance can lead to attractive investment
opportunities for investors, as deal competition is more limited and
the resulting valuation levels are lower in comparison to the U.S.

DIGITAL INVESTMENTS A S

%

Jean-David Chamboredon, the head of Paris-based venture firm
ISAI summarizes this dynamic well, when he says, “Clearly, the
competition between investors remains relatively modest, which
means that for an ecosystem of startups that — in terms of quality
— competes with the U.S., the entry price for an investor remains
much lower.” Adding to that, Matthias Ummenhofer, the head of
venture capital for the European Investment Fund (EIF), a publicprivate partnership that provides finance to small and medium
enterprises across Europe says, “Very good companies are being
sold at a nice discount.”

OF GDP IN U. S. , U. K. AND FRANCE

0.8

(As a percentage of nominal GDP)

0.7
0.6
0.5
0 .4
0 .3
0.2
0 .1
0.0
2005

2 0 06

20 0 7
United States

20 0 8
United Kingdom

Source: INSEE, CapitalIQ, Global Insight WMM

13

KKR


20 0 9
France

20 1 0

Unlocking Europe’s Digital Potential
through a Differentiated Global
Funding Chain

14

KKR


Attractive valuations and lower levels of competition are leading to
an interesting emerging “funding chain” that is starting to address
the European funding gap.
In this funding chain, local seed investors, partially supported by
government incentives, fund the start-up in its early stages. Supply
in this stage is relatively decent in Europe.
In the next phase of growth, incubators and accelerators like Rocket
Internet, Project A or EPIC are beginning to play a more important
role. They combine ample funding, often from European families or
traditional media companies, with hands-on support. As mentioned
above, incubators are also taking advantage of Europe’s roll-out
DNA to build global businesses from a European home-base.
U.S. venture capital funds, “VCs,” which are facing a highly
competitive market in the U.S., are also increasingly investing
in Europe’s digital companies. SoundCloud is a good example
of how European companies are taking advantage of the supply
of U.S. venture capital and thereby mitigating the fact that
homegrown venture funding is scarce. “In the Bay Area, there
is an abundance of money, so it becomes an entrepreneur’s
market,” says SoundCloud co-founder, Eric Wahlforss. “There is
so much opportunity that if you are a savvy entrepreneur, you can
pick and choose among the best.” SoundCloud raised capital from
Union Square Ventures, Kleiner Perkins Caufield Byers and Index
Ventures, among others.
In the later stage growth funding phase, private equity funds are
starting to take advantage of the fact that European capital markets
are often not liquid enough to support companies and founders.
They also bring a different skillset than VC funds and can help
companies with larger acquisitions or international roll-outs.
With this emergence of international capital, entrepreneurs
can potentially hold out longer and grow their companies for a
much larger exit, according to Per Roman, a founding partner
at Stockholm-based investment bank, GP Bullhound AB. Less
than a decade ago, startups would have been pushed by VCs to
exit at about $100 million in revenue. Now, more risk tolerant
investors with longer time horizons are allowing them to build their
businesses. Companies in this category include Spotify and Rovio.

Private Equity Partnerships as a Late Stage
Growth Funding Option
Private equity companies have become a viable exit and
funding alternative to the difficult European IPO markets. The
microstock photography website, Fotolia, is one example of how
digital innovators can leverage the capital, global network and
experience of private equity players to try to get to the next level in
development.
Founded in 2005, Fotolia’s crowdsourcing platform today provides
more than 4 million registered members access to roughly 24
million images from more than 200,000 photographers. These
images are sold at significantly lower prices than images of the
traditional “macrostock” agencies. Fotolia’s simple, low-priced,
online-only model disrupted the stock images space in Europe.
In 2012, Fotolia’s Founder, Oleg Tscheltzoff, wanted to de-risk a
part of his investment and needed a growth partner, who could
help him grow the company to the next level. KKR has worked with
Tscheltzoff and his team to develop a plan which was focused on
expanding the predominantly European business to new markets,
while at the same time investing in areas such as marketing, sales,
finance and information technology.
Given the lack of a liquid IPO market in Europe, private equity
can therefore act as an important exit route for founders or VCs
invested in larger online businesses, and become a partner for
operational professionalization, global roll-outs or buy and build-out
strategies.

“
For an ecosystem of startups that
— in terms of quality — competes
with the U.S., the entry price for
an investor remains much lower.
“
Jean-David Chamboredon
Head of Paris-based venture firm, ISAI

15

KKR


Outlook: Europe’s Chance to
Reduce the Digital Trade Deficit

16

KKR


In our view, Europe’s digital economy has great potential. It is
buzzing with creativity as well as the diversity that is needed to
create innovative new products. It boasts some of the world’s most
tech-savvy consumers, benefits from a high-quality talent base
that is reasonably priced and can operate from a diverse range of
competing hubs like London, Stockholm, Berlin and Paris, to name
some of the major ones. Some European governments, in particular
in Northern Europe, are supporting these ecosystems with funds
and tax breaks. Furthermore, European companies grow up with a
“roll-out DNA” that we believe could give them an edge in expanding
beyond their continent.

Large Exits Are Needed
Large successful exits are needed to energize the ecosystem and
encourage venture capitalists to invest larger sums in expectation
of bigger payoffs. “What Berlin needs is a big IPO for the industry
to be taken more seriously,” says Rocket Internet’s, Alexander
Kudlich. Large exits would also create significant wealth for local
entrepreneurs that could re-invest their exit proceeds into new
ventures like their U.S. peers. Over time, this could lead to a
normalization of capital supply.

Regulatory Barriers Must Fall
Divergent regional regulations and tax codes remain hurdles.
While the European digital industry - with its fluid, multi-lingual
international labor force, its global business outlook and its
emerging international funding chain - has already become a poster
child for economic integration in Europe, talent and capital mobility
is still an issue in many instances, in our view. A handful of leaders
in Europe’s tech sector, including the co-founders of Spotify and
the accelerator Seedcamp, have therefore recently unveiled a
manifesto for entrepreneurship and innovation that makes access to
talent and capital a key pillar of their digital growth plan for Europe.
The manifesto’s authors call for easing restrictions on companies
hiring outside their home countries and making it easier for non-EU
entrepreneurs to start businesses or joining EU businesses, among
other priorities.
Moreover, a collection of startups are poised to make big exits in
the coming years, which industry watchers expect may set loose
the animal spirits of entrepreneurship.
For all these reasons, we expect to see a correction in the digital
balance of trade that favors the U.S. However, several elements
should first align:

Various European countries are starting to realize that
entrepreneurship is the most effective way to foster growth in
otherwise stagnant economies and are becoming more open to
such policy changes. The signs are therefore encouraging that the
European digital industry will in the years ahead be able to awaken
the extraordinary entrepreneurial potential of Europe.

Access to Funding Must Improve
Europe’s biggest strength is also its greatest weakness: diversity.
It can lead to fragmentation into national markets, which impedes
the scalability of business models. Although local angel investors
and government schemes contribute to a healthy seed funding
environment, capital supply in the Series A/B, growth and latestage phases of a company is scarcer than in the U.S. Capitalraising through IPOs is much more difficult than in the U.S.
The relative attractive valuations that can be achieved for quality
companies in Europe is, however, starting to lead to an increasing
influx of capital from the U.S., while European companies and
families are investing into incubators that are de-risking the venture
phase through hands-on operational help. Private equity can play an
important part to substitute less developed IPO markets and bring
larger digital companies to the next stage of their development.

17

KKR


Important Information
The views expressed in this publication are the views
of the KKR Global Institute and do not necessarily
reflect the views of Kohlberg Kravis Roberts Co. L.P.
(together with its affiliates, “KKR”). This publication
is not intended to endorse any investment theme
or sector. It is being provided merely to provide
a framework of the current European digitization
landscape and the strengths and weaknesses of this
sector.
The views expressed reflect the current, good faith
views of the KKR Global Institute as of the date hereof
and it does not undertake to advise you of any changes
in the views expressed herein. In addition, the views
expressed do not necessarily reflect the opinions of
any investment professional at KKR, and may not be
reflected in the strategies and products that KKR offers.
It should not be assumed that KKR or the KKR Global
Institute will make investment recommendations in the
future that are consistent with the views expressed
herein, or use any or all of the techniques or methods
of analysis described herein in managing client
accounts. KKR and its affiliates may have positions
(long or short) or engage in securities transactions

www.kkr.com

that are not consistent with the information and views
expressed in this document.
This publication has been prepared solely for
informational purposes. The information contained
herein is only as current as of the date indicated,
and may be superseded by subsequent political or
market events or for other reasons. Charts and graphs
provided herein are for illustrative purposes only.
The information in this document has been developed
internally and/or obtained from sources believed to
be reliable; however, neither the KKR Global Institute
nor KKR guarantees the accuracy, adequacy or
completeness of such information. Nothing contained
herein constitutes investment, legal, tax or other advice
nor is it to be relied on in making an investment or
other decision.
This publication should not be viewed as a current or
past recommendation or a solicitation of an offer to
buy or sell any securities or to adopt any investment
strategy.
The information in this publication may contain

projections or other forward-looking statements
regarding future events, targets, forecasts or
expectations described herein, and is only current
as of the date indicated. There is no assurance that
such events or targets will be achieved, and may
be significantly different from that shown here. The
information in this document, including statements
concerning political events and financial market trends,
is based on current political or economic conditions,
which fluctuate and may be superseded by subsequent
events or for other reasons.
The KKR Global Institute assumes no duty to, nor
undertakes to update forward looking statements.
No representation or warranty, express or implied,
is made or given by or on behalf of the KKR Global
Institute, KKR, or any other person as to the accuracy
and completeness or fairness of the information
contained in this publication and no responsibility
or liability is accepted for any such information. By
accepting this document, the recipient acknowledges
its understanding and acceptance of the foregoing
statement.

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