Why Progress Requires Ambition And Risk

Posted by Peter Cochrane on March 11, 2005

Financial Times : page 11, 11th March 2005
By Alan Cane

Sarantel is a small UK company with abig idea: a radically new design of miniature antenna for mobile phones and other wireless devices that is not only more efficient than conventional aerials but also promises to reduce significantly the amount of radiation reaching the heads of mobile phone users.

The company was subscribed five times when it floated on the Aim market earlier this month, raising £18m to expand manufacturing capacity and valuing the company at about £60m. David Wither, its US-born chief executive, is optimistic about the future: "Now we have the funding in place, we see no barriers to reaching the next stage in our development. This is a global product so we see no problems with markets whether we are selling in Munich or in Taipei," he says.

The technology is proven, the company is financially sound and demand for the Sarantel antenna in a progressively wireless - but radiation-shy - world seems undeniable.

Is it then surely set to become another Cisco, the US group whose fortune is founded on the humble network router, or Dell, the personal computer assembler par excellence?

Probably not. In the 58 years since the invention of the transistor sparked off the modern information technology revolution, only a handful of Europe-based companies have managed to become world leaders in electronic technologies - and many of those through luck rather than judgment. Meanwhile, US companies set the pace and stretch their lead.

Look at the world's biggest companies by market capitalisation. The US boasts Microsoft, the world's largest software group, Intel, the world's largest semiconductor manufacturer, IBM, not only the world's largest computer maker but a huge force in IT services, and Applied Materials, the leader in microchip fabrication equipment. Hewlett-Packard, Comcast, Oracle, Qualcomm, Texas Instruments . . . the list goes on and on.

Europe, by comparison, can point only to the UK's Vodafone, the world's largest mobile phone operator, Germany's SAP, a leader in business software, Finland's Nokia, still the largest manufacturer of mobile handsets and ST Microelectronics, the Franco-Italian semiconductor group. To this shortlist can be added a few technology giants - Siemens of Germany, Philips Electronics of the Netherlands and Alcatel of France - whose size and longevity qualifies them for the first rank.

Europeans are undoubtedly as technically inventive and managerially competent as their US counterparts. A glance at the number of European-born executives running US companies is proof, reinforced by the success of companies such as ARM and Autonomy of the UK and Logitech, the mouse-maker, from Switzerland. The question is this: why is it that nascent European technology companies have repeatedly failed to become world-beaters on the scale of a Microsoft?

    Neither the question nor the answers are novel. They are:
  • a lack of appropriate funding and tax arrangements
  • the absence of a large homogeneous home market
  • an inability to bring products rapidly to market
  • a lack of entrepreneurial culture and spirit
  • an inability for countries to put aside their differences for the common good: there is no real will to create a "Europe Incorporated" in order to take advantages of the economies of scale available to a population of half-a-billion or so.

Finance and the difficulty of raising it runs through the issue like a scar. Virtually every new company complains about the difficulty of raising seed capital. Mr Wither of Sarantel says: "The biggest challenge is funding. We could have been three years further ahead at this point if it had been easier to find adequate funding. European technology is fine but companies fail because they are underfinanced."

Peter Cochrane, a former head of technology for British Telecommunications, who founded Concept Labs to invest in small, promising companies, concurs: "The banks here don't understand small businesses and the stock market is very hard to please. I wouldn't start a company in the UK and list on the London Stock Exchange. I would list on Nasdaq."

US start-ups have a huge advantage in a large, homogeneous home market where economies of scale mean that success can provide the means for a well-funded push abroad. European companies, on the other hand, must first conquer their home markets and then invest in tailoring their products to the local tastes of foreign markets. Swiss-based Logitech avoided the problem by treating the US as its domestic market. "We were in business in Europe from day one but we ran the company from the US," says Guerrino De Luca, Logitech's chief executive.

Sage, an accounting software group specialising in small and medium-sized companies and the UK's biggest listed technology company, took a different approach, buying leading players in France, Germany and the US. That gave it instant access to the local accounting culture. It faces an uphill struggle in the US, however, where the competition includes Microsoft and Intuit. "The US is not the easiest market to break into," says Paul Walker, chief executive. "It's easier to do on the back of a large home market." He thought European companies were penalised by the lack of "relationship capital", venture capitalists who provided support and management expertise as well as cash.

Crispin O'Brien, head of technology for the consultancy KPMG, believes European companies have a cultural tendency to overdevelop their products. He points to the speed - three to six months - with which Japanese manufacturers get products to market. "European manufacturers would take three to six years," he says.

It indicates a lack of entrepreneurial spirit in Europe, Mr Wither says. "In the US, you know from the start you are on your own. Nobody is going to look after you - there is no healthcare or safety net. It breeds a competitiveness, which is part of the culture."

So can Europe be written off as a promising location for technology companies? "We would not be here if we thought that was the case," says Fearghal O Ríordáin of Accel Partners, a US venture capital group with a $500m European technology fund. "Europe is handicapped by fragmented technology markets, a scarcity of venture capital and few role models. But there is increasing evidence of companies like Cambridge Silicon Radio dominating their market segments."

But Mr O Ríordáin warns that it is only those companies ready to take aggressive risks and with significant ambition - willing to look, for example, beyond local markets - that will attract finance. "There is plenty of money for the right company," he says.