SoftBank and the problem of Tech investment in Europe

I was writing yesterday on how « Tech » became a buzzword while the underlying innovation reality has evolved drastically. The way tech investment is managed is also in this in-between state. Some players like SoftBank have been built around the sole idea of leveraging digital network effects. They fund massive investments to reach for critical market mass first and achieve a « winners take all » supremacy. But the rest of the investment community can’t afford to play this game. They try to be smarter and detect the smartest teams with the smartest products. Let me explain why this is a problem for Tech investment in Europe in ways that might not be so obvious.

Winners take all?

The recent failures of the tech investment thesis of the likes of SoftBank are all over the press. Just yesterday, Brandless was shut down after only two years and a whopping $300 million in funding. It seemed that selling  « healthy and environmentally-conscious » products directly to the market (read: tortillas chips and matcha powder in bland packaging) was not a ground-breaking idea.

I can only echo this mild take on SoftBank: «Money doesn’t solve all problems.»

So that’s good news for tech investment in Europe, right? The big bullies of investment fail, victims of their own hubris. Not so fast…

Losers take it all too…

I must say, I wasn’t following Brandless at all. So, out of curiosity, I went back to what TechCrunch’s Alex Wilhem was writing on them in 2018. This was just after their mega-round of funding (emphasis mine):

The lesson from all of this is that capital, today at least, isn’t only chasing high-margin companies. Even though Brandless’s vision of $3 home goods faces steep competition from rival store brands like Amazon, lower-margin startups apparently fit into SoftBank’s purview. That leads us to presume that growth is all that matters to some of largest and most active investors in the market.

Tech has become a game where global lead investors such as SoftBank are ready to jump in and fund any up-start with a flimsy shot at taking down the likes of Amazon. No margin, no business, and —in retrospect— no product skills can be somehow OK. Just have global ambitions and bullshit your way ahead…

February 11, 2020

Meanwhile, Europe is all hyped up because US funds that have exhausted all their options at this game are now turning their eyes on us.

I’m surprised that not many of us see what it means. Same causes, same effects: expect massive rounds of investments to fall on the only dozen or so up-starts with a vague chance to scale in Europe.

This will also emphasize consumer startups because they are the only ones with a chance to grow network effects. Expect more food deliveries, on-demand retail, photo-sharing, and micro-influencers… mixed with AI buzz. And forget data intelligence in urbanism, on-demand pharmacology, or small business automation.

In terms of tech investments, you can summarize these last 20 years as follows:

• Silicon Valley leverages digital tech in massive consumer network effects and births a few GAFAs.
• Europe tries to replicate the model and fails because (essentially) they try to replicate the recipe ten years too late.
• Silicon Valley struggles to find another model but lives happily with trillion-dollar companies milking global markets.
• SoftBank and a few other massive tech investment funds try to catch the next wave in the US and fail (for now).
• Europe gets frustrated and returns to science and « deep tech.»
• SoftBank and others now consider Europe to try to reapply the Silicon Valley recipe.

And we know what will happen: a few small local tech investors are trying to push for « smart » projects with real technology, while most of the money will be diverted to pizza-delivery innovation.

So much for « deep tech,» if you ask me.

Killing the Silicon Valley dream

This is mapping the problem tech investment has and will have in Europe:

• Play the game of digital network effects in consumer markets and be crunched by US funds and SoftBank.
• Play the game of deep tech and don’t have enough oxygen to push through because everyone else will be focused on the above.

Damn, if you do, damn if you don’t? Maybe not.

I see some signals all around us and some slow awakening on the fact that the US has been playing us for too long. The US digital economy has been a hold-up in the making for too long.

But I think that where we go from here is, as for now, still an open discussion. Trump and its feud with China are playing for us on many levels. Europe is still a larger market than the US and has much more power than we’ve been accustomed to believing.

I was even very surprised (and interested) by this survey on how Europeans feel about the two other superpowers.

And for what it’s worth, I at least see some clear opportunities for European tech investment and the future. Not as it is shaped right now, but because the cracks in the current logic appear very visibly.

If I had to point at a few seemingly obvious leads, I’d say a few things to EU tech investors (both public and private):

• Play and invest only in cross-border projects and teams. Projects with local and regional focus will be decimated in the next 2-3 years (not that they were doing so well to start with).
• Get better at B2B and industry, where historically, Europe has strong tech know-how, fantastic engineers, and poor business-savviness.
• Startups are not the magical poneys you wished for; get over it. Our culture is more on the SME side, and there are tons of opportunities and sleeping beauties lying around that could go global in three to five proximal countries overnight.
• Research, science, and « deep tech » are not businesses, but they are resources. The whole tech transfer thing that several EU governments want to go back to (don’t start me with France!) is not going to work at scale because it never worked to start with. The question is not how to fund teams of researchers but how to plug them efficiently as key resources for business-driven projects.

In all this, we only need to remember that US investors don’t get our cultural diversity. The question that is more pressing than ever is: shouldn’t we?

EDIT (Feb. 11) – From Nicolas COLIN’s newsletter this morning after he recently spent a few days connecting with VCs in Silicon Valley, a contrasting view on US VCs flocking to the EU:

2/ Right now, though, my question for every Silicon Valley-based venture capitalist I meet is: Do you invest in startups in Europe? I’ve asked powerful and well-connected people for introductions to discuss that matter. But they all came back empty-handed. Venture capitalists in the Bay Area are not interested in Europe in a systematic way. A few firms now have outposts in Europe, but the reasoning seems to be as random as “One of our partners wanted to spend some time in London with his wife, so we figured we should have a look at some startups there.” More often than not, those who have invested in European startups did so because founders came to the Bay Area to pitch them.

EDIT (Feb. 14) – Because it’s getting even more ridiculous by the day, Softbank's last $375 million epic fail is a pizza-robot startup (I kid you not).