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EU faces huge innovation gap: MIT's Andrew McAfee highlights a stark disparity with the U.S.
In his newsletter The Geek Way, MIT scientist Andrew McAfee visualizes Europe's uphill battle to foster globally competitive startups.
Published on December 8, 2024
According to Andrew McAfee, a scientist at MIT, Europe’s innovation ecosystem is facing a significant existential crisis. In a recent blog post, McAfee highlighted stark contrasts between the U.S. and EU in nurturing "from-scratch" companies, those created without mergers or spin-offs, with public market valuations exceeding $10 billion. This analysis draws on findings from Mario Draghi’s report on EU competitiveness, emphasizing the region's lag in fostering tech giants.
Reflecting on Draghi’s findings, McAfee emphasized that the EU’s economic growth and competitiveness are at a critical juncture. European Commission President Ursula von der Leyen recently announced the formation of a task force to address these issues, labeling them as central to the EU’s next five-year term. Key objectives include closing the innovation gap with the United States, decarbonizing the economy, and fostering economic independence.
However, McAfee's visualizations starkly outline the EU's uphill battle. His data reveals that only 14 EU companies founded in the past 50 years qualify as "arrivistes"—publicly traded entities started from scratch—compared to a sprawling and varied cluster of U.S. equivalents. These European firms, collectively valued at $430 billion, pale in comparison to the U.S. arrivistes, whose combined worth approaches $30 trillion.
© Andrew McAfee, MIT
McAfee analyzes: "On one hand, $430B is a lot of money. On the other, it's less than half of a Tesla today and less than 1/8 of an Apple or Nvidia. The biggest American arrivistes are staggeringly big. (...) The American population of arrivistes worth at least $10B is collectively worth almost $30 trillion dollars — almost 70 times as much as its EU equivalent."
McAfee's visualizations vividly illustrate the disparity. The EU’s cluster of 14 companies, led by high-tech firms like Spotify and Adyen, appears minuscule next to the U.S., where tech behemoths like Apple, Amazon, and Nvidia dominate. Notably, the EU has no public company founded in the past half-century with a market capitalization exceeding $100 billion.
The blog post underscores the EU's unique challenges, including its fragmented markets, linguistic diversity, and restrictive regulations. “Innovative companies that want to scale up in Europe are hindered at every stage by inconsistent and restrictive regulations,” Draghi notes in his report. McAfee elaborates, likening the EU’s constraints to “weight vests and blindfolds” on young tech companies, making competing with their U.S. counterparts almost impossible.
© Andrew McAfee, MIT
While language barriers in Europe may pose less of a challenge, given advancements in automatic translation, legal and regulatory inconsistencies remain a formidable obstacle. McAfee suggests that Europe's competitiveness boosters must confront these issues head-on if the EU is to create its own tech giants.
Bottom line: Andrew McAfee’s insights offer a sobering yet necessary perspective on the EU's innovation challenges. Drawing attention to these disparities, he provides a data-driven call to action for policymakers and business leaders to rethink their strategies. As Europe aims to close the innovation gap with the U.S., McAfee’s visualizations remind us of the scale of the task ahead.
The other side of the story
Of course, there's always another side to every story. In a LinkedIn post, Jatin Modi concludes that the same forces that strangle innovation have created something remarkable. "Thirty of the world's fifty most liveable cities are European. The continent has mastered something more elusive than unicorn creation - the art of balanced living."
He asks himself, what if Europe's 'decline' is not a bug but a feature? "What if the continent that gave us the Renaissance and the Industrial Revolution now offers a different kind of innovation: the radical idea that progress isn't always vertical. Most economies optimize for growth. Europeans optimize for life. Maybe that's not decline - that's a choice."
A Visualization of Europe's Non-Bubbly Economy
The Draghi task force has a lot of work ahead of it
While eating a lunch of Thanksgiving leftovers last Friday I read that the EU has created a task force to act on the findings and recommendations of Mario Draghi’s excellent report on EU competitiveness in the second machine age (my title, not his). Draghi made an unignorable case that growth and competitiveness are fading in Europe, creating an “existential crisis” for the region. European Commission president Ursula von der Leyen apparently agrees. According to Politico, last week she “announced the main initiative of the next five-year term will be a "competitiveness compass" to close the innovation gap with the United States, decarbonize the EU economy and increase its economic independence, with each commissioner told to contribute to these goals.” This post visualizes that daunting task.
I wrote earlier here about how well Draghi laid out the challenges facing the region. I had my problems with the report's recommendations, but not with its presentation of the existential crisis. The Draghi Report combines broad descriptions of the problem with well-chosen, hard-hitting statistics. For example, I thought I grasped how big the differences were in the US vs. EU innovation ecosystems but was unaware that, as the report points out, Europe lags in VC funding at every stage by about a factor of five.
Of all the chiffres justes in the report, though, the ones that most startled me were in this sentence: “there is no EU company with a market capitalisation over EUR 100 billion that has been set up from scratch in the last fifty years, while all six US companies with a valuation above EUR 1 trillion have been created in this period.”
This sentence rises not to the level of art or literature, but instead showbiz: it leaves the reader wanting more. It tells us that Europe has no from-scratch companies founded in the past fifty years — let’s call such companies arrivistes — worth a hundred billion, but is silent on just how many US arrivistes are over that bar.
Also, how many are below that bar, but still sizable? If we lower the threshold by a factor of 10, what do we learn? How many arriviste European companies are worth at least $10B (I’m switching from euros to dollars here)? And what's the equivalent number in the US? Questions like these motivated the crack research team here at Geekway Labs to dig into the numbers and see what a fleshed-out comparison of the arrivistes on both sides of the pond looks like.
Like the rest of the Draghi report, it's not a pretty picture for Europe. Here's the European half of the picture, with each arriviste worth at least $10 billion represented by a bubble, the area of which is proportional to the company’s market cap. As is convention around here, green bubbles indicate companies in digital high-tech industries:
When assembling this visualization, we followed Draghi's definition of a from-scratch company. ““From scratch” refers to starting a company from its inception as a new entity, rather than through mergers, acquisitions or spinoffs from established firms.” We also considered only publicly-traded companies (since the report specifies “market capitalisation,” not private valuation). The picture above therefore doesn't include a bubble for Celonis, a private German enterprise tech company valued at $13B in its last funding round. According to CB Insights, that's Europe's only “Decacorn,” or private, VC-backed startup worth more than $10 billion.
We found 14 EU arrivistes worth at least $10B (But we may have missed some, even though we combed through the Factset data pretty carefully; here are our data. If you know of a company that meets the Draghi criteria but is not in the picture above, please let me know.). The total market cap of this continental quatorze is about $430B.
On one hand, $430B is a lot of money. On the other, it's less than half of a Tesla today1, and less than 1/8 of an Apple or Nvidia. The biggest American arrivistes are staggeringly big.
As Draghi points out, it's not great that Europe doesn't have any companies near their size. But it's even worse that compared to the US, the EU has so few chances at creating the next giant arrivistes. I feel like I should give a trigger warning at this point to Europe's tech and competitiveness boosters: the data visualization they're about to see is not kind to their hopes and dreams. Here’s the Euro quatorze again, this time next to the equivalent US cluster: all American public arrivistes worth at least $10B:
The US has a large and variegated population of valuable young from-scratch companies. The EU simply doesn’t. The American population of arrivistes worth at least $10B is collectively worth almost $30 trillion dollars — almost 70 times as much as its EU equivalent.
When I talk about the above facts and figures with European audiences, I typically hear two explanations for the huge disparity. They both stem from the fact that the U.S. is a gigantic market unified both by institutions and language, while Europe is not. The EU is more fragmented because of the large number of languages spoken and the patchwork of laws, legal systems, and so on.
Both of these things are certainly true, but do they fully explain the gap? Yes, Europe doesn’t have a single language, but it has several that are spoken by many millions of potential customers. German, for example, is spoken by about 130 million people in the EU (and is the first language of about 85 million), French by 110 million (65), Spanish by 75 (40), and Italian by 72 (58). Heck, about half the people in the EU say they speak English proficiently, so even technologies that ignored the local tongue altogether could conceivably find a huge audience. And with the science-fiction-become-reality automatic translation tools widely available today, for how much longer will language barriers stand as plausible barriers to technology use?
The EU’s legal situation is a much bigger problem than its linguistic one. As Draghi says right on page 2 of the report, “innovative companies that want to scale up in Europe are hindered at every stage by inconsistent and restrictive regulations.” The “inconsistent” part is bad, but I think the “restrictive” one is worse. The EU is putting too many restrictions and requirements on its young tech companies, as I described here. Expecting them to catch up to their US counterparts while laboring under these constraints is like expecting US soccer players to outplay their European rivals while wearing weight vests, blindfolds, and clown shoes.