By Rami Cassis, Founder and CEO of Parabellum Investments
The US and Chinese tech giants dominate when it comes to the world’s biggest companies – not a single European company features in the top 10. Rami Cassis, a global mid-market investor examines why this disparity has emerged and whether it will ever change
Take a glance at the world’s 10 biggest companies by market capitalisation and it is notable none are from Europe. The list is dominated by the US game-changing behemoths that have radically altered the way we live today – Apple, Amazon, Microsoft, Alphabet and Facebook.
The question is whether a European can ever emerge as a world giant? Europe has had its successes, notably Sweden’s Spotify, but they are outweighed considerably by the giants from the US. European companies are going to need to attract the right type of capital and investor if they are going to make an impact on the top 10 global companies.
The Valuation Gap
So why is it that European businesses struggle to make an impact compared to their American counterparts? For starters, businesses are sold at a much higher multiple in the US than they are in Europe. Stateside, valuations are substantially higher – at least 20 to 30% higher when you compare like-for-like businesses. A services company, for example in Europe, would trade for around five-to-eight times EBITDA whereas it would be along 6 to 10x EBITDA in the US. This gap becomes even more pronounced with enterprise software and companies growing organically at 30 per cent.
This disparity arises because US investors are less concerned about profit and more about gaining market share. An extreme example demonstrating the success of this approach is obviously Amazon.
Indeed, you only have to look at how long it took today’s biggest companies to make their first profit. It was nine years before Amazon first reported a profit, for instance, while it took Tesla a decade to declare its first profitable quarter.
Fundraising is difficult in Europe partly because it’s so fragmented (along with general attitudes to risk which are far more conservative than in the US). Typically, European investors are aligned to only one or two single jurisdictions and are quite selective in the type of investments they are willing to make.
Certainly, US investors are more tolerant and welcoming of risk than many of their European counterparts. They are open to entrepreneurs whose early ventures have failed because they are better for it – these business owners have experienced failure first-hand and have learned from it. This attitude, in my experience, is mirrored by businesses themselves – those in the US appear to focus much more on sales and marketing than their European equivalents. They are more effervescent and energised in the way they describe their businesses – although by the same token probably less precise. In Europe, the risk-averse approach often filters through into the sales pitch for funds and general attitude to success.
Scale is perhaps the major barrier Europe needs to overcome if its businesses are to become the next global behemoths. There is a difference in valuation and fundraising depending on the scale – with the magical mark around $5m EBITDA but even below that there appears to be more opportunities and access to funding in the US than in Europe.
Fundamentally Europe remains a socialist continent with a preference for big government which also shapes attitudes to money. High levels of personal tax and relatively high levels of corporation tax set the tone for an environment with a high level of moral and social welfare but seeks to achieve this admirable goal with redistribution of wealth policies that are counter-productive to an entrepreneurial environment.