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European Tech Scene Begins to Feel Silicon Valley’s Woes


The kitchen area of Deliveroo’s bustling offices in London. Credit Tom Jamieson for The New York Times

LONDON — At the offices of Deliveroo, a food-delivery start-up with headquarters in an upmarket neighborhood here, signs of activity are everywhere. The communal kitchen hums with 20-something developers. A gold-painted scooter, which the co-founder William Shu once used to make deliveries, stands in the center of the office as people bustle about.

The frenetic pace belies a more cautious approach that Mr. Shu, 36, a former Morgan Stanley investment banker, has recently started taking at the start-up.

Over the last year, Mr. Shu has urged colleagues to be more circumspect with growth plans, forgoing rapid expansion in competitive markets like the United States to focus on places where Deliveroo already has a loyal following. And while the start-up has raised almost $ 200 million, employs roughly 400 people worldwide and operates in 12 countries, Mr. Shu says profitability — and not just aggressive growth to beat rivals to new markets — is increasingly important as the company moves beyond its British roots.


A gold-painted scooter that Deliveroo’s co-founder once used to make food deliveries. Credit Tom Jamieson for The New York Times

“We need to make the economics work,” he said. “We have to understand that every round of funding must be treated as our last.”

The focus at Deliveroo is symptomatic of a change across many European start-ups. Just as in Silicon Valley, where a number of privately held tech companies have been stung by lower valuations and investor questions about their sustainability, that same unease has now reached Europe’s tech community, in a sign that a move away from soaring boom times in start-ups is going global.

Driving the pullback are some of the same forces that have caused a change in Silicon Valley’s start-up scene. Tech stocks are gyrating amid fears of a global economic slowdown — exacerbated in Europe by the region’s migrant crisis and persistent financial problems. Valuations of some start-ups worldwide got ahead of themselves. As a result, venture capitalists in Europe and farther afield are becoming more cautious about funding local start-ups that do not have proven business ideas.

“When Silicon Valley sneezes, the rest of the world catches a cold,” said Fred Destin, a partner at the London office of Accel Partners, a venture capital firm. “It’s only a matter of time before Europe faces the same issues that we’re seeing on the West Coast.”

In Europe, that is leading to situations like that of Powa Technologies. Last week , Powa, an e-commerce company based in London, entered into administration, a form of bankruptcy. The start-up had raised $ 175 million since 2013 but had failed to win enough customers for its mobile shopping technology. Deloitte, which is overseeing the sale of the company’s assets, says it is now working to find buyers for the business.

Truecaller, a Swedish start-up that had raised around $ 80 million for its caller ID smartphone application, recently laid off about 20 percent of its staff. A company spokesman declined to comment on the layoffs and said Truecaller remained committed to its business.

And SwiftKey, a popular predictive typing smartphone application used by more than 300 million people worldwide, was bought by Microsoft this month for a reported $ 250 million, which was significantly less than what many of SwiftKey’s investors had expected.

“You can already see more hesitance and lower valuations,” Christian Reber, founder of 6Wunderkinder, a German start-up bought by Microsoft last year, said in an email. “The market correction will continue, and that’s not necessarily a bad thing.”


William Shu, co-founder and chief executive of Deliveroo, is seeking a cautious path. “We need to make the economics work,” he said. “We have to understand that every round of funding must be treated as our last.” Credit Tom Jamieson for The New York Times

The chill among European start-ups is not as severe as in Silicon Valley, where companies like the storage start-up Dropbox have been marked down in value by mutual fund companies, and other start-ups have had to raise money at lower values than previously, in what are known as down rounds.

That’s because the European start-up scene is significantly smaller than that of Silicon Valley. With notable exceptions like Spotify, the Stockholm-based music streaming service, Europe has fewer start-ups valued at more than $ 1 billion than the United States or Asia.

Last year, European early-stage tech companies raised $ 13.4 billion in funding, an all-time high, according to the data provider CB Insights, partly fueled by new venture capital funds popping up in London and Berlin. Yet that figure was less than what start-ups in the United States raised in just the last three months of 2015.

“Europe didn’t fly as high as Silicon Valley,” said Par-Jorgen Parson, general partner at the Swedish venture firm Northzone, an early backer of Spotify. “That means it also won’t fall as far, either.”

Some European entrepreneurs see a silver lining to the slowdown. Carl Waldekranz, the Swedish co-founder of Tictail, an e-commerce smartphone application, raised $ 22 million last summer when venture capital was still flowing. He used the money to expand his company’s digital marketplace, which has allowed emerging clothing designers to reach a global audience.

Now, he plans to double down on his core markets, including the United States and France, in hopes of convincing small-scale fashion houses that Tictail can be their primary means of reaching people who increasingly rely on mobile devices to make their everyday purchases.

“We were incredibly lucky with our timing” when getting funding, said Mr. Waldekranz, who splits his time between New York and Stockholm. “We may have a competitive advantage as the market tightens up.”

Still, as American investor sentiment spreads across the Atlantic, European venture capitalists said they were warning start-ups that new capital would be tougher to come by than in previous years. And for start-ups that already had raised money, they cautioned, how entrepreneurs spend existing funds will also come under greater scrutiny.

“European entrepreneurs may find it more difficult to find U.S. money,” said Ciarán O’Leary, a partner at BlueYard, a venture fund based in Berlin. “The bar for investment has definitely gone up.”


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