The Secret to #SiliconValley ’s Success (it’s not what you think!)

“Why are there no successful European internet companies?” I think that you have heard this question many times, just as I have. What is the answer? Don’t we have enough innovation? Perhaps not enough disruption? Is it the lack of a single language for consumer market? Shortage of IT-skills? Not smart enough entrepreneurs? Too much focus on the consumers? Too little? Actually, it’s none of the above.

In 1958 the US Congress passed a bill called the Small Business Investment Act. It was an effort to give access to long-term investment capital for entrepreneurs, but of course as this was during the Cold War, the idea was also to beat the Soviets, hoping spur technological advances that could compete. The Act provided generous loan guarantees to investors and made it possible to set up the venture capital funds that would kick-start the tech companies of Silicon Valley in the next decades. The point has been made many times that the research that created the internet was conducted by the government, but it wasn’t only the innovation, also the investment was a government initiative. That’s right, you may have thought that the VC firms of Sand Hill Road built their fortunes on money from rich individuals or perhaps pension funds, but it was the tax money that set the ball rolling. And it’s the VC investment that sets Silicon Valley apart from Europe. The reason there are fewer successful European internet companies is simple: there is not as much risk capital!

How much tax money? you ask. A lot! If Wikipedia is to be trusted, the 1958 act gave venture capital firms “access to federal funds which could be leveraged at a ratio of up to 4:1 against privately raised investment funds”. Four tax dollars for every private! If the aim was to create technological advances that could outcompete the Soviets, it’s fair to say that it worked. The Cold War era policy-makers probably did not expect the added benefit of global domination of digital markets.

Of course the European Union is no stranger to investment support. On June 30th it announced that the European Investment Fund will invest €121 Million in guarantees to support the cultural and creative sectors (so not tech in this case, but perhaps creativity is a better bet for Europe after all), aiming to create €600M worth of bank loans. Good job, EU Commission, except you got the ratio backwards. The Silicon Valley success factor was 4:1 tax/private, this is 1:4.

Is it too late to copy the Small Business Investment Act? You tell me, 58 years after… Perhaps the right question is not about the internet companies, but how Europe can get a head start on the next wave (my bet is creative content, what’s yours?). But at least now you know why there are no successful European internet companies. As is so often the case, it’s about the money. And in this particular case, the tax money.

This is Netopia’s newsletter on July 4th.