Why 2014 will be a tough year for first-time tech entrepreneurs in Europe

Paul Jozefak is co-founder and managing director of innovation laboratory Liquid Labs and a former venture capitalist.

The last twelve months have been very good to the European tech scene.

Berlin has been at the epicentre of a tech wave on continental Europe that has led investors, entrepreneurs and the tech savvy to flock to ‘Silicon Allee’. London has more than matched the success of its German counterpart with the Silicon Roundabout seeing an explosion of start-ups, incubators and accelerators. According to Tech City UK, 27% of job growth came from the tech sector this year in London, with the number of tech startups growing by 76%.

Investors have added substance to the hype with larger funding rounds amongst established players and plenty of new businesses launched at seed stage.  In FinTech, there were 74 major deals in November alone. Last year also saw an uptake in M&A transactions, with US investors returning to the European market.

Deals in the technology, media and telecoms sector have reached a six-year high, with seven of the top ten deals taking place in the sector. The IPO window for tech companies has fully opened in the US, exemplified by the IPOs of Facebook and Twitter, and there is hope of a window eventually opening in Europe for established, venture-backed businesses.

2014’s double-edged sword

While it can be said that 2013 was a good year for the majority of tech companies in Europe, this success is likely to be a double-edged sword for new entrepreneurs in 2014. One of the biggest threats will be the difficulty first-timers may have in gaining attention from investors.

There are several reasons for this:

• Firstly, the sheer volume of new tech companies entering the market is outstripping the supply of new funds.
• Secondly, the European tech scene is more experienced than ever before and this has raised the bar, putting pressure on newcomers to deliver more solid, well thought out concepts to draw in VCs. Unlike ten or fifteen years ago, many entrepreneurs are now on their second or third new business.
• Thirdly, 2014 will also see an increased level of competition from Eastern Europe. Countries such as Poland and Hungary are slowly establishing themselves in the VC segment, fuelled by a prodigious level of talented engineers. With the relaxation of working restrictions on Romania and Bulgaria, the pressure of competition is only going to increase.

With such a glut of choice for VCs, it will be essential for new entrants to be truly innovative to stand out from the crowd. In reality, this will mean that the ‘copycat era’ will draw to a close as it will be much harder to build and flip EU copycats to US incumbents. With this exit route cut off, the attraction of building a clone has been greatly reduced.

New entrepreneurs should note that some areas, such as 3D printing and the semantic web, are still considered ‘hobbyist’ by the majority of investors and as a result it is very difficult to convince VCs to provide financing.

Considering the general picture for 2014, the good news for the tech sector is that the cost of building startups is likely to continue to drop. However, exit valuations for general M&A will also fall as more companies exit early. Although this is obviously still appealing for entrepreneurs, it may negatively affect VC sentiment.

Innovative corporations

Another notable trend likely to influence how 2014 plays out is innovation by corporations, whether via their own innovations labs, internal teams or incubators. With more corporations developing their own innovative products and services, there is likely to be a gradual reduction in the number of start-ups getting purchased outright.

For investors and entrepreneurs alike, it is going to be a year filled with opportunity, challenge and healthy competition. The biggest pressure will be on new entrants to the market, as the maturity of the market coupled with an influx of new start-ups makes it harder than ever before to gain the attention of investors.

To be successful, entrepreneurs will need to bring something new to the table. Investors, however, are still generally wary of unproven segments such as flying drones. On the flip side, with more VCs active, competition for the best deals will be equally as fierce, providing strong founders with leverage to negotiate better terms for their companies.

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