Two titans of venture capital, General Catalyst and Andreessen Horowitz, are poised to inject a significant influx of funds into the tech startup arena. General Catalyst is expected to amass US$6 billion to support emerging companies, closely following Andreessen Horowitz’s announcement of a new US$7.2 billion investment fund. These figures represent some of the most substantial fundraisings in recent memory, occurring during a period of diminished global venture capital activity, which saw a plunge from US$644 billion in 2021 to just US$286 billion in 2023.
However, the geographic distribution of these funds is skewed towards American startups, which typically attract about half of all global venture capital investments. This is in contrast to Europe and the UK, which, despite possessing a marginally larger share of the global GDP compared to the US (17% versus 16%), only see about a quarter of such funding.
As a result, the top three American tech companies, Microsoft, Apple, and Nvidia, boast a combined valuation nearing US$7.5 trillion. This dwarfs the valuation of Europe’s top tech firms, ASML, SAP, and Prosus, which together are worth approximately US$700 billion. The question arises: how can this disparity be addressed?
The extraordinary success of Silicon Valley is rooted in a complex web of interdependent factors, many of which have been established for decades. These include profitable government contracts, proximity to entrepreneurial universities, and the ongoing concentration of wealth and talent from tech behemoths such as Apple and Nvidia. The immense capital US investors often inject into early-stage companies is an advantage that other markets struggle to replicate. Startups in Silicon Valley are expected to show substantial customer traction, such as sales revenue or user numbers, whereas in tech hubs like Berlin, investors may be content with backing a robust team and a solid idea.
For instance, the founders of Airbnb had to rely on personal credit cards and creative cereal box sales to keep their company afloat before securing funding. DoorDash founders spent nearly six months making deliveries themselves before landing their first investment. These anecdotes contrast sharply with the immediate funding secured by Berlin startups such as HeyLama and the swift multi-million dollar financing of pet care startup Rex after its launch.
Between 2020 and 2022, an enormous US$44 billion was poured into early-stage deals in Silicon Valley, while Berlin saw only US$5.8 billion. Furthermore, approximately 31% of US startups move on to subsequent fundraising rounds compared to just 19% of European startups. Despite the higher funding barriers in the US, Silicon Valley exits average US$403 million, while Berlin averages US$53 million.
The perilous phase from idea inception to early traction, often termed the “valley of death,” is a make-or-break period for startups. The Silicon Valley approach to funding companies with proven traction may reduce the risk for venture capitalists and, in turn, enhance the ecosystem’s prosperity. However, this model could be challenging for European ecosystems to adopt, as it may exacerbate the funding gap for the most innovative ideas and for entrepreneurs from under-represented groups.
To emulate the success of the US model without compromising diversity, support mechanisms such as incubator and accelerator programs are crucial. These programs must be designed to signal the credibility of the startups and aid, rather than impede, their efforts to secure initial investments.
