Transcription
In late 2024, a simple graphic started gaining a lot of attention for simply highlighting how far behind Europe had fallen. Each one of these bubbles represents a company founded within the last 50 years that's now worth more than 10 billion in public markets. The European Union, collectively the second largest economy on the planet, has 14 such companies, six of which could generously be considered high tech. By comparison, the same group of companies from the USA was 70 times more valuable and considerably more cutting edge. Oh, and since this report was published, the gap has only grown wider. Just Meta alone is now worth more than all of these new companies combined. And more broadly, the five largest American tech companies are worth more than every single company listed on every single stock exchange within the European Union.
This gap goes further back in the business cycle as well. Europe doesn't have big new companies because there's not nearly as much funding for small new companies. The lack of financial infrastructure in Europe means that a lot of aspiring entrepreneurs from the continent don't even bother with their home countries and instead they move to places like Silicon Valley and even China to get their business ideas funded and off the ground. So the obvious question on everybody's mind is why? Europe has plenty of wealthy people with lots of money to invest. And it also has plenty of smart people worth investing in with an education system that matches or even exceeds America's in a lot of fields. Its consumer market is the second largest anywhere in the world. It's uh arguably more stable than America politically and most of its constituent nations have a better safety net for budding entrepreneurs to fall back on if their business doesn't work out. On top of all this, it now has dozens of government-backed organizations pouring billions of dollars into funding to try and bridge this gap. But despite all their best efforts, the continent is still lagging well behind.
Now, understanding why this gap exists is important for more than just a bit of general interest because no matter what side of the pond you live on, it's probably going to affect you. On one side, there are people calling for more government money to be spent, regulations to be relaxed, and taxes to be cut in order to turn this embarrassing comparison around and let European businesses compete on an even playing field. In plain English, if the various levels of government just got out of the way and let businesses do their thing, everybody would be better off. An awfully convenient story for business owners and one that's been told a lot before. On the other hand, for all the Americans that are getting a bit too smug at this point, this comparison highlights just as many flaws in their markets as it does in Europe's.
Now, I don't want to waste your time just for the sake of view duration. So, I've broken down all the reasons and arguments into timestamps in the video description because if you've been following this issue, some of this might already be obvious to you. But between the regulatory debates, taxpayer funding, training initiatives, cross-border agreements, and maybe just a little bit of geopolitical dick measuring, almost nobody has stopped to ask the most important question of all. Does this even matter? Comparisons like this might make Europe look like they're falling behind, but it's also worth recognizing that simply having a lot of mega corporations hasn't exactly made life any better for the average American either. The story of how Europe got here, how it's trying to get out, and how much it actually matters if it doesn't, all comes down to just a few simple practical economic differences that are currently being tested to their limits.
This video is sponsored by Cape. Most cell phone carriers have made their lack of privacy and security a big liability for users. Even if you don't use privacy tools like VPNs, those can't protect you from issues that start at the network level. Data breaches, SIM swaps, metadata leaks, tracking. These show that some telecoms companies just don't take their stewardship of your data seriously. But Cape is doing things differently. Cape is a self-service carrier that provides the same unlimited call, text, and data you know and rely on, but it's more secure. The entire product was built with privacy as its top priority. From the moment you sign up, they collect the bare minimum amount of information, so they don't even have data to leak or sell. They also have a ton of super unique security features like identifier rotation, which allows you to rotate your network identity every 24 hours, effectively making you appear as a new person every day and making it much harder to track you. And you get two additional secondary numbers included in your plan that are encrypted, so you can use them for things like 2FA codes or to give out to people or services you don't want to have your real number. So go ahead and check out Cape and use the code micro app33 at checkout to get 33% off your first 6 months and get a premium network that keeps your data away from prying eyes.
Okay, so there are four main areas that economists have pointed out to explain why it seems so much harder to grow a major new company or any company for that matter in Europe. The first big problem is one that's often overlooked in these debates. And that is that Europe is just old. It has old money, old people, old institutions, and old incentives that don't lend themselves as directly to starting or funding new businesses. At the extreme end, a Peterson Institute study found that more than half of Europe's billionaires have inherited their wealth, compared to around a third who have in the United States. As much as a fifth of all the billionaire fortunes in Europe are on the fourth generation or later, meaning that this wealth has become almost dynastic in nature, and that's ignoring the literal dynasties that exist in Europe as well.
It's a common understanding that more progressive tax and social policies in Europe compared to America have resulted in improved social mobility. Meaning that someone starting out in a low income or wealth environment can end up in a high income environment and vice versa. Now, this is true for most countries in Western Europe, but only for normal levels of wealth. At the highest levels, wealthy European families have often held onto their wealth for longer than the USA has even existed. Higher income taxes and social services do increase social mobility. But these families have wealth that generates their income rather than incomes that they're using to build wealth. So, income taxes alone do very little to dislodge their built-up assets.
Now, this matters to new business development because these types of fortunes are naturally more predisposed to wealth preservation rather than wealth generation. Survivorship bias means fortunes that are consistently betting on the next big thing are unlikely to have survived hundreds of years in the first place. And even if these families were interested in venture capital to help startups scale into bigger businesses, a lot of them wouldn't have the same ability. A lot of the biggest new businesses in the USA today got their earliest investments from other entrepreneurs who just sold off their own businesses. The founders and early executives at PayPal are the classic example of this. No matter what you might personally think of them, Elon Musk, Peter Thiel, Reid Hoffman, Max Levchin, and Yu Pan took the money they made from the sale of PayPal to eBay and then reinvested it through various channels to directly contribute almost half of the bubbles on the left. Although maybe the world would have been better off if they didn't. That's up to you to decide. The point is a fourth-generation heir to a family fortune managed through a trust and invested in agricultural farmland isn't going to have the same combination of capital and know-how to create that business ecosystem that cranks out tech companies in the USA.
The incumbency of dynastic wealth also influences new business investment in less obvious ways as well. One way is in simply hiding how many businesses truly exist. Europe is home to almost half of all the largest family-owned businesses in the world, according to a report by Ernst & Young. By comparison, the USA, despite being a larger economy overall, was home to just 23%. Old money families often owned businesses so old that they predate the idea of going public at all. And if they never go public or take on major investments, there's just less information about them to compile into visualizations like this. Additionally, old money families that draw their wealth from very conservative sources like real estate, industry, or traditional family-owned businesses arguably have an incentive against encouraging new business because the innovation they bring and the wealth they generate could directly compete with their established interests. It might sound silly to you or I, but a hotshot new billionaire outbidding an old money heir for a prime position called Cheval might actually be considered true hardship.
The nature of old money presiding over old businesses also factors into the second major issue contributing to sluggish business development in Europe, and that is regulation. In late 2024, Mario Draghi, the former president of the European Central Bank and Prime Minister of Italy, released a now infamous report outlining how Europe was falling behind the rest of the world in terms of innovation. One of the central focuses of the report was why high-tech, highly productive businesses weren't being developed in Europe. And one of the core findings was that red tape across 27 constituent countries was just too difficult to navigate. There is a now infamous turn of phrase that the US innovates, China replicates, and Europe regulates. On top of simply being made up of lots of individual countries with their own local laws, and then broad market EU rules, these countries just generally have stricter business regulations to begin with, and enforcement is more consistent. The classic example that frequently gets used is that to fulfill a business contract in Germany, a third party needs to sit in a room and read the contract aloud in its entirety before it becomes enforceable. Scale up these strange local traditions, legal quirks, tax systems, and unique languages across 27 countries, and it becomes a lot more difficult to actually access the entire market of the EU when compared to accessing the American market. And even the US itself is not exactly free of pointless bureaucracy.
The dynamics of who controls the wealth also comes into play here as well. Younger American companies and new money billionaires largely use their wealth and influence to lobby for reduced regulations to let their businesses access new markets or operate in ways that aren't strictly within the bounds of the law. Old traditional businesses in Europe want exactly the opposite. Lots of red tape and regulation makes it harder for startups to enter their markets and even harder still for them to bring something new to market that could compete with them. In the US, the typical response to existing regulations is to ask for forgiveness rather than permission when a company is venturing into a legal gray area. A simple example of this would be something like Airbnb. It's pretty clear that this business is enabling unlicensed and unregulated hotels. But the regulatory hammer has come down on this platform much harder in Europe than it has in most American cities. Now, no matter what your own opinion of this platform may be, the real winners in Europe are established hotel owners who don't need to compete in the same way.
Now, the good news is that since this damning report was first published, the EU has actually made some progress towards simplifying some of these hurdles. EU Inc. is a new proposal currently in the European Parliament that would enable businesses to incorporate one single entity with streamlined rules across the entire continent rather than having to adapt to local laws individually. It's hoped that this will blur the line between borders for businesses and let them raise money and access customers that would have been previously too bureaucratically difficult to reach. There is, however, a fine line between removing unnecessary red tape and removing guardrails that were in place for a good reason. At the same time as broadly popular reforms like the EU Inc. scheme, the EU is also pursuing more controversial measures like scaling back privacy protection and AI laws for the promise that it will incentivize more local development of this hot new technology. Now, remember this because it will be important later on.
But before that, there's perhaps the biggest challenge the EU faces in attracting innovative companies, which is giving all of the stakeholders in this process a good reason not to go to America instead. If you're an entrepreneur, it's easier to find venture capital investors to fund your ideas in places like Silicon Valley. If you're a venture capitalist, the US has much larger financial markets to cash out your winning bets. Top technical talent can get paid higher salaries, often with lower tax rates, and the wealthy investors that want exposure to cutting-edge development are going to go where the venture capitalists, entrepreneurs, and talented workers are. This agglomeration of talent, finance, and tech-forward culture is hard to compete with once it's already there. And it's also helped a lot by the fact that once a company achieves sufficient scale, there's nothing stopping it expanding back into Europe once it can afford the lawyers to deal with all their regulations. For now, at least, the USA also has the world's reserve currency, making it an attractive destination for all foreign investors who understand its markets and are more comfortable investing in something like the New York Stock Exchange than they would be investing in Frankfurt's alternative. This combination of demographics, regulation, and the gravitational pull of the US are all contributing to this gap in innovation and the massive businesses that have been driving it.
But does this actually matter? Despite how impressive they look on graphics like this, it's important to stop and ask what real benefits these companies are providing to the countries they are headquartered in. Compared to more traditional businesses, these highly innovative companies don't actually employ that many people. They have very concentrated operational centers, and their taxes aren't necessarily tied to where their headquarters happen to sit. Ironically, some companies like Apple in particular have taken these tax minimization strategies so far that they ended up paying more in corporate taxes to the EU than they did back in the USA. For the last two decades, the company had been channeling expenses through Ireland as a strategy to appear unprofitable in the rest of the world. But a legal ruling mandated that they pay what they would owe to Ireland without this advanced financial routing, which meant that they were hit with a one-time fee of over $10 billion on top of the regular taxes they'd already paid in Europe.
Then there's the fact that a lot of small companies are generally healthier for an economy than a few ultra-dominant mega corporations. Because they're still somewhat siloed in their own countries, Europe often has dozens of nation-specific competitors in certain sectors rather than just one big company that dominates an entire field. What's more is that government safety nets mean that despite their laid-back regulations, places like Sweden have a far higher rate of entrepreneurship and innovation than the USA. The difference is that because there isn't the same robust venture capital ecosystem, these companies don't tend to scale as quickly and focus instead on long-term growth. But that isn't necessarily a problem.
Silicon Valley has become very good at producing very valuable companies, but that's come with its own problems. A lot of startups receive investment because early investors know that later investors will buy in, not necessarily because the company is producing a good product. For everything that venture capitalists say about changing the world through technology, their primary objective is to buy a stake in a company that they can later sell for profit. And since the biggest tech companies in America have become so big, often the best plan is to just invest in a startup with the express intention of it being acquired by one of these mega corporations once it threatens them in any way. This means valuations and financial metrics look really good, but its actual impact on societal good is a little bit more questionable. Put another way, a lot more time and effort is spent on marketing and selling the shares in the company than is spent on actually making a good product that will provide value to the market.
The USA is currently seeing this with a surge in AI investment. If you're a founder looking to raise money and get your business off the ground, you better figure out a way to shoehorn AI into your plan, or else it's going to be extremely difficult to raise venture capital. And the reason it's going to be hard to raise venture capital is because those venture capitalists won't be able to sell it off to a market that's paying well above the odds for anything generative. Additionally, for all the hype around this technology, the real economic benefits it's delivering remains questionable at best. And beyond that, even if modern LLMs do eventually improve economic efficiency, there's no guarantee that they'll be any concentrated advantages for the countries making the investments in the first place. For example, the world's first programmable digital computer, the jet engine, and even artificial intelligence for that matter were all developed here in the UK. But there's no ongoing economic dividend for having pioneered a technology that's broadly made the world a wealthier place.
The level of financialization in the American system also makes it more susceptible to downturns if and when they come. We've been comparing performance in the tech sector over one of the longest bull runs in history. The broad market for American-listed public companies has a trailing PE ratio of 27 compared to Europe's 18. In plain English, it would take 27 years of earnings for every listed American stock to collectively cover its market capitalization. For comparison, in Europe, it would take just over 18 years. Now, while this isn't a perfect one-to-one comparison, it does show that if there is a downturn, Europe's more diversified base of smaller, more practical companies could help soften the blow compared to the more bubbly US market. It's also important to remember that this doesn't include the significantly higher share of major family businesses in Europe, which are typically run more conservatively than public companies that have shareholders to answer to. The European business ecosystem does have its problems, but this graphic isn't one of them. It is, however, a good excuse to lobby for lower taxes, less restrictions, reduced worker protections, and a concentration on that economic grind set rather than sustainable business development, genuine innovation, and quality of life improvements for real people.
There are already clear examples of this working if you can expand the scope beyond the latest and greatest industries. Go and watch this video next to find out how these very same conditions have allowed Aldi to compete and thrive in markets where, by all business logic, it just shouldn't be able to.