Europe and Israel are producing more startup ‘mafias’ than ever despite tech rout

Technology

The average time taken for a startup to hit unicorn status in Europe is now just seven years, according to Accel.
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Europe and Israel mint an average of five tech startups for every venture-backed company with a valuation of $1 billion or more, according to a new report from the venture capital firm Accel.

Of the 353 “unicorn” companies in the region, 221 have spun out 1,171 new tech-enabled startup companies as employees at these firms left to start up their own ventures, Accel said, citing Dealroom data.

A similar report from the firm last year showed that, out of 344 VC-backed unicorns, 201 led to 1,018 new startups being created.

The biggest examples of companies whose former talent went on to establish new companies include Spotify, which spawned 32 new companies, Delivery Hero, which generated 32, and Criteo, from which 31 new startups were born.

Such companies are referred to in the startup world as “mafias” — and no, they’re not like the mobs of the Italian-American gangster films. Startup mafias have existed for decades. These “mafias,” which are firms started by employees of other tech firms, have historically led to the creation of some of the largest tech companies known today.

From U.S. fintech giant PayPal, Elon Musk went on to start electric-car maker Tesla and space exploration firm SpaceX, for example, while Peter Thiel co-founded the big data company Palantir and is now a renowned investor with his Valar Ventures and Founders Fund VC firms.

VC investors say that those entrepreneurs came from a culture of risk-taking in Silicon Valley that, for many years, hasn’t existed in the same way in Europe. It began to take shape with the advent of maturing internet platforms like Skype, from which Niklas Zennstrom started VC fund Atomico and Taavet Hinrikus co-founded fintech giant Wise.

“When I got started like 30 years ago back in the Valley, I did it in the West Coast, Palo Alto. Then I’d go back to the Netherlands and my friends and my parents would say, why would you do that? Why wouldn’t you go work for Shell or Unilever? That has held Europe back,” Harry Nelis, partner at Accel, told CNBC.

“Now, unless you came out of university and studied in exactly the same way that I did, and you go straight into a startup — not like a raw startup but an established one where you can learn a trade and then you have your career already — it’s that kind of new philosophy that will, I think, help Europe over time, and has been helping the ecosystem.”

Today, the likes of Spotify, Delivery Hero, Klarna and Wise have become founder factories in their own right.

The largest cohort of newly established startup mafias comes from fintech, with almost 20% of European startups spun out of unicorns operating in the sector.

Startup employees in Europe and Israel tend to favor their own cities for setting up their new businesses, with over half of new firms founded in the same city as the unicorn they exited, according to Accel.

Tel Aviv was the largest single hub for producing startup factories, with 127 new firms being spun out from 33 unicorns, Accel said. Within Europe, London hosted the most startup factories for a single city, with 27 unicorns and 185 startups, while Berlin was close behind with its 25 founder factories and 165 startup spinouts.

More than 59% of startups that came from so-called startup mafias have already managed to raise VC funding, with 45% attracting around $1 million to $10 million of investment, and 30% receiving more than $10 million.

The data also offers insight into the journey people take to becoming founders.

It takes second-generation founders an average of 28 months before founding their own startups, according to Accel, and the average age of these entrepreneurs is 33.

Three-quarters of second-generation founders received higher education, with 60% obtaining a master’s degree. 

More than 59% of startups that came from so-called startup mafias have already managed to raise VC funding, with 45% pulling in around $1 million to $10 million and 30% receiving more than $10 million.

The average time taken for a startup to hit unicorn status in Europe is now just seven years, Accel said.

Darkening outlook 

Nevertheless, the outlook for tech startups more broadly has darkened as interest rates have risen, putting pressure on valuations of late-stage companies in particular. The market value of firms such as Klarna has been slashed as investors reevaluate the tech sector.

Last year, more than $400 billion was wiped off the value of Europe’s tech industry, according to data from VC firm Atomico.

Layoffs have also plagued the industry. Music streaming platform Spotify laid off 6% of its headcount, “buy now, pay later” firm Klarna announced cuts of 10%, while money transfer unicorn Zepz recently let go 26% of employees.

An Accel spokesperson said that the impact of layoffs on new startup generation did not feature in its report.

But despite the darkening outlook for tech, Nelis said he is hopeful for the future. 

He said the numbers show that Europe’s tech industry has matured to a level where employees are able to muster the courage to up and leave to start new firms of their own.

A deep pool of talent has now emerged, with employees feeling they have the skills and experience to turn their own ideas into full-fledged businesses.

“While founders and their teams are navigating a tough macroeconomic environment, the European and Israeli tech ecosystem is in a much stronger position than during the 2008/9 financial crisis due to the compounding effect of repeat entrepreneurs,” Nelis told CNBC. 

“With over 350 venture-backed unicorns across the continent, there’s a strong foundation of talent and success that we firmly believe will be passed onto the next generation of ambitious entrepreneurs.”

WATCH: Can India help the UK become a tech superpower?

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