Europe's first FAANG? The rise of Spotify and the war for talent.

Over the past decade, Europe's tech sector has come of age. Visionary founders, vibrant venture investors and seasoned executives have combined to create over fifty unicorns, from Barcelona's Glovo through to Munich's Flixbus. Several FinTech’s could soon be decacorns, with both Revolut and Klarna boasting valuations north of $5bn. And from Just Eat through to Farfetch and Zalando, plenty have gone public.

But despite this progress, competing with the growth of US tech companies has proven persistently tough. It remains unclear where Europe's FAANG equivalents could come from. SAP - founded in 1972 - remains our only software company worth over $100bn. Some fear the problem is structural, with the EU's heavier regulatory hand especially around data protection, and market nuances across different nations, making scaling far harder. Whatever the causes, it is true that Europe's most promising tech companies have often faced international acquisitions earlier than one might expect: Softbank - and now Nvidia - bought out Arm, Google swept up DeepMind, and PayPal purchased iZettle.

Over the past few months though, the prospect of Europe delivering its first native "Big Tech" company built in the era of venture capital has increased significantly. With both Spotify and Adyen's share price doubling since April, Europe now has two public software companies founded since 2006 and approaching $50bn valuations. If either doubles again, SAP will no longer stand alone. 

For The Up Group, it's interesting to ponder the effects this could have on Europe's talent ecosystem. In the US, FAANG companies have dramatically distorted the market for tech talent. At first, they offered executives the attractive ability to operate at an unparalleled scale, on products generally deemed not only disruptive but deeply socially progressive. But as they have built market capitalisations over $500bn, hiring hundreds of thousands of people in the process and attracting scrutiny for their effects on society, FAANGs have also spawned a skilled generation of highly sought after alumni with the hunger to start small again and build something impactful. These executives enjoy the financial independence to take such risks, and the experience to plausibly execute on their visions.

In Adyen's case, it's harder to see such dynamics unfolding any time soon. Despite the prolific run and rise in shareholder value, the company has sustained a remarkably nimble base of under 1,500 staff. But in Spotify's case, headcount is now over triple Adyen's. And alongside the inevitable cultural risk of losing pace at such scale, there is an intuitive and plausible story for how Spotify could lose its way.

To date, Spotify has succeeded primarily by taking content everyone already loves - music - and packaging it in a new digital product that delights consumers through easy accessibility, infinite choice, and a recommendation algorithm almost frightening in its precise capturing of our individual taste. But now, as various tech and investment analysts have documented, the company's big opportunity feels less product-centric and more directly commercial. By pivoting from music where record labels usurp all margins, and diversifying into podcasts where vertical integration and exclusivity is possible, Spotify has the chance to control its cost base. As it does so, it also has the chance to open new revenue lines by finally building the infrastructure to monetise podcasts and steal ad spend from analogue radio.

In other words, as Spotify seeks further growth, it could be argued there is a risk that the company's identity and primary challenge becomes less about the magic of music and their pioneering app, and more about scaling a sophisticated AdTech platform. For some executives - particularly in commercial functions - this change in emphasis is likely to be welcomed. But within both product and engineering, it is easy to see how Spotify could struggle to motivate and retain talent, in the same way former Google and Facebook staff departed to build Pinterest, Asana, Flatiron Health and Thought Machine. As we enter the 2020s, a new wave of entrepreneurship could await Europe once more.