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Are the new technologies the philosopher’s stone of the 21st century that transforms if not the metal, at least the stone of the Adolphe Bridge into a Golden Bridge on the Alzette River? What are the opportunities to transform the radiant valley of the Alzette into a European Silicon Valley?
While these questions may seem esoteric, the question of the industrial and digital transformation of Luxembourg is nevertheless posed. This is a challenge well understood by the Luxembourg government, as evidenced by the strategic study on the third industrial revolution published on November 14, 2016 under the aegis of the Ministry of Economy (www.tirlux.lu). It sets the direction the company must take to face the challenges of the digital age.
Furthermore, a government delegation led by Pierre Gramegna, Minister of Finance, recently made an official trip to California. At the same time, Telindus, a provider of digital solutions based in Luxembourg, organised a series of meetings between senior executives from the financial industry in Luxembourg and companies in Silicon Valley.
During these meetings, two pieces of evidence emerged: the extreme maturity of the development of the digital industry in San Francisco Bay and the importance of the ecosystem to continue its expansion. How can these lessons help us to develop Fintechs in Luxembourg?
Before answering these questions, let us present a brief historical overview in order to understand the keys to the success of ecosystems.
The ecosystem concept
In an article published in 1935 in the journal Biology, the English botanist Arthur George Tansley introduced the concept of ecosystem in which he focused on the inter-relationships between climate, biotope, flora and fauna. He points out "the relative instability of the ecosystem, due to the imperfections of its balance", yet, he also notes that their ability to endure is due to their capacity to evolve.
It was not until the early 1990s that economist James Moore introduced the concept of a business ecosystem, which he described as: "an economic community supported by interaction between business organisations: businesses and individuals ... Member organisations will also include suppliers, producers, competitors and other stakeholders. Over time, they will co-evolve their skills and roles, ... ".
The fragile balance of this business ecosystem rests particularly on the entrepreneurial spirit of a group of determined individuals, the existence of financing, and the availability of qualified resources.
The Silicon Valley Ecosystem
In 1930, when AG Tansley wrote his article, the southern San Francisco Valley was a rural area affected by repeated droughts. A young professor at Stanford University, Frederick Terman from the Electrical Engineering Department, was looking for opportunities for his students. He succeeded in convincing two of them, Messrs. William Hewlett and David Packard, not to emigrate to the East Coast and create their business locally. And so it was born, like others, in a garage in 1939 with 538 dollars of capital.
In the 1950s, several events contributed to the region's success:
- After the Second World War, the Pacific coast became strategic for the United States, and the population of California thus multiplied by 6 in 70 years.
- The US government invested heavily in defence technology during the Cold War, with the Stanford Research Institute being established in 1946.
- Frederick Terman, dean of his department, used part of the 32 km2 of the Stanford campus to encourage companies to set up their R & D departments in exchange for partnerships with the University.
Today, Silicon Valley has about 20,000 startups according to Compass and undoubtedly the ones with the highest stock valuations in the world. It took a few decades to write this success story.
The ecosystem of the fund industry in Luxembourg
In 1990, while James Moore was publishing his study, Luxembourg had 380,000 inhabitants, there were 800 OPCs or investment funds registered, with assets amounting to 70 billion euros.
Now 26 years later, as the population is close to 600,000, there are 5 times more funds and 50 times more assets.
The investment fund industry has grown dramatically. At present, this ecosystem is made up of more than 1,500 diverse players such as management companies, custodian banks, auditors, lawyers, financial sector professionals, etc. All these players combine their skills, their will to innovate, their economic links, and their investments to make this ecosystem a global success.
What are the lessons to be learned from these Silicon Valley players?
First of all, if companies such as Facebook or Twitter were created in the 2000s, it should not be forgotten that the champions of new technologies like Google or CISCO were born in the 80s and 90s or that Apple and ORACLE have been in existence from the 1970s.
The industrial fabric of the San Francisco Bay has been built up thanks to many success stories that have chosen to base themselves there. Alongside these more or less recent giants, there are hundreds of micro-enterprises that are created every day.
Taking an analogy from the biological world, a sea turtle can reach the age of HP or IBM (over 100 years), yet one in a thousand reaches the age of 10! The world of startups is as ruthless as that of turtles: more than 90% do not survive the first three years of their life!
The number is therefore key to allowing the emergence of Unicorns or Centaurs (market capitalisations higher than billion US$ and 100 million US$, respectively). And this statistical dimension fully fits the majority of players in Silicon Valley. It is in this context that business failure is not regarded as being a huge drama. Being eaten by a crab when the baby turtle rushes to the sea is not only a matter of skill, but also somewhat a question of luck ...
As 95% of startups are created by highly qualified people, the educational environment is a fertile ground for the development of this ecosystem, so proximity to famous universities like Berkeley or Stanford is a decisive factor.
Finally, the cumulative experience of all these entrepreneurs creates a wish to emulate others and to speed up the process of launching these startups, so let us cite some basic minimum requirements here:
- The ability to provide financing for these start-ups through Venture Capital,
- The existence of incubators such as “Y Combinator” or “500 startups”. These accelerators of success are highly selective: 120 startups were selected from 5,000 candidates for YC, 8% of the candidates join 500 startups.
These incubators all work in much the same way: two selections per year, a stay of less than 6 months, financing, coaching, emulation. These incubators are machines to create champions.
What are the prospects for Luxembourg?
Luxembourg has about as many startups per capita as the United States, however, this represents only a hundred companies against more than 70,000 on the other side of the Atlantic. So there is no other alternative for the Grand Duchy than to attract talent to increase the number of startups. To this end, missions to promote the country abroad, such as that undertaken by the Minister of Finance, are essential.
In a statistical universe, the law of large numbers is merciless. So how can one replace quantity by quality?
Luxembourg has an active population that is 2 to 3 times more qualified than its neighbours. It is therefore conceivable to rely on this fertile soil to speed the growth of startups. Recall as we have stated above, that startups are created by graduates with higher education. Targeted government support could provide support for vocations.
The Luxembourg university hub is growing but remains small, both in absolute numbers and relative weighting among the population. However, the University of Luxembourg takes a proportion of foreign students that is comparable to some of the more prestigious universities. Relying on its attractiveness by focusing on the digital area would offer significant development potential.
Financing and incubation structures are market-wide. Fostering the financing of foreign startups coming to Luxembourg would make it more attractive.
For attractiveness is a condition for existence. Indeed, if one startup out of 1,000 becomes a leader, it would take potentially more than 10 years to see a Unicorn emerge in Luxembourg! Do we have the time to wait?
So how can the process be speeded up? One avenue could be to rely on the existing finance ecosystem.
Silicon Valley stars like to reiterate that the market moves faster than large companies. Should we not listen to this message and accelerate change within our companies?
Luxembourg has one undeniable advantage: the ability to connect channels of energy on joint projects. Thus, one can imagine that based on the financial ecosystem, a universe of Fintechs (startups in the field of Finance) is gradually proliferating.
In the words of James Moore, quoted above: "Member organisations will also include suppliers, producers, competitors and other stakeholders. Over time, they will co-evolve their skills and roles." Cooperation between the various players in the market, and their ability to unite to push ahead with certain technologies are key elements in speeding up the development of startups in Luxembourg.
The Société Générale Group is fully involved in this collective dynamic in Luxembourg. Société Générale Bank & Trust actively promotes local initiatives. This commitment is multi-faceted, starting with partnerships with local initiatives such as the Luxembourg House of Financial Technology (LHoFt). But, Société Générale also promotes startups by having become an “early adopter”, enabling them to justify the interest of their product. Lastly, Société Générale is involved with many other players in the marketplace, and we are convinced of our need to engage with society in order to bring about the emergence of a new ecosystem that will foreshadow the third industrial revolution.
Olivier RENAULT, SGSS Luxembourg Country Manager, Member of the Innovation Executive Board of SGSS.
Published in l’AGEFI Luxembourg, July 2017