European corporations don’t know what they’re missing. Library House’s Doug Richard rages against the conservative buyers of SMB-produced technology.

European entrepreneurs have long complained about a lack of funding for start-ups compared to the US. A less remarked-upon problem is the conservative buying habits of large European corporations.

So many entrepreneurs in Europe tell me how tough it is to convince corporates to buy novel, innovative products. The first questions always seem to be:  “Has it been proven? Who else is using it?”  My experience in the US is the opposite, buyers are always looking for ways to innovate and take advantage of the latest technology.

LAPPING UP INNOVATION
Amar Bhide, professor of business at Columbia University in New York, believes that “venturesome consumption” (the consumption of the products of innovation), is crucial not just for those trying to grow innovation-based businesses, but also for the economy at large. In fact he suggests that it is the consumption of innovation, not its upstream generation, that is most important for the success of the economy overall.
At the anecdotal level Bhide agrees that European corporate buyers seem more conservative. In the IT sector, they appear to prefer more stable, older generation products to the latest innovations. The ratio of spending on IT to gross domestic product is 15-20% higher in the US than in Europe.

It is possible that this conservatism is driven not just by risk aversion, but in the organisational changes that may be needed to take full advantage of a new technology.

One problem with this conservatism is that it forms part of a vicious cycle. Because European buyers are more risk averse, the US tends to be the market of first resort for technology companies. So they tailor their products to the US marketplace, making them less appealing for potential European customers. There is therefore a double penalty to be paid by European firms: they miss out on new technologies that are rapidly adopted by their US competitors and they force innovators to focus on the US market, making it more likely they’ll miss out next time too.

VICIOUS CYCLE
The vicious cycle reveals one way in which European entrepreneurs try to escape their paralysing environment – by focusing their sales and marketing activity in the US. But what effect does this have on the European economy and European innovation?

It is obviously more difficult for a company to crack a foreign market than its own. So European entrepreneurs are at a perpetual disadvantage, having to fight US companies on their own turf. But the European failure in venturesome consumption has a much wider effect, bearing down, not just on ventures developing innovations, but on the wider economy which is failing to use them.

American economist William Nordhaus has quantified that from 1948 to 2000 just 3% of the economic returns generated by technological advances were captured by the producers of innovations and 97% by the consumers. America’s consistent lead over Europe in overall economic well-being is likely
to have less to do with hosting cool tech companies in California and more to do with the fact that US corporates actually use their products.

The company of which I am chairman, Library House, has just produced a report showing that UK companies backed by venture capital are rapidly exploiting new technologies, particularly on the web, to deliver traditional products and services in new ways. It is a pity that large UK corporates don’t follow suit more often.

About the Author
Doug Richard is chairman of research group Library House and the Small Business Task Force. An experienced technology entrepreneur and investor, he was also an original Dragon in the BBC’s Dragons’ Den.
 www.libraryhouse.net