Where The Big Companies Are

I was in London for a few days last week.  It was a great trip it, but it was also a reminder of how lucky I am to be investing in the United States.

London has a lot going for it.  It is an easy city to navigate, it has the best Indian food in the world, and in London you don’t need to wear a belt with tailored pants.  However, the UK is a much smaller economy than the US.  For instance, the entire TV advertising budget in the UK is only $6BN/year.  That is less than 1/10th the size of the US, and only half of what we spend per capita.  Proctor and Gamble spends $2BN/year on television advertising in the US, which is larger than the advertising budget of most European Union countries.

Market size plays a significant role in the VC business.  An adtech sector that would support a $500MM business in the US will only support a $50MM business in the UK.  This means that few “UK-only” concepts get funded.  The market size also creates unique competitive pressures.  WPP is the largest advertising agency in the UK, with 40% market share.  On the surface that may not seem like much, but it allows them to control the market in a way that no single agency could in the US.  This is reflected in greater margins in WPP’s UK business than in their US business.

As a result of this dynamic, companies must expand across Europe to get the same scale that we get by expanding across state lines.  European expansion requires multi-lingual support, multi-lingual sales, and multi-lingual marketing.  Products made in one country don’t always mesh with the cultural norms in another country, so there are risks to expansion.  The end result is significantly lower returns on invested capital in Europe than in the US market.

As US investors, we often take the size of our economy for granted.  Companies in the US have more potential customers, which means they scale faster.  Because companies scale faster, there is a higher likelihood that the next billion dollar company will be built here.  The billion dollar exits encourage more VC investment in US start-ups.  In the end, big companies become a self-fulfilling prophecy of our great economic machine.

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