European Tech Startups Hear the Siren Call of Silicon Valley

European tech startups are eyeing an early move to the U.S. West Coast, lured by the deeper pockets and stronger track record of venture capitalists in Silicon Valley.

The trend is especially apparent in the red-hot wireless technology sector, where, not long ago, European cell phone heavyweights Nokia and Ericsson led innovation.

Now the focus has almost entirely shifted to the U.S. West Coast, the home of Apple and Google, which have taken the industry by storm.

“For the first time in my career, the innovation center in mobile is actually here. This is not a chamber of commerce speech, this is the reality,” said John Malloy, a partner at BlueRun Ventures, a Menlo Park, Calif.-based firm that was named Nokia Venture Partners until 1995.

“My advice to European startups: You should move here,” Malloy added.

GetJar, an Accel Ventures-backed startup that runs the No. 2 mobile online store after Apple’s app store, took the hint in mid-2009 when it moved its headquarters from Lithuania to San Mateo, Calif.

Meanwhile, community-based traffic and mapping service Waze, emerging as a serious rival to incumbent digital mapping firms, moved over this year.

If you want to be globally successful you have to be in the United States and then go to Europe. Not the other way around.”

Noam BardinCEOWaze

“If you want to be globally successful you have to be in the United States and then go to Europe. Not the other way around,” said Waze CEO Noam Bardin, who raised $25 million for further expansion earlier this month.

And many look at moving even earlier.

Finnish Audiodraft, which provides an online service for musicians and sound designers, will set up a U.S. arm early next year, less than 12 month since its founding.

It aims to wrap its second small financing round early next year in Silicon Valley, and could move permanently, said founder and CEO Teemu Yli-Hollo.

“Through Silicon Valley we get the best access to U.S. markets which are crucial to us. It is a good place to start global expansion from,” the 27-year-old Yli-Hollo said.

Dan Serfaty, CEO of French professional social networking Viadeo, which provides services similar to that of LinkedIn, moved to San Francisco in August, but has promised to keep group headquarters in Paris where he raised $20 million from investors from 2006 to 2009.

“When you tell a European VC ‘I am going to be a billion-euro company,’ 99% of them have never seen that. If you believe in that you are ready to pay a higher valuation,” Serfaty said.

I would not start a consumer startup in Europe. There is a lot of angel money around, but there is nothing after that.”

Andrew ScottCEORummble

To date, startups point to just only one major venture-backed European success story—Internet telephony group Skype, which eBay bought for $2.6 billion in 2005.

Meanwhile, European venture firms, key for financing startups, have cut back investment in the aftermath of the financial crisis. Venture investments totaled $4 billion last year in Europe, compared with $18 billion in the United States.

“It is hard to raise traditional VC money in Europe now, and I do not think it will get any easier,” said Simon Wilkinson, CEO of mobile software developer Myriad.

On average, there are more than 1,000 mid-sized VC investments of more than $5 million each year in the United States, compared to about 200 in Europe, according to European Private Equity and Venture Capital Association data.

“I would not start a consumer startup in Europe. There is a lot of angel money around, but there is nothing after that,” said Andrew Scott, CEO of British online startup Rummble, which has raised $1.2 million in funding.

To stop entrepreneurs such as Yli-Hollo from bolting, European Union politicians have been looking to move some of its massive regional financing toward supporting new businesses while also creating a joint European VC market instead of 27 separate ones.

Other problems may lie ahead in Europe where banks traditionally provide most of the financing for small firms, said Daniel Cloquet, director at BusinessEurope.

In particular, banks could become less willing to lend to startups when their capital requirements are raised.