Most people agree the weather in Amsterdam is nothing to be proud of. For technological start-ups however, the climate is a lot more welcome. Amsterdam currently ranks 19th in the Global Start-up Ecosystem Ranking: only the fourth European city on the list (together with Paris, London and Berlin) and surpassing cities like Barcelona, Brussels and Milan. Cementing this position is a large start-up scene that since a year also includes a “unicorn”: a tech start-up is valued at over a billion dollars. The Dutch tech firm Adyen, situated near Amsterdam Centraal Station, is valued at 1.5 billion dollars, but it is only one of the 156 unicorns that populate the world. This article explores the tech start-up scene in Amsterdam and looks at the phenomenon of unicorns: what do they contribute and what are the dangers?

First the start-up ranking. The list is compiled by Compass (with help from several well-known partners) and ranks cities over 5 categories: performance, funding, market reach, talent and start-up experience. Noted should be that though the report states just “Amsterdam”, the region actually scored is the complete area between Amsterdam, The Hague and Eindhoven. The region scores highest on market reach: a strong foreign market focus, great infrastructure and the offering of multilingual products are mentioned as its main proficiencies. Amsterdam is also where many international start-ups (such as Uber) establish their European headquarters. Last but not least, the region is praised for its “unique lifestyle aesthetic”, as also for tech start-ups work is not all there is to life.

A strong appeal to international workers (also for its affordability compared to other European cities on the list) and excellent education of its population together lead to a very potent labour force. What is found to be the main challenge for the area is capital resources: the actual money needed to live up to potential. On the investment front, Amsterdam is still behind on other European tech hubs like London and Berlin. The report therefore summarizes Amsterdam as a undervalued and promising European ecosystem, encouraging investors to look for opportunities in the Dutch delta.

Amsterdam is home to more than 2500 of tech start-ups, but there is one that rises proudly above the rest: Adyen. Adyen provides financial payments systems and was founded in 2006 by a team of payment professionals. Today, they have over 300 employees and operate on 6 continents. According to their CEO, the company’s size doubles every two years and has had revenues of €150 million in 2014. Their clients include Facebook, Netflix, Spotify and; but what is most special about Adyen is that it is the only Dutch unicorn. A unicorn is a tech start-up that reaches a valuation of more than $1 billion within its first ten years (though exact definitions do vary). Many of these firms we encounter daily: AirBnB, Snapchat and Spotify are just a few. Unicorns are mostly tech start-ups that have passed the first stages of their infancy and succeeded in building a more solid business. They are no longer just hot balloons of promise but, like Adyen, are expanding their business (often globally) and steadily increasing their workforce. They are the successful businesses of our internet era.

As stated earlier, the Amsterdam area is very welcome to tech start-ups and potential unicorns. The Dutch ministry of Economic Affairs, together with special envoy Neelie Kroes, is actively supporting start-ups through network assistance and subsidies with project Start-up Delta. The strong support for tech start-up is founded  on the argument that they are beneficial for the Dutch economy. In the short-run, tech start-ups foster innovation and create a dynamic business environment. But aside from creating new markets and delivering new services, tech start-ups can also shake-up existing markets to the benefit of consumers. This “creative disruption” (or destruction), defined as disrupting existing markets through innovation, is generally seen as something that contributes to economic growth. In the long run, the start-ups to that continue to grow and form a viable business actively contribute to the economy by earning profits and creating jobs.

Though this almost sounds like a fairy-tale, there are several issues. For one, there are a lot of unicorns. Or as Jason Greene, venture capitalist at Emergence Capital Partners, states: “it used to be that unicorns were these mythical creatures, but now there are herds of unicorns.” This raises the question if we are perhaps witnessing a tech bubble. With low interest rates and few new profitable businesses, money is excessively flowing towards promising tech companies. This optimism is largely  driven by the early successes of companies like Facebook, Twitter, Groupon and about a dozen others. These companies once were unicorns but grew to become solid companies and are often referred to as the “exited unicorns”.

So why does it appear to be more difficult than expected for tech start-ups to scale-up and succeed? The success of tech start-ups is often largely based on its ability to disrupt existing markets by gaining a small foothold and then expanding market share. Experience shows however that especially the latter can be a problem. The pace at which tech start-ups move beyond promise and built a solid business is quite slow; if it happens at all. Based on early success stories, investor appear to have formed too lofty expectations about how quick tech start-up rise to success. Older tech giants like Microsoft, IBM and Amazon continue to innovate and evolve. This makes it harder for the more fragile newcomers to push them from the throne. For example, both Amazon’s and Microsoft’s cloud businesses are doing a good job at making life difficult for cloud-based unicorns like Dropbox. As a result, recent funding rounds by tech firms have disappointed and investors have been writing down heavily on existing investments. An example of the first is the disappointing initial public offering (IPO) by Square this month. For the second, we see for example Fidelity Investments, a major investor in many tech start-ups, who has recently written down on many of its investments including famous unicorns like Snapchat and Zenefits.

A more general issue seems to lie at the bottom of this problem. For a tech start-up to establish a sustainable business it often needs a large market share or monopoly. So in the long-run, only a small number can really survive. Yet many tech start-ups operate in similar or competing markets. But if similar tech start-ups are all valued as potential monopolist, many will eventually be disappointed. Think for example of all the other promising social networks that were crushed by Facebook. The valuations given to these start-ups are not necessarily wrong (many similar tech start-ups do have a chance to come out on top) but these valuation will be troublesome over a longer period. It seems now that investors are getting more aware of the seriousness of this issue and have started to worry about the real profitability of these start-ups. Investors that were around in the early 2000’s know how dangerous overvalued technology can be.

Tech firms play a key role in our current age of information. A strong start-up scene fosters economic growth, innovation and in the long run provides jobs and business. The Dutch government’s efforts in promoting the start-up ecosystem have been quite fruitful as Amsterdam has become one of Europe’s main tech hubs. However, recent developments in the tech sector have again laid bare some structural issues tech start-ups face. Against all the hype, the biggest challenge for every high potential start-up remains establishing a sustainable business. As the amount of tech start-ups keeps growing, competition increases and the odds of succeeding become smaller. In the long run this can prove to be harmful not only for private investors but also for the economy as a whole as capital funding is wasted and not efficiently allocated. For the Netherlands this does not yet seem to be a real problem as Dutch start-up investment is still relatively small. Orange unicorns are still very much wanted for Christmas.