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Is Europe the Next Frontier for Startups?
When it comes to creative enterprises, bicoastal rivalries are nothing new. Think hip-hop, think sports — and think startups. As Notorious B.I.G. and Tupac were…
When it comes to creative enterprises, bicoastal rivalries are nothing new. Think hip-hop, think sports — and think startups.
As Notorious B.I.G. and Tupac were to music, Silicon Valley and Silicon Alley are to startups, albeit in a slightly more peaceful, muted form. Silicon Valley is the unquestionable birthplace of tech entrepreneurship, the hardware-heavy region that emerged in the mid-1900s with Hewlett-Packard and IBM and has since evolved to include Facebook and Google.
New York’s Silicon Alley followed, according to some, in the 1990s, slowly at first. The scene has boomed in recent years by harnessing the uniquely diverse culture of New York City and the head-first entrepreneurial ethic that comes with it. Brands like Foursquare, coworking spaces like General Assembly, and even university campuses like the Technion-Cornell Innovation Institute have emerged as a result.
Culture, clearly, is always at play, but the flooding of the industry on the whole has lightened the disparity between American coasts — transferring it, in many cases, to comparisons between the US and Europe. Differences between the startup industries in Europe and the US are historical, structural, and cultural. Where opportunity exists in an economy partially rooted in engineering, limitations exist in a professional environment in which stability is commodified.
But recently, European entrepreneurs have come to express their plans for reformation — a hope to build off remarkable recent growth in London, Stockholm, and Berlin. The driving force? An economic downturn that’s redistributing the workforce into places it would, under more stable circumstances, prefer not to tread. But the path, it seems, is far from clear.
The Trials and Tribulations of European Startups
Europe’s somewhat-late arrival on what is now the worldwide startup scene has its roots in a variety of limitations not directly related to the industry itself. Fortunately — or unfortunately, really, depending on your current state of employment — the economic crisis has called for a swath of changes, some as psychological as they are legal.
Earlier this month, Martin Varsavsky, the Argentinian-born entrepreneur, told Forbes that some European nations are led by a mentality of opting for government and corporate jobs — typically the most straightforward, accessible approach to employment — has been undermined by cuts in government programs. Thinking outside the box is, in many cases, no longer an option; entrepreneurship is now in many cases an obligation.
Stepping away from the warm stability of government and corporate jobs places European entrepreneurs in the new position of accepting trial and error as a basic component of startup life. As Varsavsky points out, the contemporary institutions of success within the field — Google, Facebook, Amazon, and Apple — were not born out of level heads. In fact, Google has an entire lab devoted hundreds of experimental projects: self-driving cars, augmented reality glasses, and the seemingly inconceivable space elevator. There’s a certain level of agility and unpredictability required of launching in unpredictable territory; where the cultural norms are corporate, volatility is seen first and foremost as a curse.
Regardless, the European startup scene is one that inherently embraces the underlying goal of most if not all startups — disruption. At the core of ingenuity there is engineering, the framework for the ideas most capable of impact. Fortunately, Europe is a continent of engineers who face an extremely diverse set of countries. As entrepreneur Dan Woods wrote in Forbes, “The core argument is this: In Europe, you don’t have one large uniform market like you do in the US. The Euro zone has 24 countries with even more business districts. In Belgium or Switzerland or Spain, separate zones of languages and districts with different cultures add to the number of distinct markets you must address.”
Of course, the stakes are therefore higher. Kristof De Spiegeleer, CEO of Belgian incubator Incubaid, notes, “Because markets are diverse, to have any chance of success, our companies must start with a technology that has significant potential to solve many problems in many markets. If we don’t have a disruptive idea, we can never make it work in so many different markets.”
The Limitations of European Venture Capital
Were Europe to wholeheartedly adopt the startup approach, the continent would still be hindered by a lack of venture capital. Access to adequate investments has played a significant part in the success of the American startup scene. In fact, Thomas Friedman recently argued in the New York Times that Obama should push forward an agenda that makes “America the launching pad where everyone everywhere should want to come to launch their own moon shot, their own start-up, their own social movement.”
While potentially overlooking the instability of startups, which would in many cases limit expansive economic growth, Friedman points (somewhat excessively) to a number of US strengths:
- The market is the freest and most trusted
- The infrastructure and Internet bandwidth are the most advanced
- The funding for basic research is the most generous
- The rule of law, patent protection and investment-friendly tax code are the envy of the world
In many cases, European economics directly oppose these possibilities. Much of Europe, for example, has a strong severance system that counters high risk projects — read: startups — by requiring employee pay following a business’s collapse. In the same regard, European taxes are often collected through employment; as a result, venture capital in the US is significantly more powerful because it’s not drawn down by taxes, instead going to innovation.
Countries like Denmark, in fact, take the issue a step further. There, the porteføljebeskatning, or portfolio tax, requires that entrepreneurs pay 25-percent tax on any shareholder owning less than 10-percent of a company. An angel investor or or entrepreneur making an exit, therefore, would owe 67-percent in taxes upon exit. And because filing for personal bankruptcy is not an option in much of Europe, the risk hardly outweighs the reward.
The consequence has two components: first, in general, startup-based entrepreneurialism is discouraged; second, and perhaps more dangerously, venture capital firms stay in the US. “We need to have a critical mass of venture firms to build a more robust startup ecosystem,” Varsavsky said. “Some American venture firms are coming to London, firms such as Accel, but we need more homegrown funds such as Index and Atomico in Europe to finance startups.”
A Global Solution to Stunted Growth
Despite its barriers, Europe has seen a number of significant successes. Janus Friis, the Danish entrepreneur, founded Skype, Joost, and KaZaA. Last.fm and Spotify, perhaps the most significant up-and-coming music streaming services, are from the UK and Sweden, respectively. Danny and Neil Rimer started Index Ventures in Switzerland, which has raised funds in excess of two billion Euros.
To build upon this growth, European entrepreneurs have pointed to a number of possible changes, the most possible of which would take place outside of the reach of the government. In TechCrunch, Julia Szopa, program director at blackbox.vc, a Silicon Valley-based incubator that focuses on moving European startups to the US, touches upon both the mentality of European startups and their incubators. Damaging views include believing co-ownership — sharing options to ensure commitment — is counterproductive, seeing quick decisions as non-tactical signs of desperation, and building smaller products protects founders from failure.
On top of these ideological shortcomings, according to Szopa, European startups have a tendency to handout large sums of equity for small amounts of capital — resulting in smaller future rounds. “While the well-established YCombinator asks for somewhere between 6 percent to 8 percent for $11- to $20,000, there are multiple local acceleration programs in Europe that take as much as 10 percent for as little as $10,000 of seed funding,” she said. While the smaller markets suggest smaller markets and fewer competitors, “that doesn’t mean that the entrepreneurs have to accept these rules of the game, just because they have to prove the concept on the home market.”
The greater challenges are rooted in the legal limitations of the European market, the taxes and demands placed upon startups by government bodies. To begin, Varsavsky suggests is a separate set of standards for angel-backed companies: companies 3-years-old and younger, with less than 10 employees and no profits, should not be required to pay employment taxes or forced severance pay. As a result, their capital could go toward innovation. Additionally, he said, there should be no personal liability for the founders, along with an option to declare personal bankruptcy. While a traditional perspective would suggest the risk taken here would destabilize an already unstable economy, the long-term benefit may be growth that would otherwise be impossible.
Ultimately, just as Silicon Valley and Silicon Alley build upon the strengths of their respective coasts, so, too, will Europe have to harness its own capabilities while absorbing the strengths of the US market. While the European mentality, always rooted in innovation of a different sort, seems to be opening up to the risk-taking that drives startup culture, it’ll take changes in financial structures — both governmental and venture-based — to ensure long-term growth. And unfortunately, those may be the hardest to bring about.