Europe doesn’t want innovations and it doesn’t need startups
Our journey started when we wanted to understand how we can have such a big difference between US VC rounds and EU VC rounds.
First we compared economies
EU GDP is bigger than the US GDP
The EU population is bigger than the US population
So why are VC investments in Europe so much lower than in the US?
And this is our calculation from 2014:
And we’ve found a few more interesting rank lists
Like this one from KPCB - 15 years ago there was one European public internet company on a list of the most valuable by market capitalization, Axel Springer, and on a list from the last year there was none.
Or this one
On any rank list regarding digital economy you won’t find any of the EU Companies
Only US and Asian ones
But if we take a look at who are founders of the billion dollars startups in the US, you will find out that most of the foreign founders comes from the EU countries
To be exact:
Out of 60 emigrant founders of the US unicorns
19 was from the EU countries – almost a third!
So why people with ideas and skills have to go from the EU to the US to fulfil their dreams?
And it is happening for more than 100 years.
(In June 1884 Nikola Tesla emigrated in the US)
Our first conclusions were pretty obvious:
- VCs are investing in teams which are close to them
- And there is smaller number of VCs in the EU, with smaller funds
- Startup starts in their smaller home market, so traction is smaller
- Cross border growth is slower, different cultures, languages
- Early adopters are mostly in the US
- VCs are investing in teams which are close to them
- The EU is fragmented
But we weren’t happy with this because this actually are not answers but just more questions!
So we decided to ask people connected to startups what they think is the reason…
Maybe better definition is to say that we have decided to spam people, we really think that Twitter made some changes on their spamming algorithm because of us :( Sorry.
But we’ve also received many answers
In summary answers were like this
- There is no equity culture in the EU
- No entrepreneurial culture
- No innovation culture
- Lack of ambition
- Fear of failure
- Risk aversion
- Corporates are not buying startups
- Lack of good projects
So again we have asked our self – How is that possible??? Why???
A few weeks ago we’ve stumble upon an article in the Economist from July this year (2016)
In the article they ask and they answer…
What went wrong?
Slow growth in Europe has not helped, and a strong dollar has made American firms’ domestic operations more valuable. But four other factors also explain the slide. First, Europe picked the wrong businesses. It focused on old industries such as commodities and steel, and on banking, where new rules have caused a depression in cross-border lending. Europe has gone backwards in technology—it hasn’t created any firms of the scale of Facebook or Google. From the early 2000s its tech-and-telecoms incumbents proved to be poor at reinventing themselves, even as American contemporaries, including Cisco and Microsoft, learned how to evolve.
Is it true that Europe has picked wrong business? Is that the reason for this situation?
Why Europe hasn’t created any firm of the scale of Facebook or Google? Why there is no equity culture or entrepreneurial culture in the EU, why are VCs risk averse, why aren’t EU corporates buying startups…
How come that people in the US are so different than people in Europe.
So again, we decided to dig deeper…
Next on the agenda was history of Venture capital
Do you know that “the father of venture capital” is Georges Doriot – an emigrant Frenchman? In 1946 he founded American Research & Development Corporation – first self-proclaimed VC firm.
So why did Frenchman had to open first VC firm 70 years ago in the US and not in France?
(Georges Doriot (right, seated) with students at the Harvard Business School)
And then we have started to get first real answers.
To cover big US market, market needed to invent financing for small product companies which could grow on the whole US market, and that kind of deal was too risky for banks. But in the European countries, which are smaller, money needed is also smaller and bank loans were often enough.
Because of that there is no equity culture in the EU? Europe didn’t need VCs in 1950-is.
But there were a lot of questions related to culture…
And I don’t think there is lack of entrepreneurial culture in the EU, but there is a lack of pan-european entrepreneurs, and that is because it is very hard to scale across EU countries!
There are many great entrepreneurs in the EU, as we saw few slides ago, they often go to the US and find a unicorn.
There is no lack of ambition in Europe, and fear of failing is explainable - if chances for a startup to succeed in the US are 1 in 10 and in Europe are 1 in 1000, isn’t it logical that more efficient way of earning money in the EU is to work for someone?
In comparison to US VCs, European VCs are not risk averse, but market risk in Europe is much higher than in the US.
And it is not true that we don’t have good ideas, we have, but those ideas are not growing in the EU.
EU corporates are not buying startups because startups are not growing and corporates are not scared of them, it is more efficient to just wait for them to fail.
Based on all this we have formed our own theory about development of culture.
Culture is a product of market conditions and driver of culture development is efficiency
We think that in the past what people did, as a job, has been determined based on terrain, climate they have lived in and what kind of resources they had at their disposal - those were their most important market conditions. If terrain and climate ware suitable for some plants, they were probably planting those plants. If terrain was near a sea with plenty of fish, they were probably mostly fishing.
If you are mostly fishing will you develop different kind of skills than people that are mostly in agriculture? Do people who are fishing every day have to live differently than those who are taking care of their plants? Will they have different gods to whom they will bring sacrifice? Will they develop different kind of skills to protect what they are doing (their way of life)?
And if we transfer that logic in today’s Europe, what that means is that if we want to succeed in digital economy we have to change market conditions in Europe and enable startups to grow.
But, which market conditions?
EU as a single market exist only on a paper
It is fragmented by borders and borders are, for this discussion, most crucial market condition. And borders are not just landmarks but taxes, regulations and legislations inside of those landmarks.
Borders are formed to protect. To protect people of some country but also their businesses. What that means is if that business is protected from competition why should they invest in innovations? Borders protect businesses from innovations.
So in the EU most efficient way for businesses to preserve their way of life is to protect status quo.
What EU needs to develop a culture of innovations?
If you want to develop a market which will nourish innovations, you need to allow element of surprise/unknown/unexpected on the market.
“The oldest and strongest emotion of mankind is fear, and the oldest and strongest kind of fear is fear of the unknown”
H.P. Lovecraft, Supernatural Horror in Literature
The best definition of a startup which I have ever heard is “company to whom you can’t predict growth”. And because of that they can produce unexpected competition and unexpected results.
“Competition is not only the basis of protection to the consumer, but is the incentive to progress.”
Would Google happen if Microsoft could have predicted it?
Or would Facebook happen if Google could have predicted it?
Only drastic increase of competition in Europe will increase the need for innovations and create demand for startups.
Europe under this market conditions doesn’t want innovations and it doesn’t need startups.
Future of Europe
Even though the EU has bigger GDP than the US, that will soon change. With further rise of digital economy, the US and Asia will continue to grow while EU will stagnate and eventually again enter recession.
What is even more frightening is that EU with policies like GDPR and potentially new Copyright regulations, which are developed to slow down some of the biggest internet companies, is killing EU startups and development of big data technologies in the EU. And the funniest thing is, only the biggest internet companies will have money and resources to adapt to those new regulations. So EU is now building borders which will again slow down innovations in Europe.
And that won’t help anybody long-term, because as we already saw, the biggest EU corporates are already stagnating and it is just a matter of time when they will be acquired (or overrun) by their competitors from abroad.