Reasons why we have startup situation like this in the EU – Everything has its reasons and everything is logical!

So, our representative have been on the European Commission workshop about financing startups in EU. And we would like to thank European Commission and Alberto Onetti for inviting us on this workshop. It was very interesting and very well organized.

Whole agenda and presentation can be found here:

http://startupeuropepartnership.eu/investor-community/brussels-mar-25-2015/

We were present at:

-        Working Group A: How to increase scale of venture capital markets and develop these markets EU-wide and

-        Working Group D: How to develop exit opportunities for VC investors and create a better investment ecosystem (including crowdfunding or P2P lending) for startups to boost the supply of VC funds to start-ups

As we said, it was very interesting, but for so many people present (around 15 per workshop) it was just too little time for this topics. But we are all invited to write additional explanations so we are doing that right now.

Not just during the workshop but all the time when we ask question, why the situation is like this we heard a lot of phrases like: “cultural reasons”, “fear of failure”, “lack of good projects”, “lack of ambition”, “risk aversion”, “no equity culture”, “no proper education”… These are not the reasons why we are in situation like this, this are the symptoms. And by treating just symptoms we won’t get far.

Like always we will make comparison of the EU with the US because we are culturally and by size closest to the US and, as we all know it, US is probably the number 1 country regarding startups in the world, and EU might be the last one.

Business culture

Business culture is not a product of culture per se, but a product of the market conditions. If you live in a place where plants grow whole year without many interventions, than you will probably grow plants. If you live in place where you can pick diamonds on a beach, than you will probably be in business of collecting diamonds. And a culture of people who grow plants will be different than the culture of diamonds collectors, because they will need to develop different skills to be good at what they do and to preserve their business.

If a market during history can easily produce a fast growing business than it will have interesting stories about fast growing business. Also it will probably praise the entrepreneurs who have made it happen and consequently try to produce more of them. Because of that in US entrepreneurship is glorified, they have stories interesting to people! But bottom line is that that market can produce a fast growing business easily – not harder, but easier!

Risking and fear of failure

We might say that big chunk of the US population has origins in the EU. So how can we explain that we in the EU are risk averse, and US people are not? We should have similar DNA. Or EU people are born with an additional DNA  “don’t take risk” strain, and if they move to the US, that part of the DNA in disabled? Why once the biggest risk takers are now in fear of risk? Why are people from the EU moving to the US to make their dreams come true? It is happening for more than 200 years… It is because it is easier to make success in the US than in the EU - not harder, but easier!

In the US, entrepreneurs are risking less, not more! US market infrastructure enables business to grow faster, with less obstacles, with established tools for growth!

Entrepreneurs in the EU are risking much more when starting business in the EU, we could even (with enough information) calculate how much more! By comparing number of obstacles, access to finance… we could make a formula to calculate how much is who risking when starting potentially global company.

Nonexistent equity culture in the EU

Divide EU on the 28 different countries and you will get 28 smaller markets, none bigger than 100 M people (the biggest is Germany with 81.3 M, mean is Sweden with 9.8 M). Through the history, did business need VC investments to grow on a market with a population up to 10 M people, or is it enough to take a loan from a bank and keep 100% of equity? Small, predictive market, slow but predictive growth, different kind of products. So there is no equity culture because we didn’t need equity investments on our small markets. Because of that we now have the best developed banking system on the world and no VC infrastructure.

Ambition

Ambition is a product of a culture which is a product of a market. If you are on a small market, you see big obstacles for growth outside of your country. Also there is no financial infrastructure present to enable you to develop your product, and you still want to do something by yourself – you want to be an entrepreneur. Then you will turn to services like e.g. web-production, consulting, education you don’t need so much money for. And after, if you succeed, maybe you will think about using your profit to finance a product development. And also, by becoming successful, you will have access to the loan financing from banks. So, it is objectively much harder to make global success from a small country, because of that there are not many successful and praised entrepreneurs who have succeeded fast and gloriously. If one in 10 have succeeded you would have crazy ambitious market, but in a situation when 1 in 200.000.000 succeeds what do you expect? We are asking you how can you expect ambition if success rate is so small in the EU! When you take all that facts into the equation, you can say that the situation is even better than we would expect.  

Lack of good projects

When you don’t have experience and you don’t have access to the “first hand” or the “second hand” know-how about building global business, you have to start somewhere. We would even make a bet that the average “successful” EU entrepreneur is on average at least 7 years older than his US counterpart. And that is exactly because EU entrepreneur needs more time to get necessary know-how and experience to make a successful product. There is nothing wrong with the EU entrepreneurs, they just need what every other entrepreneur in a well-developed startup ecosystem has –know-how, access to finances and the most important - market which will support them!

If anybody has any additional reason why EU entrepreneurs aren’t good in starting startups, please share it with us and we will explain it like the ones above.

To conclude this part - EU startup entrepreneurs are either stupid and they don’t see the obstacles or they are just plain crazy as crazy gets and they don’t care. And we bet that this crazy ones are majority, but to be just crazy is not enough to succeed. Unfortunately, to succeed in building 1B+ Company in the EU, entrepreneurs will need to go to the US. And we would like to change that.

Symptoms of situation

Let’s take a look at the symptoms EU market has produced and explain them briefly.

1. Smaller number of product startups – entrepreneurs are turning to services that can be offered on the local market. Reasons explained in the text above.

2. Not enough private financing for startups in the EU – not enough successful startup stories in the EU that have earned a lot of money for their investors. Money will go where money will grow! And one more plus for the US market is that they have a US wide promotion of successful startups.

3. Risk aversion – much bigger market risk -> bigger risk for everybody in a chain, from entrepreneurs to investors.

4. Small valuations – this is probably the worst part. High demand for, but low supply of money. Low supply is because we don’t get to see so many unicorns in the EU, but there are enough crazy entrepreneurs (lack of ambition you say?). Also there is a much bigger market risk, yes, because of 28 different markets. But this is where things get a little bit more complicated - it would be better if fewer EU startups get funds, much better valuations and enough money to make global success - those ones would drive more of EU’s private money in startups. Now everybody get some money and nobody gets enough.

5. Corporates don’t buy from startups in the EU – small number of the EU startups that have overgrown corporates. Because of that, corporates don’t respect EU startups as they respect US ones.

6. No exits for startups made by the EU corporates – again corporates don’t respect EU startups. Corporates don’t fear that EU startups could disrupt their market. And startups are mostly bought by “ex startups”, and we don’t have “ex EU startups” who are now big corporations that are buying other startups.

And these are all symptoms. And the real problem is EU’s market, or better to say lack of single EU market. EU doesn’t have infrastructure which will enable startups to easily grow outside of their local borders. And exactly because of that our first proposal is "Unlocking the potential of the single EU market - A single EU company for the single EU market" http://bit.ly/1FXJYND

Startup growth is the beginning and the end. As long as we are trying to fix the market only by treating symptoms, we will get some minor results and it will be as effective as moving tons of sand without any tools, only by hands.

After we fix the market, we have other challenges to address. Next one on our list are investments. Because of that, we are preparing our next proposal “We want our EU investors to scale!” (Still in preparation http://bit.ly/scaleVC)

Basically, with the valuations we have, it is impossible to get to a billion dollar company. It is as simple as that. Founders burn their equity in the much smaller rounds, so when they should go for a valuation of e.g. 100 M they are left with less than 20% of equity. There is no more room for investments, it is time for exit. An additional factor is that it is more expensive to grow in the EU (because of the lack of the market infrastructure) than in the US, so we need even more money to reach the same level of success than the US startup, and we are getting less!

This is where the EU should interfere and we will explain why and how.

As technology risk is the same in the EU and the US, market risk is (we might say) 28 times bigger in the EU. Because of that market risk, startups are growing slower and getting smaller valuations, and as said before, because of that we don’t get so many super successful startups which will drive more private money… So, main things that have to be influenced are:

  • speeding up growth

  • increasing valuation and lowering market risk

How, you ask?

This is how our ideal financing would look like. Angel round – local angels. Seed round – 4 investors from 4 different countries, so that we can get a specific market know-how and their local help. Also by investing in startup they will make him local in their country. If we make big success and we earn a lot of money for our investors every country from which we got money will get some of that. A round, 6 new investors, again 6 different countries… With every round we would like to get new countries on board, and with them a local market know-how and help. Why would investors do something like that? Because we don’t need help on our local market, and they can’t help their local startups as much as they could help us. And, of course, they would be incentivized to do so, by grants which startups they finance will get from EU.

What will a grant do for startups? They can lower market risk for investors – if someone will additionally pay for growth, without diluting investors or founders, than he is increasing chances that startup will get to the wanted destination.

But there must be some regulations :) e.g. only startups which get more than one non-local investors can get the grant. The more different local investors, the bigger the grant is. And also investors have to invest enough money in that startup e.g. minimal total investment in the seed round to apply for the grant must be above €1M (maximum dilution 20%), minimum investment per investor € 100.000. Minimum grant € 100.000.

In this case, every investor increases chances for success in his country and speeds up growth, EU additionally reduces market risk, and also increases chances for success. Rounds are getting bigger, which means that founder could drive his startup stage or two further (and by doing that earn more money to investors), and more than one country can see benefits from success of that startup, which is a very big thing – maybe the biggest. To make really connected and agile market every country have to see benefits. That will drive promotion in the local news, and again, increase inflow of the private money... make the wheel spin faster! Imagine that you have a feeling that success of a startup which is founded in a EU country you have never visited might have a positive impact on you.

What’s in it for the EU?

Except taxes, new jobs, development of the market, being more competitive, keeping startups in the EU and a few more things, nothing, just that :)

And few more words, like this is not enough :)

We really need a common EU infrastructure, and there is no time for waiting, politics, etc. We need it yesterday. You have to make this happen or there is no future for startups in the EU, and if there is no future for startups in the EU, there is no future for the EU.

Maybe US’s strict immigration policy is the best tool EU has to keep Internet startups in the EU. But in the near future they will probably change that also (President’s Executive Order to Expand Visas for Startup Entrepreneurs) , and if they do, who will stay in the EU if the situation doesn’t change?

And if by any chance some local politician is reading this, global startups/unicorns don’t grow in the backyard/local countries, you have to let them be free, at least in the EU. Even if that means giving up part of pleasure of watching it and collecting taxes from it. There is no other way. Other way is not having them at all. If you try to bind them they will escape (probably in the US) and they will never come back.

Made by #EUstartupRadicals

 

 

By #EUstartupRadicals

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