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April 4th, 2017

Why Americans Don’t Understand The European Startup Scene

“I think it is the same thing that Europeans don’t understand about the European startup ecosystem, that it’s connected and fragmented at the same time.” ~ Robin Wauters

From an American perspective, Europe has a tech problem.

In Europe, it depends on whom you are asking. Some regions will bemoan the lack of venture capital and especially the lack of talent flowing into startup communities. Some will—with nationalistic fervor—tout the technological communities and successes that have sprouted all over Europe in the last decade.

In almost any quantifiable way, the European tech community is growing. Enclaves are forming and capital is flowing. But, because massive success stories are few and far between, the natural fragmentation of the European market and the fundamental difference in entrepreneurial culture, most American techies don’t see Europe’s growth. Or they don’t care. Or both.

It’s a perception problem. One that the governments, venture capitalists and entrepreneurs of Europe want to rectify.

“I don’t see a lot of difference in terms of ambition, skill set, all of that,” said Robin Wauters, founder and editor-in-chief of Tech.eu, a digital magazine focused on European startups, in an interview with ARC at its office in Brussels. “They are entrepreneurs. They would be entrepreneurs anywhere.”

Robin Wauters at Mobile Sunday during MWC 2017 in Barcelona.

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A Continent Rising … But Slowly

For the last two decades, the focus of global technological and economic ecosystems has centered on Silicon Valley. Including San Francisco, the Silicon Valley area has become the model for creating wealth by building technological communities, launching product and companies that became world beaters and broke the bank.

See also: La French Tech: How The Startup Ecosystem In France Finally Got Its Act Together

No other region in the world can claim the measure of success found in Silicon Valley. Boston and New York rival for No. 2 in the U.S. while a dozen smaller enclaves have sturdy communities (Portland, Ore., Seattle, Austin, Boulder, Chicago).

In Europe, the Tier One tech cities are London, Berlin, Paris, maybe Stockholm and Tel Aviv, if you include Israel. Second tier cities are places like Barcelona, Zurich, Munich, Copenhagen, Frankfurt and maybe Lisbon (well, Lisbon desperately wants to be in that group). Smaller enclaves are located around universities with good technology or business schools and have developed large developer communities in cities like Warsaw, Budapest, Dublin, Amsterdam and Madrid.

Lisbon

“When Americans look at Europe, they either see one big block or they see a bunch of different regions” Wauters said. “And both of them are true. But it is complicated, right? Because you have, sort of, a pan-European community of investors and publications and governments even with the European Commission. Then you have very, very local startups, initiatives, communities.”

Europe is a big place, especially if we expand the definition past the current member states of the European Union. If we take all of the countries considered European (plus or minus Russia), the population and overall gross domestic product eclipses well past that of the U.S. But the overall region defies centralization and thus leads to a fragmented market with different languages, regulations, policies, cultures, mindsets and behaviors. These are all inhibiting factors for the growth of European startups.

For the last two years, investment firm Atomico has attempted to map the growth of the European startup and tech landscape. What it found (albeit with a bit of a biased viewpoint) is that European companies are definitely growing and gaining more access to capital across the continent.

“They looked at the whole picture. What they expected to see was centralization. Everyone going to London or Berlin or Barcelona or wherever,” Wauters said. “In fact, the opposite was true. There are hubs in places like Zurich and Munich. Places where you would not normally expect a large community.”

In terms of investment, the current climate in Europe tends to favor small investment rounds for lots of smaller companies over bigger rounds ($25 million or more) for more established companies, according to Atomico. Investment is also flowing to more locations than just the hubs of Paris, London and Berlin with places like Sweden, the Netherlands and Spain experiencing growth in both the number of venture rounds and total dollars invested.

Did you know? Applause Europe, based in Berlin, can help companies large and small ensure high quality digital experiences and quality for their customers. See what Applause’s network of 250,000 global testers can do to help companies build quality products here

Europe’s Lack Of Recognizable, Community-Building Unicorns

Communities are difficult to build. The perfect mix has a good blend of quality universities, established companies investing in the local ecosystems and growing companies that become local pillars that then create new entrepreneurs and investors.

See also: The Common Problems That Stunt Growth For European Startups

“It takes time. If there is one thing you can’t accelerate, it is the formation of ecosystems,” Wauters said. “You can lay the foundation and have all the talent and accelerators and companies but you still need to wait for these companies to grow up. That usually takes five, six, seven years or more.”

The tech community in the U.S. loves to talk about “unicorns,” companies with at least a billion dollars in valuation. According to Atomico, the U.S. has 50% (126 companies) of the unicorn companies founded since 2003. Those companies have $843 billion in market capitalization, which is 63% of the worldwide value of such companies. China has 59 such companies with $300 billion in value. Europe has 37 unicorns (15% of total) with $108 billion in value (8%).

The explosion of European startups began around 2011. The most prominent companies of that era are beginning to mature and build a global presence … even if the U.S. tech ecosystem does not recognize those companies.

The best example is Paris-based Bla Bla Car. The startup is a long-distance carpooling company that has expanded well past the borders of France and even Europe into Latin American and Asia. But the model does not really work in the U.S. where long-distance driving is a relatively normal and cheap endeavor. Bla Bla Car is building a truly global company run by intelligent people with grand ambitions.

“Bla Bla Car is a perfect example of a company that people in the U.S. see and say, why does it matter?” Wauters said. “This is a company that is growing at a fast clip. Raised a shit load of money. Incredibly talented people and the founders are super smart and know what they are doing. They are in India, they are in Russia. In Mexico. They are growing like crazy. But because they are not in the U.S., they are not relevant. That is mind blowing to me because they are building a really sizable global company. Just not in the U.S.”

Paris-based music streaming company Deezer is another company that falls into this category. It only launched into the crowded U.S. music market in July 2016 and has gained little mindshare stateside. But Deezer is available in 180 countries across the globe and is considered one of the top music streaming companies in the world. A headline in Forbes encapsulated the issue: “Deezer Launches In The U.S., But Does Anybody Care?

So, yes, there are unicorns in Europe. Just a lot less of them than in the U.S. Spotify (Stockholm) is the most recognizable, joined by the likes of SoundCloud (Berlin) and payments company Klarna (Stockholm). When these companies mature and exit (via initial public offering or acquisition), they will help accelerate not just their local enclaves, but European tech as hole.

“Once you go through that cycle and you have more mature companies, you have people here that have gone through the process of building a $100 billion company before,” Wauters said.

Attracting Talent To The High Quality Of Life In Europe

Don’t listen to the headlines. Most of Europe—especially western and northern Europe—is a lovely, safe place to live.

See also: Digital Single Market: What You Need To Know About The Biggest Problem For European Startups

“I see a lot more people now choosing a location based on A) business and B) lifestyle,” Wauters said. “And now they are looking at the cost of living in San Francisco and going: wow. I can live in Lisbon, which is pretty nice, and pay my developers a third and build probably a little bit smaller company with a little bit lower valuation for my investors, but have a pretty good life on the side.”

Brussels

Atomico notes that when companies founded in Europe move, they tend to move to where the talent is. Many times, that brings them to the U.S. (especially San Francisco). But entrepreneurs are also staying put more often.

A common saying in tech these days is that it used to cost $50,000 and an office (the mythical garage) to start a company. Now it costs $5,000 in Amazon Web Services and a laptop.

“Increasingly, if you are talented … does it really still matter where you are?” Wauters said. “The Internet population itself is growing. So it makes a lot more sense now. Why wouldn’t you go direct to consumers? All the barriers that used to be there are gone.”

I once asked a startup out of Lausanne, Switzerland I met at the Web Summit why it stayed in the city. The entrepreneur looked at me and said, “really, have you ever been to Lausanne?”

The most common complaint I hear from European startups is access to talent. Part of that problem is the lack of foundational companies grown in Europe. But a significant aspect is getting experienced people to move. People tend to stay in either established startup hubs in Europe or the U.S. to take advantage of network effects and community … or already live in a pretty nice place.

Barcelona

Atomico notes research from Teleport.com that ranks the quality of life for startup hubs across the globe. The top 10 cities are all in Europe (Munich is No. 1). The first North American city comes in at No. 11 (Boulder) with the only major U.S. tech hubs in the top 25 being Boston (No. 16) and Palo Alto (No. 20). San Francisco ranks No. 31, mostly due to cost of living.

“The hardest thing they face is not capital, it is not marketing. It is talent,” Wauters said. “It is experienced managers in sales and business development and marketing that has gone through it before. There are not that many, right? To recruit that type of talent is super, super difficult. You don’t get them from Silicon Valley to move to Berlin. Or, at least, not often. But it does work the other way around. That is where the real difference is, where the real struggle is.”

Fundamental Differences In Culture Between U.S. And European Entrepreneurs

The common mindset of Silicon Valley entrepreneurs is to think global from the start. Companies like Facebook, Google, Uber and Airbnb have barged into markets, kicked ass and dealt with the consequences later (Uber is an especially good example of this).

European startups often start smaller, establishing local markets in native languages before moving to adjacent countries. They play by the rules and regulations of their native countries and deal with the complexity of the European market when it is necessary. This mindset is beginning to change as companies like Bla Bla Car, Spotify, Deezer and SoundCloud have shown.

“You could argue that Europe has been letting these U.S. companies play by their [own] rules the entire time to the detriment of European startups,” Wauters said. They [European startups] couldn’t grow as fast because they have to take care of local regulation laws. Where the Ubers and the Facebooks just came in and said we are doing this and this and we will see how it plays out and we will fix the problems when they occur.”

In essence: American startups ask for forgiveness. European startups ask for permission.

Another difference is that European startups often wait till a product is finished before beginning sales and marketing cycles or even fundraising rounds. This is distinctly not an American trait. American companies often tout their mission, product, culture, funding, team, founders … everything … before even building a functional prototype.

Wauters explains:

I do think that where they differ is that Americans tend to be a lot better at sales and marketing from day one. They don’t even have a product and they are shouting about how good they are and really selling the product before it is even built. But Europeans will wait three years until the product is completely finished, or at least up to their standards, and say, hey, we exist. It is really bad from both sides. As a reporter, you are kind of fed up with people shouting before it is ready, because it is nonsense. But I really wish the European entrepreneurs would be a little be a little bit more proactive and shouting about their publicity and making noise and selling. They are very bad at selling.

Ultimately, the European tech scene is growing. It has its problems, based around the lack of a Digital Single Market, fragmentation of language, culture, regulation and policy. All of these elements factor into how Americans dismiss European tech. But that mindset does not grasp the big picture of the progress that is being made.

“Entrepreneurs are getting more ambitious. Investors are getting more international. Conferences are getting bigger,” Wauters said. “So, lots of momentum. But still very, very slow growth compared to the U.S. and China. Growing, but quite slowly. Which I guess is the reason that people don’t always care.”