Building Great Startups in Europe

In the last month or so I have spent a fair amount of time in Europe, first in London and Cambridge, England with Silicon Valley Comes to the UK, and then in Paris, at the Le Web conference. I have judged two startup competitions, participated in a SeedCamp demo day, and met with dozens of founders and entrepreneurs. It has been an incredible survey of what is to come in Europe. There's lots of great stuff cooking. But European entrepreneurs face some real challenges when it comes to building their businesses and those challenges threaten to deeply retard the success rate of startups overseas.

The biggest challenge European entrepreneurs face is a crisis of capital. There simply isn't a robust network of angel investors who are actively investing in Europe. There are some exceptions (one of the Le Web startup competition judges reported that he was investing in about 2 startups a week -- a number that puts all but Ron Conway to shame) but the scale of early stage capital is insufficient to sustain the breadth of startup ideas being born. I believe that this lack of early stage capital is the biggest single challenge Europe faces when promoting the emergence and growth of a meaningful startup culture.

Angel investment isn't just about the capital. It is also about the advice. First time entrepreneurs face a mountain of challenges that they lack the experience to overcome. Good entrepreneurs overcome those challenges through strong intuition and sheer force of will. But great entrepreneurs overcome those challenges through strong intuition, sheer force of will, and the ability to draw upon the experience and advice of others who have navigated the challenges before them. Experienced early stage investors (be they angel investors or VCs) can help founders: avoid significant pitfalls; save time; use capital more efficiently; partner with others; think more strategically; raise future capital; etc. Without sufficient mentoring, European entrepreneurs will be left to navigate these perilous waters alone, severely inhibiting the number of survivors, let alone those who will prosper.

The early stage capital challenges European entrepreneurs face are compounded by the relative conservatism of the European Venture Capital market. Not only is it more difficult for companies abroad to raise startup capital, but they often need to make more progress than their American counterparts before qualifying for venture investment from non-US investors. Not surprisingly, many of the most promising European startups thus make fundraising trips to the United States, bypassing their local venture communities altogether. While this may good for the likes of August Capital, it will not help to grow a strong startup ecosystem overseas.

There is no question that it is important for Europe to nurture the entire startup ecosystem -- technologists, lawyers, accountants, bankers, debt providers, recruiters, etc. -- but until European entrepreneurs have a robust local source of startup capital, they will continue to fail disproportionately. Any European government hoping to incubate the next Silicon Valley should start there. The country that solves the capital conundrum will be the country on a path to meaningful startup growth and prosperity.

Comments

[Cultureslurp]

Great observations David. As an American living here in Europe (Barcelona) I can attest to everything you mention. I would also add this... more than capital, Europe needs more EXITS! The life cycle of: fund > grow > exit > return > fund again just doesn't exist here and is a major component of why there is a capital crisis, as you mention, and why investors put there money in revenue-stage businesses and don't roll the dice on innovation.

[Philip Smith]

David, spot on! I've been working in the Valley with startups coming here from Spain, Italy, UK - all over Europe really - and the big reason they're here is the (lack of) funding to get an idea off the ground, and then the (lack of) ecosystem to help nurture, grow and develop from there.

Even the vague initiatives of easy government loans to get going in places like Spain backfire because the few early stage VC's look at that money as a way to put in LESS themselves and have LESS dilution, instead of leveraging the heck out of it. That has happened to at least one Barcelona company I work with.

Another, a SAAS company also from Barcelona, is very proud of their 20% EBITDA on a $3m revenue expectation, almost doubling from the prior year. But if you look deeper the real issue is that by not reinvesting the profits in hiring and sales they are missing the opportunity to seize a market by the scruff of the neck and make it theirs. In fact they need to take VC money to really press the pedal down. As you well know, profits in a rapidly growing SAAS business get deferred as you reinvest in gaining more new accounts, renewals etc. But there is no ecosystem or experience there to guide and mentor the Spanish founders in that thought process. And its hard to provide that guidance from here (the Valley) ...

Urgh! So much potential ....

[Joris Keijzer]

Thank you for your thoughts. I certainly agree with it. I would add that in addition to the traditional advisory role, European mentors also need to guide start-ups in their internationalisation. As you have seen, there is not one unified Europe, with one value system or even one language.

So scaling up a business in Europe is therefore already much more of a challenge in terms of localization, marketing, logistics, legal. That may well be the reason that there are not as many highly publicized exits, which in turn do not draw the capital and nurturing eco system that is boosting the valley.

[Philip Petersen]

Hi David,
I can only agree and we spoke about this issue when we met briefly at the SVC2UK events (which were great, by the way). And within the tech sector it is even worse if you are not focused on consumer internet / mobile / social networks.

Aside from the lack of early stage capital there is also a cultural difference between the UK and Silicon Valley, as I see it, and the SVC2UK events really highlighted that for me. Whilst profitable exits are definitely needed for a range of good reasons such as generating returns for investors and cash for recycling into other ventures etc, as "Cultureslurp" comments above, they are not the only thing. In fact I seem to remember you and other panellists saying that the entrepreneur should not start a conversation with a potential investor by talking about the exit; instead, he/she should talk about how big the opportunity is and how an enduring, scalable, big, profitable business is going to be created with the investment. Contrast that with the approach that many UK early stage investors take asking about the exit potential first. (As borne out by panel of some UK B2B software angels talking at an event in London I attended immediately after SVC2UK)

I know it is not as simple as "SV right and Europe wrong" but the paucity of early stage capital, and the associated conservatism, is undoubtedly frustrating and it impedes timely progress. Perhaps the likes of "Seedsummit.org" will help.

Meanwhile, as an entrepreneur, there is no choice - you have to keep pushing ahead and innovating and networking.

[Beto Juarez]

David,

Great comments. I can't help but think that there is plenty of capital in Europe, but it still afraid of touching early stage companies. The real question is what other policy initiatives can governments take to have the private sector have more risk appetite in entrepreneurship and not financial speculation.

-Beto

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[Cristina Soviany]

Hi David,

I completely agree with you. It is tremendously difficult for European entrepreneurs to raise capital in the early stage, and in the rare cases one succeeds with raising some seed money, there is no further support or advice. Going to VC's for an early-stage is almost impossible in Europe. There is a tremendous difference between Europe and US with respect to startup building process and time.

[Nick Pelling]

Hi David,

A really spot-on post! Here's my TechCrunch post on the same depressing subject (but seen from a UK entrepreneur's viewpoint):- http://eu.techcrunch.com/2010/12/20/top-ten-uk-startup-finance-myths-imho/

Best regards, ....Nick Pelling....

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There's lots of great stuff cooking. But European entrepreneurs face some real challenges when it comes to building their businesses and those challenges threaten to deeply retard the success rate of startups overseas.

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Europe is a different beast, it's difficult enough in our current economic climate here in America. The one nice thing is that when money is being lost or gained, it's changing hands, and that means you can find it. Some of Europe seems mighty stale in that regard and their just isn't the confidence or movement of investments to fund start-ups.

[peter griffiths]

David
I started, developed and sold a software services company based in the UK but doing business across Europe and I have a slightly different take on the matter. I know that the view that entrepreneurs are starved of capital is a widely held view but IMHO in B2B at least it is not the limiting factor. I would suggest that the biggest problem is the stiff cultural resistance faced by startups selling to large companies. The propensity of buyers in such large companies to buy from small companies is markedly lower than it is in the US. When I started doing business in the US I flat out couldn't believe the difference. (The irony of this is that the same buyer will often willingly buy from a small US company operating in Europe!) This results in a still longer still more expensive sales cycle and such a delay is crippling for early stage companies. Needless to say, it becomes still harder to demonstrate the kind of proof of traction so loved by those holding the $$$. I believe that money is available to entrepreneurs in Europe, it may be more difficult but a true entrepreneur will find it. What is MUCH harder is to deal with a culture that makes creating sales momentum like kicking a dead whale up a beach.

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