Why Europe lags the US in Technology Startups

As someone who worked for a U.S. software company with a strong focus on helping entrepreneurs succeed (Palo Alto Software), I am intrigued by the apparent gap between the U.S. and Europe when it comes to the development of successful technology and Web-based start-ups. Judging by US academic Vivek Wadhwa’s recent post ‘Can Russia Build a Silicon Valley?’ I am not alone in my thinking.

When we look at some of the most successful technology/Internet-based companies of the last few years, from Google to Apple to Facebook to YouTube, there is a very strong U.S. bias. In recent months new poster- boy technology start-ups from the U.S. include FourSquare, GoWalla and Groupon.

This phenomenon got me thinking as to what were the key drivers behind this apparent disparity and whether Europe could begin to emulate some of these technology start-ups in the months and years to come. The following represents a (non-exhaustive) list of some of the key drivers behind the gap, as I see it.

Location

It is apparent that there is a strong West Coast link to many of the aforementioned names (from San Francisco down Route 101 through Silicon Valley and on to Los Angeles). In many respects, there is a self-perpetuating cycle at play, in that the success of recent ventures serves to attract more entrepreneurs, venture capitalists and engineers to the area. Europe lacks the same hub effect (although there are growing innovation pockets around London, Dublin, Berlin and Cambridge) and it is unlikely that the ecosystem that was built up around Silicon Valley in the last 20 years will be easy to replicate in the short term.

Talent

Building on the previous point, it is also evident that Silicon Valley enjoys a wide, diverse talent pool with a strong sprinkling of engineers, software developers, and venture capitalists as well as a significant Asian influence. As U.S. based academic, Vivek Wadhwa outlined in his Business Week article ‘Open Doors Wider for Skilled Immigrants’:

‘.. 52.4% of Silicon Valley startups had one or more immigrants as a key founder. Indians had taken the lead in starting companies, but founders originated from all over the world—from Australia to Iran to Vietnam. ‘

He goes on to say that;

‘What became clear is that skilled immigrants have become a significant driving force in the creation of new businesses in the U.S. and that their economic contributions have increased over the past decade.’

What is interesting with his observations is that he has gone on to argue in recent months that many of these same immigrants are beginning to return to their native countries to start businesses, as opportunities emerge domestically and local conditions become more receptive to entrepreneurship (other factors cited included ‘quality of life’ reasons). In terms of Europe, the significant mobility afforded to EU citizens has definitely resulted in a wide-ranging skills pool in many places (including Dublin and London). However, this has not really translated into a meshing of these diverse skill sets into successful startups in anything like the same numbers.

Market Size

With a population of 307 million who generally speak the same language, use the same currency, and share the same culture, there is no doubting that U.S. entrepreneurs have a much more homogenous market to appeal to when they launch a new offering. While Europe has a larger overall population, it must cater to customers with different languages, media, cultures and currencies, all serving to add friction to innovation (particularly in terms of marketing). As a result, launching a product in the U.S. has a much greater chance of gaining traction and sufficient revenues to grow and prosper than is the case in Europe.

Support Systems

Entrepreneurs cannot function in a vacuum and need to rely on a range of service providers to help drive their businesses, be they VCs, lawyers, PR firms, media, etc. As I mentioned above, a whole business environment has been established on the U.S. West Coast to help support entrepreneurs. Contrast this with Europe, as Hussein Kanji, formerly of Accel’s European division, declares:

‘Startups need all kinds of help to scale, at each stage in their history. Unfortunately, the number of investors who can provide this is pretty minimal in Europe. When you look at the European venture scene, you find a lot of former investment bankers and management consultants, and only a handful of individuals who get technology, can understand ‘go-to-market’ challenges, have the ability to help build world-class engineering and commercial teams, and have a wide network across the technology landscape’.

In terms of ‘access to capital’, he goes on to argue that:

‘It also doesn’t help that European investors are more risk-averse than their West Coast colleagues, which is a more pronounced phenomenon of the difference between East and West Coast investors. It also doesn’t help that venture investors in Europe capital-starve their investments, with the data showing that European startups get on average about 1/3rd of the capital that U.S. startups are able to raise. And that’s just the investor side of the equation’.

There is no doubting that Europe lags the U.S. in many of these issues, although in recent months there have been some notable attempts to reduce the gap, through initiatives such as Seedcamp, startup promotion by TechCrunch, or the emergence of new early-stage funding players such as PROfounders Capital. I also feel there are related, softer factors at play here; for example, all the informal, after-work drinks or dinners in the Valley can only lead to more serendipitous outcomes, which geographically dispersed entrepreneurs cannot serve to replicate. In terms of Kanji’s point re the investment gap, one could also argue the reverse in that European funded ventures are more capital efficient given the more modest investment amounts typically secured.

Attitude to Risk

While more difficult to prove, there is a lot of anecdotal evidence to suggest that there is a different risk appetite between the U.S. and Europe, as a recent Economist article points out:

‘In Europe starting your own company has long carried higher risks and lower rewards than across the Atlantic. In America, a failed start-up tends to be a badge of honour; in Europe, it often spells professional death’.

This appetite for risk is not constrained to entrepreneurs, but also applies to consumers, as the article go on to argue:

‘Big American cities in particular contain a critical mass of early adopters eager to try new online services such as Twitter or Foursquare. Many Europeans still shy away from online shopping because they are afraid that their payment information could be intercepted’.

Again I tend to agree with these claims, which combine to reduce the ability of UK-based entrepreneurs to compete on a level playing field. That said, entrepreneurship has gained a lot more credibility in the UK in recent years and I do not think there is any stigma associated with a failed startup. While a claimed fear of ‘online shopping’ will seem alien to TechCrunch readers, the general point regarding a critical mass of early adopters in US cities relative to Europe would appear a valid point.

Media

The media also has a strong role to play in championing these startups. The more that you can get key influencers (who are usually early adopters) talking about your product or service, the greater the likelihood that others will be encouraged to trial it. As well-known Los Angeles-based VC Mark Suster claims in his Both Sides of the Table blog;

‘In short, innovators and early adopters have faith that there will be benefits to using products that are unproven and even if they don’t they enjoy the process of using new stuff. This applies to business users as much as to consumers… So the early part of a technology company is about finding your hard core group of early adopters and making them passionate about your products. You need to give them “back stage” passes to your company. You need to give them advance notice of your product development or better yet let them help influence your direction. Sure, they need a little social proof’.

He goes on to argue that for many people, decisions rely on ‘social proof’, which he defines as ‘looking for others to guide our decisions’. When I consider the various blogs I read in relation to entrepreneurship, technology and raising finance (such as Mike Arrington of TechCrunch, and Jason Calacanis (This Week in Venture Capital), they are overwhelmingly American and all do a great job at signposting emergent companies worthy of further consideration and trial. Only Mike Butcher of TechCrunch Europe comes close in terms of influence, reader numbers and focus on promotion in Europe. Add into the mix the fact that a plug by the likes of Mike Arrington will bring significant global traffic to your website and again you’ll get another sense as to the influence gap between Europe and the U.S.

Summary

This post outlines some of the reasons why I believe the U.S. continues to have a (semi)monopoly on Internet-based startups that stay the test of time. While there is still hope for domestic European-based entrepreneurs, I feel that structurally there are some underlying reasons which combine to make European successes more difficult to achieve at present. One recommendation as to how European entrepreneurs can help themselves is to ensure that they take smart money only as investment; where the investor is able to help them with some of the wider challenges outlined above. A second key recommendation is for European entrepreneurs to focus hard on gaining market traction through the creation of awareness of key influencers. Networking is a key element of this which again reinforces the importance of considering a base in one of the emerging European hotspots I referred to.

Finally, as European governments increasingly champion entrepreneurship and innovation the combined forces should serve to reduce the structural gap between Europe and the US and help ensure a brighter future for European technology entrepreneurs.

This is a guest post by Alan Gleeson , the General Manager of Palo Alto Software, Ltd, creators of Business Plan Pro. He holds an MBA from Oxford University and an MSc from University College, Cork, Ireland. Follow Alan on Twitter @alangleeson

This article originally appeared on Techcrunch.

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