Avoiding the Cargo Cult And Getting The Trans-Atlantic Startup Model Right

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This guest post was written by Roman Stanek, the founder and CEO of Good Data, a cloud-based business intelligence startup headquartered in San Francisco. Roman has been a tech entrepreneur for almost 20 years. He was founder and CEO of NetBeans (acquired by Sun Microsystems) and Systinet (acquired by Mercury Interactive and later Hewlett Packard). Read Roman’s blog here.

When I met Michael Arrington back in April, I told him he was crazy to dismiss the possibility of a first-class technology startup coming out of Europe. I was born and raised in the Czech Republic, I’ve spent the last 15 years working towards building a global hi-tech company. So naturally I took it a bit personally. But I’ve been thinking about this quite a bit since then.

The story usually goes that Europeans just don’t have the drive and commitment to spend enough hours necessary to get a fledgling company to an escape velocity and grow it from there. Our love of the two-hour lunch and Augusts in Provence is the evidence most often cited to prove this theory. But I believe that there are some very driven people in Europe who are willing to put enough time into it.

My problem with the European startup ecosystem is somewhere else. I actually believe that it bears some signs of a Cargo Cult. Here is the definition from Wikipedia:

A cargo cult is a type of religious practice that may appear in traditional tribal societies in the wake of interaction with technologically advanced, non-native cultures. The cults are focused on obtaining the material wealth of the advanced culture through magical thinking, religious rituals and practices, believing that the wealth was intended for them by their deities and ancestors.

The best known examples of Cargo Cults come from some Pacific islands during World War II. The American airfields and their personnel brought relative prosperity and modernity to the island people, but once the war was over the Americans took their planes and equipment and left. The local people wanted to bring the prosperity back but they did not understand the substance of why the Americans came there. They only saw the form. And so the locals crafted wooden headphones, lit fires to light up runways and tried to attract back the planes with canned food and other useful goods by emulating airfield traffic.

Something similar happens in the startup community in Europe these days. People start companies, write business plans, meet with investors, talk about term sheets and exits. But in reality most Europeans don’t actually understand the substance of the system—the business plans are wooden headphones and term sheets are fabricated control towers. Repeating the form of US-based startups without a real understanding of how much the deep and complex ecosystem of Silicon Valley contributes to the success of VC-funded US startups won’t bring prosperity to companies coming from Europe.

In order to overcome the limitations of not being in the Valley and to avoid the the cargo cult mentality, I had to adjust the typical model. I’m on my third attempt to get the trans-Atlantic startup model right.

I started my first “global” startup in Prague in the summer of 1997. I was so impressed by Marc Andreessen and Netscape that I wanted to build something similar. And so I started NetBeans and sent the business plan to Esther Dyson. Esther introduced me to her friends in Silicon Valley. And that’s when I first realized that I had no idea how the system works.

And so NetBeans was marketed in the US, we raised money here but the engineering team was always based in Prague. We were ultimately able to build the company on a shoestring. Eighteen months later we got a call from Sun Microsystems and we agreed to sell our baby. I did not know until the last day if my transaction was going to happen. I had spent all my money (and more) on lawyers and advisors and there was no break-up fee in the term sheet. Startups are absolutely not for the faint of heart.

I thought Systinet would be very similar, but it turned out quite different. We started working on the code in Prague in 2000. By the time I got here after the Summer of 2001, the situation did not look so rosy. Fortunately we managed to get the attention of the VC community; by Christmas time we received a $21M term sheet from Warburg Pincus. In November 2005 we signed a term sheet with Mercury Interactive for $105M. What we did not know is that during the due diligence, Mercury would be investigated by the SEC for stock option backdating and the company was delisted from Nasdaq. Not a pleasant experience for a small startup going through a very disruptive (and expensive) process of being acquired. Mercury was eventuaally acquired by HP.

I am now working on my third startup: Good Data.

I am a huge fan of the Customer Development Model by Steve Blank, but it assumes that the company can continue spending money on engineering and market/product fit tests until the target market is actually validated. And as much as I like the startup ecosystem here it seems to me that the people cost of software development forces startups to launch half-baked products. Very few companies can make the “Four Steps to the Epiphany” work financially – this is one reason having engineering located in a cheaper country from day one is a major plus.

Good Data is still early but we managed to raise money from Marc Andreessen (among others)—the same person who inspired me to start NetBeans. Since Good Data was born in the cloud, we own no hardware (except notebooks), we have no PR agency, we do no outbound marketing, there are no software downloads, but we’re able to release a new version of our service to our customers twice a month. Startups are cheaper to operate these days, and technology helps us be much more agile than ten years ago—agile throughout our business. And being here in the Valley lets us be part of new trends—we can move even faster.

My advice is always the same to European entrepreneurs: emulating and competing with Silicon Valley startups in Europe looks easy but the substance is quite a bit more complicated. You just cannot compete with Silicon Valley completely from the outside. Europeans—and all entrepreneurs—should consider that bootstrapping and focus on local markets is usually a better way to obtain the material wealth of the advanced culture rather than through magical thinking, religious rituals and practices.

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