Guest post: Why Europe lags the U.S. in technology startups

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This is a guest post by Alan Gleeson is 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.

As someone who works 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.

  • Starfleet

    “Attitude to Risk”, yeah in Europe we don’t like throwing money away and causing global depressions.

    • Sal

      Oh really? You don’t like causing “global depressions”? Who caused WWI and WWII? Thank god you Euros are worth less than nothing in today’s world, otherwise if you had the power that the US has, this world would be a horrible place to live in. The US has caused depressions due to stupid, immoral people in Wall Street, but it has also created a lot of wealth that has benefited the entire world. Stop criticizing the US and work hard to create a reality such as Silicon Valley, if you are smart enough to do so, you worthless Euro-trash.

      • http://www.toshl.com andraz

        wow… awesome, really.

      • Phil

        If you’re not averse to risk, I wouldn’t bang on about WWs 1 & 2. What kept you? Maybe it was getting the paperwork right so we were still repaying debt to you untilm the end of the 20th century.

        Then again, having lost every war you’ve been involved since maybe propensity to risk isn’t such a good thing.

        Stick to the subject in future.

  • http://www.adavengers.com Farhan Lalji

    Nice post Alan. But I do believe the attitudes are changing (albeit far too slowly for this entrepreneur’s liking). The fact that Betaworks has invested in a UK company and Index has invested in a US early stage company (chartbeat), the fact that investment vehicles like Seedcamp and Stefan and Eileen at White Bear Yard, not to mention the legal eagles at Bootlaw, are all indications that the UK (if not Europe) is getting closer to fostering the right environment for the next big tech successes to come out of Europe (like Skype did a few years back).

  • http://www.quora.com/Wired-magazine-claims-that-London-is-the-new-startup-Mecca-What-are-the-strengths-and-weaknesses-of-starting-a-web-venture-in-London#ans102567 Wired magazine claims that London is the new startup Mecca. What are the strengths and weaknesses of starting a web venture in London? - Quora

    […] Lalji Interesting that there's a post on Techcrunch EU looking at this very same discussion.http://eu.techcrunch.com/2010/09…My thoughts are that the European start up community has a way to go, but it's encouraging that […]

  • http://www.slazar.com Spencer Lazar

    Alan. As an American now in the European venture ecosystem, I have noticed distinct difference between US & EU entrepreneurs in terms of their embrace of self-promotion. In the US, when your company does really anything at all, you tell the world about it. In the EU, this tends to be perceived as off-color. Self-promotion in (its most appropriate incarnation) is the key to raising money, hiring, acquiring customers, and ultimately selling a business. I would like to see more of that attitude here. I blogged about this notion here: “US VS. EU: EXTRAVERTS VS. INTROVERTS” (http://bit.ly/aoqpZz)

  • http://theopenfund.com Dimitris Athanasiadis

    Alan,

    Gradually, things are changing. We in the OpenFund seed funding vehicle offer exactly the smart money you suggest in your summary, i.e. support both monetary and in terms of know-how and connections.

    However, I am not sure I agree with the key influencers approach of yours – winning a positive impression with a few A-listers will at best result in a good coverage or two and some subsequent spikes in your website traffic/product shipping and then little else. Our experience with the OpenFund has shown that for something more than that you need the proverbial ‘1000 loyal fans’ – and that’s something quite elusive to achieve.

    Plug: Our fourth round has just been announced: http://theopenfund.com/Blog/post/openfund-iv-call-for-proposals-opens.aspx

  • http://wirelesswanders.com Paul Golding

    In the UK, the long-standing financial services revolution has dominated the mindshare of our strategic thinkers. Many of the best thinkers graduate into the financial services ecosystem. This has created an industrial-cultural bias towards this ecosystem and what it pays attention to, which is seldom technology. There is no foundation for a “technological culture,” in the Silicon Valley sense. There is still an elitism in business culture that doesn’t pay attention to entrepreneurship and risk, especially not expressed through technology.

    The article doesn’t mention the impact and contribution of academic institutions, like Stanford in the Bay Area. Our so-called “hubs,” like “Silicon Roundabout,” lack this kind of input. I’ve seen plenty of the start-ups in the area, but very little innovation that tends to come from the PhD/research conveyor-belt that is linked back to industry.

  • http://www.artifiicalgold.com Andrew Metcalfe

    I found this post interesting. I have had some thoughts about it myself. I blogged a follow-up to this too: http://bit.ly/aoYfxt

    I like the point about Silicon Valley being the main hub and that this is not really all over the US.

    I think we need to make sure the UK skills are up to scratch as one point and that people are encouraged to go for it.

    Good stuff.

  • http://www.italiaseo.net Gianluca Fiorelli

    Overall your assumptions are quite right.. as correct is what said in the comments.
    But if you notice, when it comes to EU we are talking mostly of UK/Ireland, that country historically connected also in the entrepeunarial activity with the USA.
    Different is the case of other EU Countries, where a huge factor that influence the economy and therefore the entrepenaurial culture, is the big presence of the State.
    Infact, if you want to raise funds for your start up is more common to look for States’ funds (and banks).
    Great post.

  • http://www.hrlocker.com John Dennehy

    Alan,
    That’s a great article. In the UK and Ireland we’re very closely linked to US culture and it’s easy to see how we end up consuming a lot of their services.

    I just returned from a trip to China this week and it’s amazing how different the tech scene is over there. I was testing response speeds to my company’s (hrlocker.com) web servers. From Dalian in Northern China access was at a snails pace making the service essentially unusable. We replicated our service to Microsoft’s Azure platform in Hong Kong was fixed the issue but it shows how a European or US service just won’t always fly in Asia for a pretty simple reason: speed, not to mind all the other obstacles.

    Obviously a lot of the social media services from the US, like twitter and facebook, are banned but overall SaaS is very immature and there are very few US success stories.

    This is probably good for many tech companies in China like QQ and Baidu.

    We have a very blinkered view of the world in Europe and the US.

    John

  • http://www.redorbluedigital.com Kun Dang

    Good post Alan, I think there is still lots of room for change but there is change none the less.

    Government funding and better business support will be the key.

  • http://lemoninnovation.wordpress.com/ Rafael Martins Vieira

    Great post Alan! I wonder when this entrepreneurship wave will hit developing countries (I’m speaking from Brazil), are the startups a phenomenon comparable to the Industrial Revolution? Hope not, because we are already far behind!

  • http://www.lucamedia.com Bernadette O'Reilly

    I am working with tech start up companies as a Mentor at Seedcamp London amongst others.
    I am aware also of IBM Smart Camp and Launch 48 as new positive forums that are now developing exciting new European tech businesses. So things are happening in London, and Dublin as you mention.
    It’s slow though,the recession/depression is a major contributing reason. Just look at video on line, the ad revenue is small relative to other internet sectors and rival mediums. There are hoardes of VC’s looking around, but are they really interested in investing time to make things work, just cash?
    The interest seems to be around funds and investors and not other sources that Alan Gleesen rightly mentions are essential to start up success.
    New digital successes are essential to the recovery of the economy here. Maybe I should come over to silicon valley to persuade US start ups that the water is warm over in London?

  • http://blackrhinosolutions.com Black Rhino Solutions, Inc

    Great blog! We’re a tech start up company and I agree with a lot of what you are saying.

  • http://www.holidaycrowd.com Ryan Pasco

    Im currently in the early stages of my startup here in the UK (Bristol, about 100 miles west of London) and considered very seriously going over to the states to get off the ground. However i managed to raise seed funds (about $120,000 usd) over here in the UK. It feels like we are getting off the ground over here, but a little too slowly for my liking…I am still considering taking my business to the US at the next stage, as VC here seems a little scarce.

  • http://www.vccafe.com VC cafe
  • http://www.whitebearyard.com Stefan Glaenzer

    Being a football fan, clearly Europe has lost out big time. Nach dem Spiel ist vor dem Spiel (“after the game is before the game”). A bit more heads up, stuff like the WWW and open source have emerged out of Europe.

    • Camelback

      At least you got the WWW right; I’m so tired of hearing europeans (and those who love them) insist the Internet came out of europe. I always find it amazing how “educated” people have no idea the diff between the Internet and the WWW. Cellular tech and fiber ops came out of the US, too, just to clarify. As did mechanical flight and rock n roll and gay pride parades. USA!!

  • http://marketpilgrim.com/2010/09/18/9182010-update/ 9/18/2010 Update « MarketPilgrim

    […] Guest post: Why Europe lags the U.S. in technology startups […]

  • J.T.

    People in europe keep saying the climate is changing, the climate is changing. How long have they been saying this? Since the US-led “new economy” started in the mid-1990s? How can europeans catch up to the US if they don’t even understand the concept of free markets and investment capital? The problem is cultural. The US is comprised of pioneers and immigrants. Europe is comprised of pensioners and aristocrats who already inherited their wealth generations ago. The european ruling classes have no need for “bourgeois” wealth creation.

  • http://actutechno.com/2011/06/14/leurope-est-nulle-en-technologie/ L’Europe est nulle en technologie - ActuTechno | ActuTechno

    […] l’ancre pour aller s’installer dans le Nouveau Monde, justifient leur déménagement par diverses raisons. L’attrait de la Silicon Valley est incomparable, car elle offre un important réservoir de […]

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