It is not uncommon for European entrepreneurs to come to the Silicon Valley to learn how to launch globally. However, they often play “the startup game” by the wrong rules. With scarce venture resources in Europe, founders learn to compromise way too much and accept what’s typically unacceptable by those who build great, successful companies with global potential.
Having talked to dozens of entrepreneurs from outside of the U.S. shortly after they arrive to take their first steps in Silicon Valley, I have observed a set of common false beliefs that most of them share. Even if they have great products, great teams, and endless motivation for working hard in their startups, the crucial first step for them should be to get rid of some misconceptions about the startup game… ASAP.
Co-owning the company with your team is crucial to its success
As Tim Draper noticed during his recent visit at Blackbox Connect, the concept of co-ownership is often misunderstood and underestimated outside of the Silicon Valley. Giving stock options to employees with a vesting schedule, which is one of the most natural ways to establish a real sense of ownership and motivate, often takes the last place on their lists of priorities (if at all).
There are countries, like Denmark, that explicitly discourage entrepreneurs from giving shares to employees, as their tax laws impose an additional 25% tax on any shareholder in possession of less than 10% of a company. In case of an exit, a stock-owning employee would owe the Danish government around 67% of what he’d made by investing his blood, sweat, and tears into building a successful startup.
Many entrepreneurs from Europe often point out that potential employees they talk to usually don’t even recognize the value of owning shares in a startup. In the culture of scarcity the short-term tangible benefits matter much more, and too few success stories among their peers make them believe that having shares in a startup could not really bring any profit.
Giving away too much for seed money limits your agility
Standards of equity amounts given away to investors, angels or advisors in Europe are incomparable with those in the Silicon Valley. While the well-established YCombinator asks for somewhere between 6%-8% for $11K-$20K, there are multiple local acceleration programs in Europe that take as much as 10% for as little as $10K of seed funding. I’ve also met entrepreneurs who have given away 35% of their company during the seed round and they weren’t just rare foolish exceptions.
While sometimes it’s crucial for startup founders to raise whatever seed money they can, they need to understand that giving away that big of a share of the company to investors will make it harder for them to raise future rounds of financing.
Furthermore, it also minimizes the incentives to reap meaningful rewards, as it sets the frame for inequitable partnership between the entrepreneur and the investor.
There are a couple of totally legitimate reasons for small markets VCs to demand more equity for less. First, they count on small exits, as the markets are smaller. Second, they have few competitors, so they simply can ask for more and still get a good deal-flow. But that doesn’t mean that the entrepreneurs have to accept these rules of the game, just because they have to prove the concept on the home market. Of course, having achieved decent traction in home country definitely makes entrepreneurs look more legitimate in front of the VCs from the Valley, but it doesn’t prove anything about their capabilities to scale to the global market.
Thus the very common assumption that “first we need to prove ourselves locally, and then go global” is not always true. Sometimes it just makes more sense to start globally, and then localize (as most of the Silicon Valley startups do).
Making quick decisions doesn’t always mean you are desperate
Whenever a VC invited to give a talk at Blackbox Connect mentioned that it takes her or him around 4 weeks to close a deal with a start up, the audience reacted with huge disbelief. How come it can take such a short time? while back in their home countries they would talk to VCs or angels for months before they get funded.
Apparently SV is much faster with making decisions, and the entrepreneurs are expected to act quickly too. Being able to make a decision fast is not a sign of desperation.
Thinking small doesn’t protect you from failure
Almost all of the companies that come to the Valley from a different startup ecosystem bring here the fear of failing with their startup. They pitch their tiny little projects — an app for this, an app for that — believing that maybe they will not change the world, but at least they’ll build something in order to start playing the startup game and move forward. And if they fail, that will be just a tiny little failure — much easier to digest.
Non-US startups must learn that failing is always an option. While small failure is less painful, no big win comes from playing it too safe. To succeed in the world of global business, they must adopt the Silicon Valley mindset. That means making fast decisions, taking bigger risks, giving shares to everyone in the company, and being smart about financing their company growth.