Why Europe Leaks Startups to US

It has been some months now that i have been actively engaged in my local internet startup scene (in Greece). In paralel i have been researching funding options for my startup [geowarp.com] and studying about other startups in Europe and the world.

Flower in the desert

Focusing on the European startups, i noticed a big trend towards the absolute local, creating the facebooks of [put country here], or the groupons of [same]. There is also a notion that all startups are required to be cash flow positive within a few months, if not right after, their launch.

Many startups focus on niche markets, mostly local and a few global. These do pretty well actually but as with all niches, they have a small total addressable market. Very few of them seem to make any move towards a wider audience with a global reach.

The few globally scoped, disruptive startups that originate from Europe all seem to have set up shop somewhere in the US. Don’t get me wrong, i know of numerous startups that are in this category and still have offices in Europe. But if they are to become the next 100 million registered users service they will soon run out of fuel…

There are three main reasons why this will happen and why the European startup scene is so introverted.

1. No Funding Resources

There are simply very few funding options in Europe. I have spotted no more than six true high tech, Venture Capital firms. And they are spread out all over the continent. There are many more, bank-owned, VCs but they really are a bad fit for an internet startup.

Bankers try to overcome their inexperience in the tech sector by having cumbersome requirements  for the entrepreneurs, like unrealistically detailed business plans, positive cash flow and real market proof. Funny but real. The sad thing is that all European Union funds for high technology and innovation are funneled through this channel.

The seed funding projects are even fewer. And their capacity for funding is quite small, doesn’t exceed 50 companies per year.

A successful entrepreneur and currently a partner at GRP V.C., Mark Suster, notes in his podcast that he pitched to a total of 83 VCs and had only 6 YESes. And this is a high ratio, the norm being at around 40 NOs for a YES. So what are the chances of a European startup geting funded when the only choices are one, two at best seed funds in the country it starts in?

2. Not Enough Experience

The sum of startup building knowledge, is simply not adequate to mentor all the needy up-and-coming startups. You have to have mentors and leaders in the community who have built multi-million dollar dot com startups.

i don’t say that such people don’t exist. But they are very few and spread around Europe – there is no central point of reference. Who will guide me (an entrepreneur) through all the common pitfalls i will face? Who has the experience to mentor me? Who can connect me with the CEO of x company to make a deal? Who can get me the super star engineer i need, to build the y technology?

Europe is missing the network, in the broadest sense. It’s not entirely cultural and it’s not entirely policy-related. There are benefits that accrue from growing a habitat for entrepreneurship organically, over several waves of innovation.

3. Scarcity of Human Resources

While anyone can come around with a team of 5 to 10 people, there is no way you can hire 50 to 100 high tech engineers in the short period of time it is often required for startups with traction and momentum. [let's not discuss the thousands scale].

Not only can’t you find that many developers anywhere, but the vast majority of developers have a preference for safer, big company jobs. It’s quite unlikely that a top-notch engineer in Europe will bootstrap a year for a third of what he would normally get paid, just to live the startup dream. With the global economic crisis at hand, this may hopefully get a twist, but not there yet…

Actually, it’s not just developers. Good marketing / business development people also tend to avoid startups. Let alone experienced managers. It’s both cultural and a chicken-and-egg problem.

i’d just call it the eurozone crisis.

These are the main reasons i have decided to go to the US and discover all the options for my project. I would highly encourage anyone engaged in the funding community in Europe to read Brad Feld’s blog post on how to create a sustainable entrepreneurial community. It is a real insight on how Boulder actually achieved the wet dream of every developed or developing country in the world, to replicate the success of Silicon Valley.

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About thanpolas

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This entry was posted in Rants, Startup Funding, Startups, Venture Capital. Bookmark the permalink.

3 Responses to Why Europe Leaks Startups to US

  1. whYMon says:

    Very good points. Thank you for this excellent article and i wish all the best on your new conquest!

  2. Pingback: Enter Silicon Valley – Making The Leap | Thanasis Polychronakis

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