Thursday, April 27, 2006

On Cloning YCombinator in Europe

A YCombinator in Europe? Paul Graham seems to think it can't be done:
"Hackers are unruly. That is the essence of hacking. And it is also the essence of American-ness. It is no accident that Silicon Valley is in America, and not France, or Germany, or England, or Japan. In those countries, people color inside the lines."
Business Week chief economist Michael Mandel agrees:
"Where does the U.S. competitive advantage come from?

First, the ability to finance and reward high-risk startups. No other country has the same well-developed venture capital structure that we do.

Second, the willingness to work long hours is essential. You can’t make new technology work without immense inputs of time."
YCombinator is a seed venture capital firm. They recruit groups of founders straight from university, give them $6000 per person to work on their idea for a summer (or winter) and take 5-7% of the equity in exchange. In effect, their business model is much like that of a traditional VC, but with lower stakes since they get in at the seed phase. This has the potential to be a highly profitable business.



Can we clone YCombinator in Europe? I'm going to argue that it's hard, but not for the reasons that Paul Graham and Michael Mandel cite. Instead, it's hard because YCombinator has unique competitive advantages that are hard to replicate, even in the US.

This is a thinking exercise; I'm not planning on cloning YCombinator anytime soon.

First, let's defuse the Europeans-are-lazy myth. While the average US employee works 1777 hours per year, the average German puts in just 1362 – that's 24% less! But remember that these values are averaged over the entire working population. Contrary to popular belief, there are still hungry and highly educated people in Europe. At my school in Switzerland, it's almost impossible to find the CS lab unoccupied at any given time of the day (and night). There are also lots of bright, hungry people in Eastern Europe willing to work hard to score a big hit.

Similarly, it's possible to find hackers in Europe. DeCSS was written by a Norwegian. Ruby on Rails, to my knowledge, was composed on Danish soil. Germany has the CCC, one of the world's biggest hacking organizations, and c't, the country's mainstream computer mag, makes PC Magazine look like Cosmo Girl.

Still, the vast majority of innovative startups is in the US. If Europe has the hackers, why doesn't it have the startups? I believe that an important factor is that we are missing role models: There are no Googles or Yahoos that originate from Europe – imagine what Silicon Valley would be like had there been no Hewlett-Packard. Another factor is that Europe has a much more risk-averse culture. The YCombinator model works in this environment, too. It needs 10 to 20 daring founders, not tens of thousands.

What infrastructure is required to make young companies blossom in Europe?
  • Talented people
  • Availability of venture capital
  • Potential buyers
While Europe doesn’t have hotspots of concentrated talent such as Silicon Valley or Boston, I'm not worried about being able to get good people. They couldn't even move to the US: Visa restrictions are tough. Inside the EU, people are free to move around, and even in Switzerland, arranging for a working visa is a short and relatively painless process.

A large percentage of the ETH Zurich's CS students are going to end up writing backends for banks, as that seems to be one of few career options. Some of them, I'm sure, would love to work on exciting products with smart, unbureaucratic people. The financial risk is much smaller, too: Remember that in Europe, going to university is practically free. After getting your degree, there is no pressure to pay back loans. You can even continue living in your subsidized dorm room, as long as you can convincingly tell a story about having decided to get another degree, this time in philosophy.

Venture Capital is a different story. Last semester, I attended a Startup-School-like lecture series at ETH and met a couple of local VCs and business angels. Some of these guys were really good, but others has no understanding of the technology and markets or acted as if VC were an extension of the traditional small-company corporate loans business, with similar expectations in terms of collateral and returns. These qualitative differences between VC companies, however, exist in the US as well.

As a startup, it's much easier to get bought if your offices are in Silicon Valley, not Oklahoma City. After all, it's just a one-hour drive to Yahoo headquarters. It's hard to find a spot in Europe with similar qualities, but since everything is one hour away by plane, location should not be a huge problem.

So what's a good spot? I first thought that Eastern Europe – Budapest, Prague, or Tallinn – may be a good place. However, while that's a cheap option, it's hard to imagine getting West Europeans to move east. In addition, you may risk appealing to students in the respective country only. A good choice may be Berlin; very appealing to young people, inexpensive, and in the West. Munich may work better, as it is home to many IT companies – read: potential buyers. Zurich, too, seems like a good spot; the Swiss, in general, seem more enterprising, and both Google and Microsoft have large offices. London, on the other hand, already has a sizeable startup scene and is in many ways virtually indistinguishable from Boston. For my part, I'd pick Zurich or Munich, but that's based on personal preference, not data.

Let's reiterate: We have the talent, and we could arrange for the capital and the buyers. What's missing?

To replicate YCombinator, you need three things: fame, picking talent, and capital.

The last of these is probably the easiest to solve. Per founding round, the YCombinator model only requires a couple of hundred thousand dollars. The founding fathers of the European YCombinator could likely cough up this money by themselves.

More important than deep pockets are the skills of the founding fathers: The ability to judge the promise of business plans and founders. Here, YCombinator is well positioned by bringing on a team that has already been successful at Viaweb. I'd be willing to bet that the partners - Trevor Blackwell, Robert Morris, Jessica Livingston, and Paul Graham - will achieve a higher batting average than the VC industry. How do you assemble a similar team? Even in the US, this would be hard to do.

Getting financed by YCombinator increases a company's chances of succeeding. You'll get more PR – on launch day, it's almost guaranteed your startup's website will be on top of Reddit, and the New York Times will be happy to mention you in their next article. The team also helps with advice on technical and strategy question. It never hurts to get input from startup veterans, as long their ideas aren't forced on you.

Still, of all these factors, Paul Graham's fame is probably hardest to reproduce. His hacker street cred greatly increases the quality and quantity of applications. How do you find a high-profile European who can get hundreds of hungry European CS students to apply for a founder's program? Who could set up a good clone of the Founder's Program and organize a Startup School with high-profile guests? I can't think of anyone who could fill this role.

I'm convinced that a European YCombinator would work. We need a skilled team and the famous guy.

--

Thanks to Douwe Osinga, Branimir Dolicki, Bálint Miklós, and Fabian Siegel for their insights and for reviewing earlier drafts of this.

25 comments:

Luistxo Fernandez said...

Brilliant post. We hope you're right, and that European talent gets support.

Stephan said...

I'm sure it would be possible to create something simular in europe (I'm doubtful about Germany though and I do live there). But hey, timezones don't matter here so even if you have your team spread out I'm sure you could create some great projects. Let me know when you start! :)

Kris_Tuttle said...

Do Skype, Linux and Systinet matter? The notion that this kind of thing only works in America is really narrow minded. Those are just the headline names there are hundreds of others.

Posts like this are helpful though because it helps describe the depth of American complacency.

Anonymous said...

hmmm... this whole `innovation' debate is BS: americans are `good' at selling stuff because they have a vast internal market of monolingual consumption-obsessed, bored, distracted and poorly-educated `citizens' to inflict their useless wares on...

Gabor said...

kris: Excellent thought. I did forget Linux and Skype. Also, SAP was a European startup company once, but it was founded in a much earlier and different business cycle.

anonymous: Guys, let's not turn this into a debate on american politics or attitudes. That doesn't help anyone or advance the plot. You've got to cut the Americans some slack: They have a lot more innovative startups than the Europeans, so they must be doing something right.

L. said...

Fame is a bonus but I see more difference in the managing style.

Paul Graham says "your project looks promising, you are clever. well, here is the money, do whatever you want for your project, call me if you need help or advice, I am accross the hall. The next stop is in six month, we'll see what to do then, we may have to change stuff".

Most of the VC are saying "give me numbers and numbers to reassure me that I've taken the right decision invest money in your project. In six month, you had better reached the goals set in your powerpoint presentation or else..."

I *really* would like to build something like YCombinator. Alas, I have no deep pockets...

Felix said...

Currently the sole goal for many US startups (the web2.0's) seems to be getting bought within 2-3 years by Google/Yahoo/Microsoft. For those kind of startups it is imo best to be in the US. It is highly unlikely that a new Google will come from one of those companies. The VC's know that and probably want to sell the company as soon as possible.

I believe that European startups will be more succesful if their goal is not to be bought up quickly. This of course requires a sound business plan. In that case it doesn't really matter where in Europe the company is located. The hard part is obviously the financing. Personally i would rather not depend on a VC if possible.

Btw. i do think that European startups could try to create more exposure by cooperating with other European startups / small companies and find complementary solutions. We don't need a hundred del.icio.us clones (now with pineapple flavour!).

fad said...

Great post.

There's a recent spOn article about Startups in Germany:
http://www.spiegel.de/netzwelt/technologie/0,1518,413256,00.html

The startups presented there don't seem to have really great ideas imho. They are just "doing s.th with tags and rails (which they say is a programming language :D) and stuff" and calling it Web 2.0.
Anyway the article says that Hamburg is a center for software startups these days.

Btw.
Here's anothe spOn article on Web 2.0 which I liked more.

fad said...

article1
article2

Dave said...

I know you are mainly talking about continental Europe, but I just though I'd mention Dublin, Ireland.

The home of;

Google European HQ,
Yahoo! European HQ,
eBay & PayPal European HQ,
Microsoft European Operations Centre,
Microsoft European Product Development Centre (EPDC)

and probably a few others too.

Unfortunately it can be expensive. I'm sure there are other negative points too.

Gabor said...

Dave: Yes, I was going to mention Dublin, but I know very little about it.

Yahoo's European HQ is in London though. Google's European Development Center is in Zurich. I thought Microsoft's European HQ was in Paris, but I might be wrong. eBay seems right, though.

Dave said...

Hi Gabor,

You are correct about Yahoo!, I got my info from here, I guess that didn't come through.

Google's European Development Center is in Zurich, but EU HQ is in Dublin.

Microsoft's HQ is in Paris, the European Product Development Centre is located in Dublin.

Could be wrong though.

Good article.

nordsieck said...

I don't know much about Europe, and persumably, one could base out of some place like Ireland where the corporate taxes are low, but Europe as a whole has a reputation for obscenely high taxes. This is a big negative for businesses that aim to expand - especially web businesses, where customers don't really care where the physical business is located.

Stiennon said...

Very well thought out post. There is no great mystery to why one area spawns more startups than another. It is what I call the copycat syndrome. If the fellow next to you at the club made a million euro's off of a ten thousand euro investment that creates twenty new angel capitalists. If one venture fund makes a billion off of a 100,000 investment, that spawns a VC industry.
Europe is ripe to overshadow the US in startups for all the reasons you point out. Great technologists, great schools, good Internet access, and no lack of capital. As somone who has started a dozen companies I would rather be in Berlin, Dublin, Zurich than Detroit Michigan!

Anonymous said...

I have found that the UK has the tallent to innovate but that effort just gets given away by our clueless 'leaders' and their astonishing lack of vision. Computers, Jet engines and Radar are good examples.

shaner said...

Great post. Couldn't help thinking "what about Ireland" the whole way through the post though... Then again, I'm biased, I'm from Dublin.

There are alot of innovative companies and individual programmers that have come out of Ireland. SpamAssassin was originally written and maintained by an Irishman (Justin Mason) before it became part of the Apache Foundation.

Low corporate taxes are also a benefit, but not enough IMHO.

For the most part, the very talented programmers and hackers from Ireland tend to gravitate Westwards (it seems to be easier for us Irish people to get US Visa's...) or abroad rather than stay here and form startups of their own.

I wouldn't mind being the Irish version of Paul Graham one day myself. Watch this space I suppose... ;)

Shane

http://shaneryan.blogspot.com/

Anonymous said...

It's no secret Europe is in the hole because of the high taxes. France has over 15% unemployment, and Germany has similar numbers.

Because software does not require any particular headquarters, there is no incentive for developers to start a company in europe.

The story of little innovation in Europe is a story of taxes, which reduce incentive. There's no need to solove Lagrangians either, simple self-interest will tell you that, say, if the tax rate is 50% on your company, and your chance of selling is for 5mil is 0.05, then the companies' expected return is only 125,000. Contrast that with a 15% tax rate, where the ER would be 425,000.

This tax rate makes the availbility of capital smaller as well, since investors would rather put their money in low-risk, less taxed bank assets, than high-risk, high-taxed startup companies. Innovation stems from low-taxes, and less red-tape.

The anonymous poster claims innovation is a sham, but ironically, the very computer he uses is a product of Silon Valley innovation, both in software and hardware. Innovation isn't a ruse, but the high taxes in Europe are.

felix said...

@anonymous,

The high taxes you are talking about are personal income taxes. Several European countries are actually very tax friendly towards businesses. Do you know that Microsoft is one of Ireland's biggest taxpayers? They are actively trying to avoid paying taxes in the US. It is also a big reason why many US software companies have their European hq's there.

Anonymous said...

Your counter-arguments are all valid, but it is PG's argumentation that if flawed in the first place.

The problem is not the difference in hacker-culture, but the difference in investing-culture.

At least in Germany, investment-banking is just a hip term for granting credits, which is diametrically different from US-investment-banking.

(The benefit is that a huge IPO-scam like GOOG will never happen here.)

Miguel said...

technology transfer. That's one of the main factors why Silicon Valley is in Silicon Valley. The question is not whether ycombinator can be cloned in europe. The question is whether the rate of technology transfer between ETH and all those places and industry (europe) is similiar to say that of Berkeley or Stanford. Just look at who's funding the research carried on in europe vs Stanford.

Gabor said...

Miguel: I was not talking about recreating Silicon Valley in Europe, which IMHO would be very hard to do.

For cloning YCombinator, the rate or quality of technology transfer here is irrelevant.

None of the YCombinator startups I know of is a spin-off from a university research project. By luring their founders off campus for the summer, they engage in a form of people transfer, not technology transfer.

Steve Balogh said...

People mentioned Linux and Skype. There are countless other examples of EU-innovation. Think of MySQL, InnoDB, SSH, IRC. If you look at innovation per capita, probably the nordic countries come the closest to the SV. Besides the above projects, there are some huge established companies like Nokia, Ericsson, and hundreds of smaller ones on their backwaters. Helsinki and Stockholm have some really good unis, burocracy is virtually zero, English is spoken everywhere. I think this pretty much sums up why this region if any can be SV in Europe.

Steve Balogh said...

Forgot f-secure.
On a non-related note, I wonder what's missing in Eastern Europe for real innovations. Smart programmers are plenty, but most most of their efforts go to outsourcing, which is less risky than making your own products and assures a reliable cash-flow. I know ArchiCAD in Hungary or BitDefender in Romania, but where are all the others? Curious to hear your opinion on this question.

cs said...

"Still, the vast majority of innovative startups is in the US. If Europe has the hackers, why doesn't it have the startups?"

--> because Europe is more pragmatic. Frankly, who can do in EU a 4m$ business with a site like http://hotornot.com. (Read more @ http://james.hotornot.com/2007/02/on-having-balls-part-ii-staying-hungry.html)

--> US is a more consumer oriented market that any other in the world. Americans buy everything, literally everything.

--> I'm always checking the Top Of Most Promising Startups wherever they are (STIRR, YC, CNN, Forbes and more ...). While Americans need it, we don't. We don't spend money on that.

--> I think anyone can make a living in EU by building his own startup from nothing. Frankly, the YC $5000/founder is nothing, it only assures your living during the development.

cs said...

And let's do not forget that Europe and lately East is changing/breaking the economies of the world.

Once Napster gave us the sign in the Music industry we have started with the low cost airlines (Ryan Air), then with telcos (Skype), now from East is coming with the '06 Nobel prize winner the idea of people banking, and still to come.

Basically the brain export to US is loosing ground, more and more chaps are managing themselves @ home. And they are good.

I think the next big thing comes from China and Russia, and from innovators like Scandinavia and Eastern Europe.

While in US people are giving money with a hand to be able to take money with the other hand, the rest of the world is hungry. And we do not spend our time logging into hundreds of social networks and photo sharing web2.0 services. Instead we will innovate for food.