Saturday, December 30, 2006

Why Startups Don't Condense in Europe

(This post is based on a discussion at BarCampZurich back in October. The opinions expressed here are mine, not those of my employer or other attendees.)

When you ask a random but well-informed person, the only European startup he or she will name is Skype, but when you ask about the US, plenty come to mind: Google, Yahoo, eBay, Youtube, and many more. What's the reason for this disparity?

Many have written about this before, including Paul Graham, Xavier Comtesse, David Heinemeier Hanson, and David Hornik and I doubt that my thoughts on this are unique.

Still, here's my take on why there aren't many more European web startups:

1. Lack of Role Models. Even revolutionaries need role models. The fact that others have hit it big before makes startups look like a much more reasonable option. For Europe, there's the aforementioned Skype. In the US, there dozens of very successful entrepreneurs and companies to look up to.

For recent graduates such as myself, going to a big, established company seems like the smartest option. The traditional way of slowly climbing the ladder at a big company is hardwired in our brains.

2. Lack of Venture Capital. While you can start a business with two guys in a garage and a few of thousand Euros, you may at some point need money to grow and hire employees. This is where Silicon Valley's ecosystem of venture capital comes in. We don't have that here in Europe: Here, good VCs who are willing and able to take risks and give valuable advice seem few and far between.

3. Lack of Ambition. When Larry and Sergey started Google, they had global domination in mind. After all, organizing the world's information and making it universally accessible and useful seems like an ambitious goal.

In contrast, Many European startups often grow to a comfortable size of 10 to 20 people, and then stop. It's fun to work with your dozen best friends and enjoy a family-like atmosphere: If you grow any bigger, some of the fun melts away. While you can change the world with just a dozen people, I doubt that the 'next Google' will have just twenty or so employees, or grow organically from an existing small business. Europeans need to aim higher.

4. Attack of the Clones. Many web startups here are rip-offs of existing US companies with established business models. Alando may have started started it all: This Berlin-based company, started by the Samwer brothers in 1998, cloned eBay's functionality and UI in every detail. They sold it to eBay for $43 million after just 6 months, showing that you can win big by simply copying. For today's examples, look at Sevenload, Yigg.de, or Aimido. A little more creativity wouldn't hurt: The potentio upside of doing something truly original is much larger.

5. Fragmented Markets. The US has a single, relatively homogenous market of 300 million people. Almost everyone speaks English, payment systems are the same everywhere, addresses share the same format, and laws are very similar in all states.

The European Union has a total of almost 500 million people. It is a huge, largely deregulated, but heterogeneous market. This makes it unattractive to web startups: For every language and possibly every culture, you'll need a localized version of your product. You could start with one of the three biggest countries, but you'd still need to localize much sooner.

So what? There are many things that Europe is getting right. We have smart people, good universities, and attractive cities. It's easier for qualified people to get a visa in Switzerland than in the US, it's still possible to IPO without too much overhead, and tax rates are quite nice if you incorporate in the right country.

All Europe needs is a few rebels with great tech skills, original ideas, and good connections to VCs. People who fit this profile will ignore all the difficulties and just go for it.

--

Thanks to Nicolas Berg, Douwe Osinga, Christophe Dessimoz, Alexandru Balut, Philippe Schoen, Keno Albrecht, Florian Walpen, David McCreery, and Corsin Camichel for attending and participating in the discussion.

17 comments:

Lawrence said...

Hello, I work very closely with the yigg.de team. While I agree with you on most points you make in your summary, I believe your assessment of yigg.de does not represent its fair value. Yigg has many original features, has therefore, moved far beyond cloning digg and was also not conceived as a digg clone. If you are interested, please check out the site in detail, I will be happy to provide more background info and to point out some of the highlights. For now suffice it to say, that Yigg is the result of two guys spending their leisure time on a project that has developed nicely and has attracted a loyal community. Not many a venture has gotten this far without funding from the VCs.

Meanwhile I wish you a happy New Year
Lawrence Nell
nell (at) yigg.de

leo said...

Good thoughts! For my the most important point is point three (specially for swiss people). I think thats also a bit a cultural difference. If you try to start a multi-million-dollar company in switzerland they may call you "grössenwahnsinnig", in the states you may be called a visionary.

Gabor said...

Lawrence -

sorry if my listing of yigg.de came over badly. I don't think cloning is a bad thing per se, and in fact I was almost going to drop point the "Attack of the Clones" point but obscure scifi references just sound too good. :-) Also, yigg - which is a great site IMHO - partially made it on the list because it's just soo close phonetically to digg.de. It was not meant to offend and I'm sorry if it did.

There have been many good products which were the result of taking an established concept and adding a new twist. Somewhere in one of my textbooks, there are results of a study which contrast first-to-market companies with quick-follower companies and found that both strategies fare equally well in the marketplace. I'll post the reference as a comment when I have time to look it up.

Gabor

Alexander said...

Hallo Gabor, ich wünsche Dir ein gutes neues Jahr und beruflich wie privat nur das Beste. Dein wirklich sehr guter Artikel hat mich die letzten Tage ein wenig ins Grübeln gebracht. Ich habe daraufhin ein paar Gedanken zu diesem Thema in meinem Blog zusammengefasst, weil sie als Kommentare Deines Posts zu lang geworden wären: Svizzer
Viele Grüsse,
Alexander

Anonymous said...

Interesting thoughts.

See this related article:

http://www.silicon.de/enid/b2b/16619

Greetings

> Marc

(Blog: www.ifyoucandreamityoucandoit.com)

Gabor said...

Alexander - Wow! There's a lot of good feedback in your article. I'm very busy right now but I'll get back to you in the next week or so. Maybe my view on some of these things is too gloomy indeed :-) Cheers, Gabor

Ossi said...

Hi Gabor,

Very good post. The issue is extremely interesting, and I have actually set up a blog to cover it (see my reply to your post here.

In sum, I agree with three of your five reasons why there is a lack of successful startups in Europe. Venture capital, lack of innovation (cloning) and the fragmented nature of European markets are big problems. I am not sure that there is really any lack of ambition, the problem is more that there are not enough resources (and big enough markets) available to fulfill those ambitions. As regards role models, I think Europeans have been almost too good in cloning their US role models. It is time to come up with something on our own.

Gabor said...

Lawrence –

I promised you a reference that contrasts first-to-market with quick-follower strategies. I looked this up in the book that is the "marketing bible" by Kotler and Keller, and, to my surprise, found that they think followership is not a rewarding path:

Philip Kotler, Kevin Lane Keller, Marketing Management, 12e: Part 4, Chapter 11: "Dealing with Competition":

Market-Follower Strategies

Some years ago, Theodore Levitt wrote an article entitled "Innovative Imitation," in which he argued that a strategy of product imitation might be as profitable as a strategy of product innovation. The innovator bears the expense of developing the new product, getting it into distribution, and informing and educating the market. The reward for all this work and risk is normally market leadership. However, another firm can come along and copy or improve on the new product. Although it will not overtake the leader, the follower can achieve high profits because it did not bear any of the innovation expense.

[...]

What does a follower earn? Normally, less than the leader, For example, a study of food-processing companies showed the largest firm averaging a 16 percent return on investment, the number-two firm, -1 percent, and the number-four firm, -6 percent. In this case, only the top two firms have profits. [...] Followership is often not a rewarding path.


Of course, they're looking food-processing companies, which is much different from the high-tech arena. If I find a more fitting study, I'll let you know.

Gabor

Gabor said...

Some great links on the same topic:

by Andreas Göldi, CEO, Namics (Swiss Internet company)

by Saul Klein, VP at Skype

Paul Elosegui said...

The nightmare scenario is where Europe lapses into being a technology consumer rather than supplier.

I worked out a few macro-economics statistics regarding the European startup environment in

Top European Countries for Doing Business

Anonymous said...

One problem is location. London is far too expensive. North of London, such as Nottingham , Sheffield, Leeds is where people can afford to exist on a shoestring while working at a startup.
BTW I think Google are insane to locate in London. There's tons of jobs advertised at Google I and many other Linux/perl/python guys where I live could go for. But when housing costs 3 times as much and IT salaries are only 20-30% more it doesn't add up to go to London.

Anonymous said...

Of course Google has boatloads of money and doesn't care about having to pay high salaries in London.

Arvixx said...

Don't forget Last.fm.

Bosky said...

Well maybe thats perhaps since startups usually neeed to market where the markets are biggest & source talent from where they are the best .

Europe by now way falls back in the latter half . But perhaps it is the market size that pushes everyone west.

On the other hand,having a site catering to the us perhaps is so that they can infact cater to a global audience .Similiar to a lot of companies from tight here in Bangalore are trying to do .

Keep Clicking,
Bhasker V Kode ,from India

Anonymous said...

Good thoughts! http://www.yehhu.net

Mike Faber said...

it's quite simple - point 5. contains an explanation to point 3. and 4.

if you don't have a large homogenous market to get your innovative idea going there is no point in being innovative

US companies have very favorable conditions compared to European in this respect

anisha said...
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