November 27, 2014
I was at a meeting recently with a European government official when I was asked, is the US draining Europe’s tech talent and economy when startups head there for growth opportunities?
There is no doubt that the most resourceful European startups are leaving town when they hit the investment wall. But there are many other reasons why European startups head west. To label it as brain drain is a bit of a stretch. It’s more like jump-starting the EU ecosystem engine.
Young Ecosystem & Gaps in Business Culture:
The European Tech landscape is very young and developing. The oldest accelerator, Seedcamp, opened 7 years ago, is an exception as most are just 4 years old. In contrast, Silicon Valley’s Y Combinator has programs dating to 2005. Such a young ecosystem has its challenges, and funding options is one of them. But it’s much more than that. Access to growth talent and business mindset mismatch for startups’ stage of business are major factors that drive them to more mature pastures. While these are gaps that exist today in hubs like London and Berlin, they’re obviously not long-term but developmental.
Valuations are more art than science when it comes to early-stage startups with little revenue. But there’s a universal distinction – a geography bias which some have called the ‘Silicon Valley Vortex’. It is no mystery that crossing the Atlantic will increase a startup’s valuation, sometimes by as much as 3x. Ironically, the same valuation bias can be seen in emerging hubs in the US. Whether it’s Chicago or New York, all metros suffer the same problem with lower valuations in their territories compared to Silicon Valley. An angel investor once told me that the lower valuation in Berlin is tied to a lower cost of living, and the lower cost of procuring staff and business resources. I would argue that there aren’t a lot of differences between Silicon Valley and New York costs of living and business resources. A startup heading west is simply heading there to achieve a more favorable economic climate.
Mergers & Acquisitions:
Useful exits are good for an economy. They recycle wealth for emerging entrepreneurs. They don’t necessarily have to occur in the territory where the startup started, for this effect to occur. But the exit needs to be significant. Currently, in Germany for example, over the last 2 quarters, while CB Insights shows 50 acquisitions, of which 12% were of venture-backed companies, it’s important to look at some recent venture-backed exits. Berlin firms such as Xyo and Dreamflat, which are recent M&A examples, went for reported low seven-figure sums. Is it sustainable to build scalable 9-10 figure businesses without outside international participation? In a presentation at the Kauffman VC Summit at the Dublin Web Summit, it was emphasized that close to 1/3 of all European businesses are acquired by a US buyer. Further noted was that 2/3 of all European rounds above 10M actively involve a US VC. And it’s safe to assume that those rounds and subsequent exits can only happen when startups start courting these investors early in their lifecycle.
It’s becoming a buzz-word in Europe, and with the many countries in the region and the growth in tech, it’s easy to see why. I can mean many things to different stakeholders, though. The best way to describe it is a mutual process that involves incorporating learnings from other regions into the European ecosystem. The most mature startups in Europe, for example SoundCloud and Zalando, are hiring internationalization consultants and research teams to scope out other markets, how to enter them or to draw learnings from other markets to their business. Gerald Sussman, in the book Marketing for Entrepreneurs and SMEs: A Global Perspective, emphasizes that most internationalization focus on the outward processes associated with exporting, licensing, franchising, and foreign direct investment with exporting being the main mode of internationalization for SMEs. Startups heading to the US invariably spend spurts of time back in Europe. In that regard, they are bringing knowledge gained and learnings that are a value-add for the system.
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