Daniel Faloppa

@faloppad

Are Networks and Regulation Responsible for Slow EU Startups?

A few weeks back I wrote “The European Startup Scene is Still Broken” and published it on medium here. In that article I argued that scaling companies in Europe is still difficult, mostly because of market fragmentation. The article got picked up by @hackernews and more than 50 people reacted with comments. I’ve read them in search for suggestions and here is what I found.

From the 77 comments the article gathered, 2 main conclusions can be drawn:

1 — Networks (in the Reid Hoffman sense) are much less developed

2 — Many people argue that government affects, one way or another, the scalability of startups

Europe and the lack of Value-Creating Networks

Many of the comments focused on an aspect that I might have underestimated in the original article, the importance of networks. Hubs, experienced people, connections that can support startup growth.

On experience: “There are many copies of the US startup accelerators, but the people running them do not seem to have the same level of experience and connections as in the US.” (SandB0x)
I wonder if the reason why startup culture thrives so much is because a lot of the VC’s/Investors are ex-engineers who made their wealth from their own companies… (pm90)
On talent: “What are the factors stopping remote working in start-ups? It seems easier to address these than to force your hires to all move to a single place.” (rwmj)

In asking ourselves how we can improve startup scaling in European countries, these comes as interesting points, especially if looked upon in the contest of the lack of networks.

The startup network in the valley is strong for three reasons:

- it’s tight, the people powering it have been knowing each other or working together for years

- tolerates failure better, every person gets many chances

- it’s based on merit

Europe lags behind on all these points, the first for technical reasons (geography and language), the others for cultural ones.

The cultural reasons are easier to asses, but they need a collective effort. And again, as entrepreneurship in Europe gets stronger, these factors are moving in the right direction.

Government, good or bad actor for startups?

This topic, kickstarted by ThomPete, took king role in the discussion:

While it’s true that the funding gaps remain larger in Europe than in the US it’s still the wrong question to ask.
The real question is why the funding gaps are there to begin with. I would claim 4 major reasons.
1. Disconnect between the needs of the European politicians and those of European startups.
2. Europe has no Silicon Valley or New York.
3. European startups ask for permission instead of forgiveness.
4. The EU seems to be fixing the problems that the startups could fix.
In other words a lot of the problems in Europe is the EU.

Many people reacted citing the benefits and issues of government for European startup:

- EU is giving away grants to startups

- Each government is trying to create it’s own SV

- Government is preventing entrepreneurship with laws (that are stricter compared to the ones in the US)

- Government is preventing entrepreneurship by solving problems that should be solved by entrepreneurs.

And again, it is not very clear if the net effect of government involvement, regulation and grants is positive or negative.

If we look at regulation, the main difference is qualitative. US enforce common law. Each judge can decide independently on the legality of the issue at hand. In Europe (apart from UK), civil law clearly states the boundaries of what is legal and what is not. And it also states the rules to conduct business.

Many have argued that companies like Uber and AirBNB were already present in Europe but they were constrained by regulation. Thus they could not scale as fast and got crushed by their american cousins.

Regulation can then affect scaling speed. But to what extent? Is this the prominent reason for less and slower unicorns in Europe?

Among other factors, regulation seems to be the most applicable factor to Europe as a whole. And this is maybe the reason for it to be so heavily debated. The main question, though, is how to improve the competitiveness and speed of European startups. In this light, we have to determine what is the factor that provides the most leverage. Regulation is changing at a slow pace, while ways and techniques for faster internationalisation and scalability could be easier to identify.

Last but not least, de-regulation and common law have disadvantages as well. The amount of lawsuits in the US is higher, and startups that get sued in their early days have a hard time getting back up.

Conclusion

Networks and government are both good points raised in the comments to foster European startup development. Government intervention and regulation seem hard to change soon. But the creation and fostering of networks could be easier. We also have to keep in mind that networks should consist of serious people (experienced?) and committed to foster the knowledge and growth of the system. These people should not be motivated by personal gains.

I think this is achievable in the short(er) term, and of course I’m always open for connecting and raise awareness about it. What do you think? Anything else that we are missing, that should be discussed or acted upon first?

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