Daniel Faloppa

@faloppad

The European Startup Scene is Still Broken

Europe is the motherland of some of largest companies in the world and lately, to a large(r) number of unicorns. TechCrunch discussed them this week in Willy BRAUN’s “Identikits of The European Unicorns” and folks seems to get hyped already about them.

The article highlighted 42 unicorns coming from Europe and part of the study. But it lacks to address the differences between these and the ones in the Valley. When were they founded? What was the time it took them to grow that large? How much capital were they able to raise?

As the startup world gets faster and more globalised, the time to global market dominance becomes central. As an example, many countries in Europe had their own social networks before Facebook. These networks did not manage to scale out of their country fast enough and were surpassed by the superior resources of the American rival.

The reality of things is that starting, funding, and more importantly scaling companies in Europe is still harder than in the United States.

My belief is that more resources should be focused on learning and understanding the specific scaling challenges of European startups, to bring back competitiveness and even an edge towards our American cousins.

So here is my attempt to mention the first problems, and maybe the few advantages, that European startup face and start a discussion on how to overcome them and reconfigure them as strengths.

Unique difficulties for European Startups

The main difficulties stem out of language barriers and market fragmentation. So here the top 3 (everybody on the internet seems to love these) difficulties of scaling a company in Europe:

Talent Acquisition in Scattered Communities

Talent is still localised. The European mobility is still low and employment laws are still strict on non-EU citizens. This results in a home-market bias for talent, which is fine if the country is large enough but it puts smaller countries at a disadvantage. When the talent pool is small, the hiring strategy also needs to be “internationalised”, with all the challenges that this brings.

Capital Restrictions

Funding gaps remain larger in Europe than in the US. Raising large rounds is still a challenge in Europe, and fertile terrain for the ones willing to take the risk. The value that companies like Rocket Internet created is impressive. It is also proof that american models work well in the fragmented European landscape if coupled with patient investors and a fast scaling mindset. But these cases are rare. Europe still needs more capital availability, less risk aversion and larger ambition.

Market Fragmentation

By far the strongest one, market fragmentation means several unnecessary scaling costs that companies bear during the scaling phase. To overcome this issue, many companies and investors eye the United State as a second market. This has worked well in an array of cases, like the Dutch payment company Adyen. But it presents its own set of challenges.

European and American customers do not usually know each other, making it difficult to create cross-sea network effects and branding. They probably know somebody in the neighbouring country, but they rarely speak the same language.

So internationalisation is a hard thing to accomplish. And ideally it should start once the home market is conquered or at least locked-in. This creates then an advantage for countries with large home markets.

Companies with small home markets should then build-in internationalization right from the start. This often forgotten aspect is one large differentiation point peculiar to scaling in Europe.

Most of these difficulties are moving in the right direction. English language penetration, work mobility, larger investments and less fragmentation are moving in the right direction. Also, a fragmented market has some advantages on it’s own:

Unique Advantages for European Startups

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Small home market

Yes I know, I just listed this among the disadvantages, but bear with me. A small home market means a company is closer to the customer, can get cheaper, faster and easier word-of-mouth and market dominance. This allows companies to enjoy position rents and maybe monetise the market sooner.

Sooner monetisation means more resources to expand to other countries. By optimising internationalisation from the start, the company might be in a strong position to expand.

Expansion problems remain. Foreign customers might not have the same needs, or might not be triggered by the same message. The choices are then expanding the home market, grow further in the home one or choose a different expansion target.

This choice already justifies the smaller number of unicorns but the higher number of national leaders in an array of categories.

Lower development costs

This is often cited as one of the main benefits compared to the Silicon Valley. Internet companies are generally cheaper to operate in Europe. This is mainly driven by lower salaries of employees with web-development skills. Does this overcompensate for the hardship of funding? Not sure, but it could still be a net advantage.

The need for further investigation

To conclude, scaling companies in Europe presents it’s own set of challenges that cannot be overcome using US strategies. There is a need to address these challenges separately. Writing about and discussing them is the first step towards understanding how to address them, and maybe one day turn them into strengths.

I’d like to start a discussion on these topics. So please, if you believe the opposite, if you have more resources or insightful advice, share it below. Let’s increase our competitiveness collectively!

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