The challenges of the European startup scene

Firstly, as you probably already notices, I am changing the language I publish content in to English, to allow this kind of content to get to a wider audience. As much as I love the Romanian startup scene, unfortunately at this moment it is too narrow to be able to grow this project in any significant way.

Let's go to the actual content now and talk a bit about the challenges of the European startup scene.

On the global startup scene, the US dominates clearly. They have more startups, more unicorns, a bigger stock market that enables more exit events, way more available funding for early stage ventures than we have in Europe. But for many, it is not clear why this happens. After all, most of the statistics put EU and US pretty close in all charts, and in some areas (such as education or happiness) even put Europe above.

But when you look at this specific area, startups, clearly there are some key differences that skew the success rate of US startups way above what EU can pull off. Let's explore.

Population/market size

The first key difference is about population, more precisely, how this impacts the market size for new startups. Even though the population size advantages EU (EU has ~450 million people vs US's 330 million), in EU, the population is highly fragmented not only geographically, but also culturally, legally and economically.

Given the fact that EU is in fact a bunch of smaller countries (with few exceptions), it is extraordinarily difficult for new startups to be able to scale how a startup scales in the US.

Let's take an imaginary example: a startup that is set up in Germany, a country of ~83 million people, can build something that addresses that market. But as soon as they want to scale further, they hit a few challenges:

• they have to expand beyond their borders, meaning they have to expand to a new country
• new countries have different cultures which affects the perception of the product or even the way it has to work. For example, the real estate market in Romania is very different from the German one, and not only different due to the way people look at real estate, but also how things are done, how the laws work around dealing with real estate, etc.
• new countries have different laws and regulations, which, if a startup deals in certain industries, they have to obey different laws. This will increase the operational costs and complexity.
• new countries have different laws and regulation, but this time when we look at labor. If a startup wants to expand its operations in a different country by setting up an office there, they most likely have to create a new company that obeys the local laws. The employment rules are very different from country to country, while in US, they are mostly uniform, with small details that are handled at the state level. But in EU, each country has pretty different rules: number of paid days off required by law, bank holidays, taxation, maternity leave, employment agreements, etc.
• the cultural differences are an obstacle because people are more likely to have some preconceptions made up for dealing with people for another countries, which affects the way they cooperate. We wish it hadn't been the case, but unfortunately, it is.

Culture

The cultural differences are a big one, because it is probably the most significant factor that defines the startup scene. The key differences that I see are in the following areas:

• how people view risk: in EU, people are more risk averse (at least in some countries), even though they have a stronger social net that will "catch" them if they fail, culturally, EU citizens are more risk averse, and more oriented towards other aspects of life besides work.
• how people view work: in EU, work isn't as central to the human existence as work is in US. We have all heard of the US work culture vs the EU work culture, and the difference is that US workers push harder and work longer hours than their EU counterparts do. EU workers look for a more balanced life, where they can take please our of some other areas of life besides work. Honestly, this is one of the aspects I like about EU, and it's something I don't think needs to change at all. If something, I think US has a bit to learn from us.

Money

The financial power of an economy also plays a big role in how the startup scene develops. Even though both US and EU have plenty of rich people, US definitely has more, and the rich are richer.

This makes the amount of available funding be skewed in US's advantage, concentrated in the Silicon Valley area, the "epicenter" of the startup world.

It's not unheard of certain US startups to get millions of dollars in funding as seed only for an idea, while in EU, to get the same kind of money you'd have to already be somewhat established in the market. This also speaks to the risk averse culture, which this time is more visible for the investors than the general population.

In EU, you rarely can get funding only based on an idea, and if you get, the amount is minimal. It will be clearly not enough to hire a team, pay the founders a living wage and do all this for a whole year until you build up your product from scratch and go to market.

Exit opportunities

It's not a secret that startups will seek an exit at some point, so that the investors can recoup their money. This either means being acquired by a larger company for different purposes, or getting listed on a stock exchange, thus becoming a public company.

In EU, both paths are harder:

• exiting by being acquired is harder due to fewer companies with a big buying capacity or aggressive global expansion strategies. In EU, we don't really have so many corporations that can just buy a startup, and the ones that exist are not focused on the technology market. In contract, US has plenty of big technology focused companies that look for acquisitions to grow and create new lines of business.
  Probably you've heard of Instagram, which was an independent product which got bought out by Facebook. Same with Google Maps, which before it became Google Maps, it was a different product developed by a few people, for other purposes.
• exiting by becoming a public company: to do that, you, as a company, will put a part of your shares for sale on a public stock exchange, where then people and companies will come in and buy them. Those initial offered shares are from the people and institutions that look for an exit.
  In EU, each country has its own stock exchange, that is mostly accessible to the general population of that country plus a few institutional investor companies. This means, that to make an exit that way, it's way harder to draw the necessary funds and get the necessary hype to call your exit successful.
  In US, by contrast, you have the biggest two stock markets, NYSE and NASDAQ which offer way more liquidity than any individual European stock market.

Conclusion

That's about it, from my point of view. These four key differences makes it harder for a startup to start in EU, grow and then exist, than an equivalent startup in US.

The next steps would be: how do we change this? How do we make the EU startup market more viable for any founder that has a global vision and and the capacity to put it into practice, without having them move to US?

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