Why the European Startup Scene Lags Behind the U.S. One
While working in both Silicon Valley and European entrepreneurial ecosystem, we discovered our share of contrasts between the two. Let's debunk: Why Europe is behind Silicon Valey?
A survey states that European tech startups lag behind America and Asia when it comes to valuation (Europe: $240 billion, Asia: $675 billion and U.S.: $1.37 trillion).
In 2016, venture capital investment in the EU amounted to 6.5 billion euros ($8 billion), a fraction of the nearly 40 billion euros invested in the U.S the same year. Though the GDP of the European Union (18.9 Trillion) to U.S. (18.3 trillion) is almost the same, U.S. companies have raised far more funding rounds.
According to the latest reports, 2,063 European startups are with a fundraising profile on the AngelList platform, compared to 2,270 U.S.-based startups. The average “amount raising” reported by European startups ($298,705) was less than that of U.S. startups ($443,859).
So why aren't many European startups raising enough capital similar to Silicon Valley?
Lack of access to huge funding capital
One reason European startups struggle to catch up with Silicon Valley startups is due to the lack of access to huge funding rounds. Venture capital funds are leaner in Europe. There comes a point in the timeline of a startup where success or failure is determined by the amount of money injected in the company. Silicon Valley has many big risk-taking investors whereas European ecosystems that have strong seed funding opportunities lack high funding investors even after recording great sales.
Having started a company in Europe, we have observed that European investors are skeptical and precautionary in writing a check. They are more fixated on returns in the coming years than the growth of the company. The difference is immense compared to Silicon Valley, where investors are more focused on growth without being bothered about immediate revenue generation. Silicon Valley startups get access to their funds within a month whereas European startups have to wait longer -- up to six months.
Less intellectual resources
The proximity to top talent has always been a major concern for European entrepreneurs. According to the latest World University Ranking (2018-2019), seven of the top 10 universities are in the U.S. and three in Europe. European universities are behind their U.S. counterparts. This has resulted in many bright minds preferring to choose the U.S. over Europe to improve their skills, which have led to a shortage of talent in Europe.
One way to deal with this problem is to invite offshore freelancers and build a team remotely. We had a similar situation with our company. We had a hard time finding a developer and after months of search, we landed a developer with the required skill set.
Unfortunately, few companies require dedicated in-house software development and IT support team. In these scenarios, offshore recruitment is not a viable choice.
Focused on revenue rather than growth
Silicon Valley runs on a modern swift mechanism: to progress and fail quickly! It is a haven for adrenaline driven risk-takers, whereas the European ecosystem has adopted a conservative approach. It works on the principle of “preventing failure” rather than “failing and learning.” Silicon Valley startups have the license to adopt this mechanism because of high reserves of talent, large financial capital and risk-loving investors on the contrary to Europe, where opportunities to raise large capital are bleak.
This has forced European entrepreneurs to generate profit at their early stages to survive rather than focusing on expanding, whereas Silicon Valley investors allow startups to grow and expand exponentially without immediate revenue expectations. No wonder their valuations are higher than European startups. Such a situation where growth is neglected for revenue generation has led to the downfall of many companies in Europe.
Smaller fragmented market
European Entrepreneurs have to deal with their fragmented market. The different countries of the European Union speak different languages and have various cultures, laws, history, practices, lifestyle, etc. What works in Germany might not work in France. To target the entire European Union, entrepreneurs have to find out a winning formula that works for most of the countries in the union, unlike the United States that has a more unified market. The time and effort involved in translating content to various European languages and understanding their diverse markets have resisted the growth of many European startups.
According to the Bureau of Labor Statistics, Eurostat, the Unemployment rate in European Union is 6.8 percent compared to 4 percent in the U.S. Unemployment results in fewer sales and revenue.
Brexit is another headache to deal with!
To attract investors, the European Union has agreed on a new plan with an aim to double the amount of venture investment and raise an additional 6.5 billion euros from initial funding of 410 million euros of public money. The move has been applauded by the European venture capital and private equity association as a great step forward for investment in innovation. It is steady progress, but the question is whether the European ecosystem can challenge Silicon Valley.
On the contrary, the positive side of a small ecosystem is that it's more economical for marketing, developing loyal customers and dominating a market. Therefore, entrepreneurs can monetize sooner and generate revenue at earlier stages.