Y Europe can seed growth of its new stars
Europe has so far under-delivered in terms of globally successful technology startups.
But we're starting to turn a corner in Europe as we start to leverage some of our emerging assets. We've always had great talent (especially in academia & research institutions), but now we also successful entrepreneurial role models, sophisticated early-stage financing and the ability to start and test businesses at low-cost as well.
We should stop worrying about why we're not Silicon Valley and start thinking about what we can do with the great advantages we have. So this is really a call to arms: for first-time European entrepreneurs to let us know what they need to improve their chances of global success and for serial entrepreneurs and investors to figure out how we can better support the best ideas and talent.
We have a real chance to improve how we find, develop and accelerate the growth of our best European ideas - we need to work together to figure it out.
London's emerging young entrepreneurial scene
This issue has really come into focus for me as I've started to spend time with some of the rare people who are coming straight out of university to start Internet businesses. Some are staying in the UK and some have headed off to Silicon Valley - but I've been really impressed by the appetite for building startups by this group drawn primarily from Oxford and Imperial universities.
For the London startup community, Imperial and its talent pool must be one of our best hidden secrets. It's rated 1st in Europe and 4th in the world for technology by the Times Higher Education Supplement. Imperial's Computer Science department has around 600 undergrads and 400 PhDs, so it's great to see some of these people begin to start companies. In fact the student body has created Imperial Entrepreneurs (disclosure: I'm one of the founding patrons) to help potential student entrepreneurs reach out to London's established entrepreneurial and venture community to kick start opportunities.
How they've been doing it in the New World
Here in the old world, this is new news but in the US of course this is an old story. Schools like Stanford, MIT and Berkeley have long been known for producing great teams who come straight out of school and start significant businesses.
In fact in the last five years, this phenomenon has spread beyond this technical trio to encompass even liberal arts schools like Harvard (Facebook) and the amazing alumni like Scott Banister and Max Levchin of University of Illinois at Urbana-Champaign who have been behind great businesses in the last 10 years (LinkExchange, Ironport, Overture, PayPal and Slide).
Stanford with Google and Yahoo! to its name is the benchmark by which all other schools are measured. At Stanford, talented students not only have a faculty that encourages innovation, but of course they have Sand Hill Rd (and developed angel networks) on their doorstep for funding plus an MBA program and hundreds of technology businesses in the area to draw from for hiring.
These networks become self-perpetuating and are replicate anywhere. Silicon Valley is unlikely to ever be equaled as a magnet for innovation unless something very fundamental changes, but there is no reason why London in particular and Europe in general can't start to really compete in the creation of global success stories.
So how can Europe start to compete?
- Availability of Talent
Europe has incredible depth and breadth of talent. Skype is perhaps one of Europe's first global Internet success stories and it has exposed me to some of the most amazing developers and product people working in technology today -- these are people who are from Estonia, Denmark, Russia and Sweden.
We think of these markets (like India) as being a source of cheap talent, but this misses the point entirely - this talent is world-class. Check out the stats on Topcoder and you'll see that Russia, Poland not just holding their own with the US but ahead in competitions - and Ukraine and Slovakia not far behind. Given the web was developed at CERN and some of the great successes of the open source market like Linux and mySQL were both born in Europe we shouldn't be surprised.
Somehow we have persuaded ourselves in Europe that the US has all the talent, but if you look at the chart from Eurostat below you'll see that in 10 European countries including Lithuania, Ireland, Belgium and Switzerland have more science & technology graduates per head of population than in the US.
Now of course you need more than just great engineers, mathematicians or biologists to make great disruptive companies but this mix and diversity of talent is actually something where London and many other major European cities are blessed. There are plenty of experienced commercial marketers, product managers and financial types around to help build out a business once it starts to take hold.
Critically, we still don't have a deep pool of experienced startup talent in Europe, but one positive from the bubble of the late 90s is that it bloodied a generation of employees who know what it's like to ride the roller coaster of success and failure in a startup. Of course Silicon Valley and Boston has several generations of this kind of employee but tasting and learning from startup failure (as well as success) is something which Europe needs more time and experience to compete.
Many would argue Europe also needs a major change of attitude (and possibly legislation) here. Failure or bankruptcy is not culturally accepted in Europe, but if we want to encourage the abundance of talent to start and join early-stage companies trying to change the world, we need to accept there will be many many more flops than hits.
If we want European talent to stop feeling disheartened and start saying "I don't have to go to Silicon Valley to do this", we need to support failure and encourage people to take the risks you need to think and succeed big.
- Sophisticated Funding
A major part of supporting success or failure is funding. Library House have just conducted some very interesting research which breaks down venture capital investment into geographic clusters which takes an analysis of the US market beyond the national level. In this view, California and Boston are way ahead of the game but the UK is #3 worldwide in terms of investment.
Funding is only one piece of the jigsaw. It's not just the access to capital, but it's access to investors who have ambitions to build big global businesses, not just local players.
Ambitious entrepreneurs have been educated to believe that you need to have a US investor to build a global business, but there is certainly a much more developed and competitive market for backing European entrepreneurs today than there was even 5 years ago. When I started Video Island (now Lovefilm International) in 2002, there were very few Silicon Valley style, top-tier VCs ( Index and Benchmark) willing to back consumer Internet businesses but now there are several in the game (including Accel and Atlas). These established firms and very strong local players like Mangrove, Northzone (Scandinavia), Gemini (Israel), Wellington (Germany) and others, are all looking for and prepared to back teams that want to take on and change the world.
There are also now a significant network of serial seed-investors and entrepreneurs - who are lending both their capital and experience to build and back European start-ups. These include Niklas Zennstrom (FON), Martin Varvasky (Netvibes), Stefan Glanzer (Last.fm), Pierre Chappaz (Netvibes, Wikio), the Samwers (Hitflip, Wunderloop), Simon Murdoch (Lovefilm, Viagogo), Klaus Hommels (Stardoll, OpenBC) and Brent Hoberman (WAYN, Moveme). At TAG alone, we have invested in around 10 European start-ups in the last four years.
There has been quite an active discussion recently about the funding gap for European start-ups, but in funding terms, I don't think there has been a better time to get a start-up funded in Europe. Index has just closed a €350m fund.
- Role Models & Ecosystem
The same can be said for the availability of both companies and people are can provide role models to first time entrepreneurs about what can be done.
Larry & Sergey at Google and Jerry & David at Yahoo! needed there to have been Jobs & Wozniak at Apple or Gates & Allen at Microsoft. In Europe, we are only just beginning to recognize that if Niklas & Janus can do it with Skype, then why not others?
Why not indeed. There is nowhere near as many examples of people creating global technology businesses in Europe as in the US, but you just need a few examples. Skype was a watershed moment in how European entrepreneurs can think about their potential, both in terms of exit and global footprint (only around 20% of the business comes from the US).
We now have several businesses born in Europe that have the potential to make a global impact and they are spread across the Continent: including last.fm (London), Netvibes (Paris), Habbo (Helsinki), FON (Madrid), Skype (Tallin & London) and Rebtel & Stardoll (Stockholm). We also have a generation of second and third time entrepreneurs who are not only helping to seed the next generation but are also now focussed on building their own new businesses.
There is also now a growing ecosystem of support services -- lawyers, communication agencies and recruiters -- that have experience working with startups and helping them scale.
Perhaps one of the key factors that is swinging into Europe's favour is the changing dynamics of the Internet and globalization. Ten years ago, in fact even five, you could not consider building a global technology business without starting in the US but that is not true today.
The Internet outside the US is bigger than the inside and that trend is only accelerating. Google, eBay and Yahoo all know this and the fact that YouTube is already over 65% international in less than two years from launch shows that the US in no longer an island.
Against many important measures -- broadband penetration, % online advertising spend and mobile phone adoption -- the US is no longer the world's most important market. This is not for one minute to say that the US shouldn't part a major part of every ambitious startup's plans but if for example you want to be in the market with the largest share of online advertising as part of the marketing mix, you want to be in the UK.
Skype again is a great case study of a business that did well to look East before it looked West. Today Asia is a major part of its community and several developing country markets like Poland, Brazil and Turkey are very significant as well. European companies are ideally placed to take advantages of these globalizing trends and not just because of their location.
Location is important, but in this case, an attitude which is attuned to being open to other cultures is actually more important. No European market is big enough to sustain a single-market player, so no ambitious European technology business thinks either single geography or language. Where Netflix could create a major player by thinking US only, that is not an option for Lovefilm. If you start your business in Tel Aviv, Stockholm or Tallin you can bet you're thinking from day 1 about how you can take your products to a global market - if you start your business in Palo Alto, international is probably an after thought.
- Start Up Costs
Open source technologies have evolved to a level of maturity and popularity that if you are a talented developer with a great idea for an Internet application your only really significant costs are your time. Amazon's web services have even started to push bandwidth and storage into an area of affordability.
The barriers are now incredibly low for creating software applications which you can get out onto the Web, expose to a global audience, get feedback and iterate.
Starting small doesn't mean that you're not going to need funding to hire and scale up if you have a real business to pursue, but what it does mean is that you can find out very quickly and cheaply if your idea has traction. There is a big difference between an idea (which is easy to discard) and a business that has taken on people, costs and commitments (which is very hard to discard both rationally and emotionally).
We have a great opportunity today to test more ideas, which we can do very quickly and cheaply, and start businesses which have a better chance of succeeding.
- Role Models & Ecosystem
Well, not surprisingly there are already some models looking to help encourage young talent to start businesses in the US like YCombinator startup schools in Boston & San Francisco and the new Techstar summer program in Boulder.
Both these models are similar in terms of their approach:
- invite smart first-time entrepreneurs to apply for an intensive course on developing their idea into a business
- surround them with experienced entrepreneurs and investors who have been their before
- invest small amounts of capital ($5-15K) to take small equity stakes (5-10%) in a limited number of the entrepreneurs
- support these entrepreneurs for a limited period (say 3 months) on site in SF, Boston or Boulder
- give the successful teams the chance to pitch to VCs and experienced investors
What I really like about YCombinator though is the focus they have on the developer, especially young developers. Paul Graham writes really eloquently about today's hackers being like the Renaissance artists of our generation. The democratization of the tools needed to create great software means that anyone with the talent and an idea can try to start a business. The same will become true for the creative arts and is to some extent already the case on YouTube and Amie Street but for now the focus should be on the hacker and the giving talented software developers the chance to turn their ideas into businesses.
I think Paul Graham has it right. Not every great hacker will be able to create a business, but today's world gives them a better than average chance and giving them access to the right support networks, advice and capital is the right way to do it.
The jury is still out in terms of the commercial payback of the YCombinator crop but I think regardless of how many businesses come out and get funded, acquired or become sustainable - the educational benefit that accrues to talent from the support they receive and the networks they form is the biggest payoff. It's basically a cheap and very compressed MBA, because anyone who has done a startup knows, you only learn by doing and making mistakes.
We can do this. We should take this model (perhaps with Paul Graham to help!) and make it work for Europe -- I suspect it needs significant tweaking and I've seen some interesting riffs on the model starting to emerge, but it's really a service for the entrepreneurs - so you should let us know.
Seeding Europe's Potential
We compete with the rest of the world in being able to leverage open source and the growing ubiquity of the Internet.
But in Europe we now have some advantages of our own:
- world-class talent within the EU and in our orbit including Israel, Russia and South Africa
- proportionally more 20-29 year old science & technology graduates in 10 European countries than the US
- available startup capital like never before and experienced investors keen to back daring ideas to create global businesses
- a generation of experienced European entrepreneurs ready to offer a support network
- successful role model companies in capitals across Europe
- cultures that are attuned to thinking global and acting local
Right now, I've love your feedback.
Let me know;
- what you think,
- who you'd want to be involved,
- how we should go about finding the right talent,
- who should we be telling about it,
- how should the model work best,
- if your an entrepreneur what you would need,
(Note: thanks to everyone who gave great comments on this tirade and to Sam Sethi for a great title)