VentureBlog: Entrepreneurship In Europe

We (SAP Ventures) faced this continually, an abnormal degree of risk aversion among both the young entrepreneurial class and among professional investors in Europe. I am not an expert on the cultural nuances of the various countries, but it does strike me that a good number of people in their twenties would be better off abandoning doctorate programs in favor of spending their most productive years building companies. Speaking of education, countries like Germany need to seriously reform their education system to increase investment with the goal of improving the quality, and to abandon the antiquated three tier system that is failing students by limiting their ability to participate in higher education that will serve as a cornerstone for evolving the overall economy. Rather than looking to government to fund and direct R&D, the EU should just get out of the way and encourage risk capital, entrepreneurship, and if they insist on getting involved it should be to attack the cultural barriers that entrepreneurs face from the very beginning and then the stigma that invariably goes with failure.

Having said all that, not all hope is lost. There are some very cool companies and U.S. based investors are still heavily involved in Europe (although the EU should be concerned that India and China is drawing a lot of capital away from Europe). I’m going to write about one such company later in the week.

VentureBlog: Entrepreneurship In Europe:

Despite some relatively recent efforts by U.S. venture capital firms like Benchmark Capital abroad and the notable recent success of Index Ventures out of Switzerland (driven largely by the spectacularly successful outcome of Skype), Europe remains more or less devoid of risk capital.

More on this topic (What's this?) Read more on European Union, Entrepreneurship at Wikinvest

7 thoughts on VentureBlog: Entrepreneurship In Europe

  1. “Starting up a company in Italy is a real effort. You need a super-human will and a certain propensity to masochism. That’s explained in the report of the World Bank and the International Finance Corporation called ‘Doing Business in 2006: Creating jobs’.

    The report compares the different countries for starting up and closing down a company, getting licences, taking on personnel, paying taxes, registering ownership, access to credit, legal proceedings and protecting investors. In 2005, Italy was in 70th position.”

  2. Jeff, I don’t know if you’ve been following my overseas travels, but I just spent two months in 10 European countries meeting entrepreneurs, businesspeople, academics, and being a tourist. Higher ed in Europe is not doing so well, and a spirit of entrepreneurship really doesn’t exist outside of the UK, generally speaking. The #1 thing Europe can do to improve their universities is to promote the liberal arts instead of pre-professional or technical skills.

  3. This is what i couldn’t post on the ventureblog itself. If i had time i’d edit heavily, but i wasted too much time trying to register and then post (from Word) in a cut & paste fashion. Please please forgive me if the formatting goes to hell on this attempt to reply – i tried in vain to learn what markup Typepas (the system ventureblog uses) would permit, and it became clear to me that only retyping would suffice. I gave up.

    Here goes nothing :)

    Fair comment, this articlette, but as a UK based European, it reads like an reverse advert for the Valley, since it touched not at all upon any of the cultural issues that affect business attitudes in the EU. Valley business culture is comparatively new, phenomenally successful, fascinatingly self – destructive (a good thing from Fairchild Semi on in) and a hive of distributed financing. These developments coincided with modern mass media penetration, post war US economic dominance and many factors that turned Europe’s collective head towards the USA. As someone who grew up reading, say the Nat. Geo. (a magazine that declines to cover the USSR as policy until the mid 80s, because of their all – positive editorial predilection) there remains, I think in anyone over the age of thirty, a penumbra of reverence – which you might stretch to partially explain more recent underling resentment towards non economic US policies. I think the [US] PR was simply too good, our economies (of the past 4 decades) too sclerotic, and the positive aura created by North American entrepreneurial technology, contrasted with nationalized EU industry , too harsh a comparison for many to rationalise or understand.

    But for an non – European to look solely at the post – WWII era for an understanding of our business foibles, is at the risk of polarizing politics from economic reasoning, and to ignore the history of European company formation and governance. Indeed it wholly ignores by default an enormous swathe of economic integration, from the Hanseatic league to Hope Brothers and similar mercantile banking systems that lay at the heart of trade routes for hundreds of years. Europe arguably never had a defining internal dispute, but series of realignments. Hope & Co (as it became) found itself financing two sides of many a military skirmish, for example. Conflicts of interest, royal patronage and dynasty and poor, often disrupted communications due to local wars and in-fighting over empire building, dictated business was conducted privately. A classic example of the effects of this is Merton Miller’s report that a student announced to him, with supporting differential equations, “I know now who owns Deutsche Bank . . . it’s Deutsche Bank”. The sense that business knowledge prevails only within a select (and self – chosen) circle, permeates perception and psychii, regardless of the rationale. One might flippantly contrast this with the exceptionally small number of significant VCs in the USA, compared with the size of the connected economy, but that observation must be tempered with the much wider ownership structures created by the ferment of the VC world.

    In the space of a blog comment, I can only hope to deliver gross generalisations. Attempt not even a précis, but some thematic display of the grist of the matter. My unworthy disclaimer, whilst I have studied business history since I can remember (a strange hobby for a boy, but the early merchant traders lives seemed impressively swashbucking to me) I do not attempt rigor in my commentary. Just a little tempering of the idea that this post constitutes “info” or considered perspective and an impression from the other side of one whose family largely emigrated to start business in the US after the last WW.

    Back to the subject in hand, no matter how you argue the perils of founders poorly negotiating their term sheets, US VC’s create a more flexible independent governance umbrella than could any government, and they have appropriately organized themselves to lobby for this freedom to react, where legislation cannot be timely. Contrast this with the UK company law, with which I was intimate until a couple of years back. Companies

    House, the perceived “regulator” of the incorporation process here in the UK is in fact no more than a records deposit. They are permitted by statute no more than 48 actions for filing infringement in any year. More than 3 million individual company directors exist in the British Isles. Policy stances make it hard in the extreme to push a new company to file on time. The permitted license has risen as high as 22 months after a 18 month grace from incorporation, before action is considered. I might hold the record for getting Companies House to act in a timely manner, but I had to show that a director’s pseudonyms had been summarily criminally liable on numerous previous companies. Even then, my complaints were leaked, and the action dropped, leaving me to take private action. On the evidence I had, I cannot believe that a District Attorney would not have picked up o similar uncovered activity in the States.

    I sound a sourpuss now. Kroll Associates or similar companies fly high in my priorities to research backgrounds. But, you know, that costs as much as many small outfits need to receive for angel type kickstarts. The way to manage a company in the UK is not to worry about term sheets, at the outset, but to worry about the tables of incorporation (Table “A”) – however there is a real mismatch between investor – recipient understanding of these legal relations, and in fact areas of conflict between Trust and Company law in which overreach and responsibility to the company make it difficult to resolve complex matters quickly. No different in the States, however we have two initial points of contact here with the judiciary: Applications Court and Companies Court ; former for (broadly) injunctive action (preliminary or interlocutory) and the latter for points of governance, and often the latter needs to hand off to Chancery, as soon as issues of Trust arise. The key is Companies Court, because there are maybe 200 good practitioners, none of them much below the top billing tier.

    In essence, the US VC culture handles these functions. Since the EU has no court comparable to Delaware, and has intertwining laws and as yet unfledged supra-national modes of recourse in cross – border transactions, I humbly submit that control ethos overrules appropriate legal due diligence. On the opposite side, the costs of bankruptcy and personal liability if proven in (here) UK companies make for highly contentious negotiations. Very recently too, cross – border banking mergers and non EU acquisitions to faster growing markets have removed almost entirely UK bankers’ incentives to increase their abilities in small business lending locally. Detail is being lost in scale. My thread of discussion returns when I suggest that the historical conflicts of interest and poorer cultural disclosure (or even discourse of itself, like this weblog, as opposed to actual disclosure) disincline those active in VC in Europe to huddle ‘round and get their act together. I shouldn’t mention the bonanza that has been privatization and “public private partnership” that has, particularly in the UK, sweetened deals to the point those who call themselves Venture Capitalists are in fact credit derivatives traders, enjoying the vig of implied Sovereign ratings and politically motivated discount equity.

    On the part of aspiring entrepreneurs, too, there are ingrained cultural tendencies. Whilst figures on wealth distribution in the USA increasingly make headlines in the past 20 years, the USA never experienced the depths of feudalism, patronage, tithes to the church and the vast disparities of European history that can hardly even be considered as an

    equation of personal wealth, because for much of the time, there was no such possibility. Thus, for the most part, I see would be great entrepreneurs jaundiced by a feeling they must somehow game the system, use rules against the establishment, be suspicious of anyone who wishes to discuss legal recourse, even in the most positive of ways, so that a disaster – exit might be planned if the worst should ever occur. (Yes, I believe at least for UK directors, a disaster exist ought to be arranged, because of the severe impact here on loosing a credit rating, and the severe social consequences that still exist in failure).

    How do we get past this? My view, let’s plagiarise. Let’s method act, but know who we really are. Let’s copy the Valley attitudes. Let’s even be drastic, and say that for every angel deal we do, the founders, if they make out, must morally recommit a portion of their capital. The reason I say that last thing is because I observe a far greater “shopkeeper” mentality, the “lifestyle entrepreneur” in us Brits, and many of us, if we do good by sticking with a firm, or no, ought to forced out of our self – inflicted cages.

    Bottom line, guys and gals, reading this: don’t make hand-waving observations about UK or EU VC, until you have some sense of the original malaise.

    At this point I should stop, and some “real” work!

    Very best to all

    – john

  4. Erratum : when i say permitted by statute” above, i mean Companies House is statute limited in scope of action and consequent funding to independently pursue errant companies who choose e.g. not to file accounts in a timely fashion.

  5. Ben wrote: “The #1 thing Europe can do to improve their universities is to promote the liberal arts instead of pre-professional or technical skills.”

    Just my ever – jaundiced observation, but i wonder if instead we have not overpromoted the exact idea you describe. I say this when CS degrees become Java programming boot camps, and when “media studies” graduates come to me with a half-hearted appreciation for mass psychology and zero knowledge of anything related to the commerce of broadcast and publication.

    I would like to hear just once how a “liberal arts” graduate, without further separate education, could innately be more successfully an entrepreneur. :)

  6. Ben,
    Thanks for your comment. While I agree with your point about liberal arts I can’t help but wonder what happened to a good liberal arts education in the U.S.? I’m more inclined to think that the broadening the access to universities is a more important goal at this point. Per capita, enrollment in undergraduate programs trails the U.S. by a wide margin, and in Germany especially I think this goes back to getting rid of the 3 tier system which many have called a relic of the feudal middle ages.

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