“THE EXCEPTION SHOULD BECOME THE RULE - How the next big 1 billion company can come from Europe
by Joelle Frijters and Janneke Niessen
Facebook. Google. Amazon. All born in the USA. There is an ongoing discussion as to whether these kinds of tech giants could ever grow - and even more importantly stay - in Europe, or if the European cultures and structure actually prevent that from happening. Being co- founders of a European technology company, we think they absolutely can, but only if Europe is in for a serious improvement plan.
Europe is not standing still when it comes to starting fast growing innovative tech companies, but why is it so hard to grow them into global multinationals? There are significant differences between the US and Europe that result in lower chances of the next €1 billion success story to be European - and we think that should change.
Looking at the number of big companies in the US and Europe and their founding dates portrays quite a shocking picture. Since the beginning of the last century the number of big European companies that were founded has been shrinking at an alarming rate. Where is growth and innovation in Europe supposed to come from in the future? What is going to save Europe in the next decade and secure a strong position between competing continents? Let’s face it - we are in a crisis and even if we could manage to get out of the crisis we would still have a structural growth problem.
What will allow Europe to change into an ideal place to start a company and enable it to lead the way in growing innovative companies that fuel the global economy? As a start, we feel the improvement plan should look like this:
Get Europeans enthusiastic about starting high-growth companies
Education plays an important role in increasing entrepreneurship. Everything about growing a business is learnable. Today, at college and university the focus is mainly on corporate careers. We would have loved to have learned more about the dynamics of starting a high-growth company; what are the types of investors, how does the entrepreneur negotiate a term sheet, what to look for in contracts with angel investors and VC’s, how to determine valuations, strategies to grow your company and so on. Education that really comes in handy when you choose to ride the bumpy road of building a fast growing tech start-up.
A side effect of more attention for entrepreneurship in education is that the attitude of people around those who have chosen to start a company will be different. We have heard far too often the advice to not start a company and go for the ‘safer’ option of becoming an employee. More recognition and admiration for entrepreneurship will serve as a catalyst for more people daring to choose the entrepreneurial option and be successful.
Simplify rolling out a European Company structure
We are all supposed to feel European, but when we started a company in our home country and wanted to expand to other markets within Europe, we had to set up a new legal entity within each new country. Without a local legal entity your capabilities of operating in that market and hiring people are limited. But setting up legal entities in each market requires investment and increases business complexity. These are the kinds of things you don’t want to be distracted by when scaling your company and rolling out internationally. The fact that you need the right team and the right approach, combined with the growth speed of your company is already complex enough.
If we truly want to be Europe this business structure morass should not exist. A European legal entity that provides you with the same possibilities as a local legal entity would solve this problem. This can be limited, if necessary, based on revenue, the number of people employed, or the number of years you have been active in a certain country. It can also be limited to specific types of taxes or other regulations. This will allow small, high-growth companies to expand faster, with less cost and benefit from the scale Europe could provide if it weren’t based on separate countries but instead behaved as a true European market.
Break down the “Guillotine” rule that applies to entrepreneurs in Europe who try and fail
If you never fail you have never tried, and people learn from their mistakes. Very successful entrepreneurs have often had multiple companies in the past before they managed to create that one killer company. (The Ewing Marion Kauffman Foundation found that the average age of a successful high-growth entrepreneur was 40 with two prior entrepreneurial endeavours.) In the current structure, entrepreneurs face a huge potential personal liability, which reduces their chances of starting a new company multiple times in order to become experienced entrepreneurs. In the US there is limited personal liability for entrepreneurs in case of business bankruptcy, and people are able to start anew whenever the market believes in them. The time between the end of the liquidation and the entrepreneur being free from debt can go up to 6 years in Germany and even 9 years in France.
Equalize and simplify labour laws across Europe
For us, the right people were definitely the key factor to our success, but also a large part of the investment and the risk. A start-up company needs to stay agile and flexible but, in Europe, there is little flexibility with regards to hiring and firing people. The cost of the average severance package is a huge (often insurmountable) cost for smaller companies that are not yet profitable. Our labour laws serve as a profound limitation for companies who are trying to hire and build the best team.
Further, the non-existence of a single European business entity greatly increases the cost of labour because, if you don’t set up local entities, you need to hire people through payroll companies. This usually means exorbitant surcharges - once again creating an unnecessary burden for the cash-strapped start-up.
Love European innovation more and market the stuff better!
We should really recognize and celebrate the innovation that’s happening in Europe instead of assuming all innovation happens in the US. We operate in a fragmented, complex market with different cultures and currencies and although that creates its own challenges it also often forces us to be even more innovative.
The big companies in Europe today also need to realise that they can play a role in driving growth and innovation in Europe. This can be achieved, not only by utilising the investment funds at their disposal, but also by seeing it as part of their local, corporate social responsibility to actively create fertile soil for innovative, European start-ups. By working with European startups, even when they are still small, this allows these companies to reach a certain level, which will attract sizeable investment, which will then enable them to cross the chasm and become established.
So let’s start looking at the innovation in Europe!
Foster a healthy investment community
Scaling a company fast requires substantial, high-risk investments. This requires a healthy ventur ecapital (VC) community and VCs requires a vibrant mergers and acquisition (M&A) ecosystem. There is no Sand Hill Road in Europe. There are VC firms in each market. There are VC firms that invest across Europe and there are venture firms from the US that are active in Europe. But we need more of them - many more. But there is no way to attract these firms other than creating the right environment and the right opportunities. If there are more high growth companies, and more successful ones, VC firms will follow automatically. There is a tipping point that will accelerate that process; we just need to make sure we get there.
In that respect, Europe can be seen as a high growth innovative start-up that needs to cross the chasm. We all need to work hard to get past that point. We should celebrate and learn from successful European entrepreneurs. Role models are key and will serve as a fundamental catalyst for future entrepreneurs to take the leap. Because, just to be clear, none of the reasons mentioned above should be used as an excuse as to why a company is not or will never be the next big thing; nor should or will it stop any entrepreneur chasing their dream. Regardless of where you live, nothing will stop a true entrepreneur from trying to reach his or her goal. Any challenge she faces will be overcome, ignored, or used to her own advantage. Starting a company will always be a journey with ups and downs and, although it is the coolest thing on earth, it is not easy. Anywhere. It needs determination, blind faith, drive and above all passion. Everywhere.
That does not mean, however, that we cannot start creating an environment that increases the chances of companies growing from small and medium sized companies into large multinationals. The exceptions should become the rule in Europe and allow new European companies to become the fuel for future economic growth. There is no plan B so let’s go for it!”