Out of 108 startups with a valuation of more than one billion dollars, 78 are from the US and only nine are from Europe. Why?
Before you read on: This is a complex issue and I don’t claim to have the answers. In fact, I’m going to ask more questions than provide answers. It’s not even obvious why chasing Unicorns is such a good idea. Now they are here, let’s at least have a look at why Europe has so few. Agree, disagree or have some observations of your own? Please share them on POV International’s Facebook-page under this blogpost.
It’s hard to to build a business, no matter where in the world you do it; most businesses fail. So the entire premise of a healthy economy is that new companies consistently get created. Over the last 10-15 years, a new type of company has emerged called Unicorns. These are companies on the private market that are valued at more than $1 billion and they are primarily found in the tech industry; companies like Airbnb, Dropbox, Uber, Spotify and Square. Data from some research in WSJ and Down Junes VentureSource did show that a surprisingly small number of them are European. Out of 108 Unicorns only 9 of them are from Europe. Why aren’t there more?
One of the explanations I hear a lot is that Americans are just better entrepreneurs and that they think bigger. I don’t believe this is true — In fact, after having spent more than 15 years working with both European and US startups, I have yet to meet a European founder who doesn’t aspire to become as big as their US counterparts. Yet somehow European startups just aren’t producing these fast growing companies.
One of the explanations I hear a lot is that Americans are just better entrepreneurs and that they think bigger. I don’t believe this is true . I have yet to meet a European founder who doesn’t aspire to become as big as their US counterparts. Yet somehow European startups just aren’t producing these fast growing companies.
According to Forbes, 40% of the fortune 500 companies in the US are started by foreigners and 60% of popular tech companies are started by 1st or 2nd generation immigrants, many of them Europeans. In other words, the US is often relying on foreigners to innovate and create those businesses and plenty of Europeans are amongst those who succeed.
The other reason I hear a lot is that it’s a matter of access to capital and that European VCs are more risk averse. This might be the case but it doesn’t explain why American VCs aren’t just taking over and investing in the startups. In other words, it doesn’t explain why the VCs are risk averse, which is really the question to ask.
The third reason I hear is that the US market is bigger and therefore it’s easier to get traction. Yet there are 503 million Europeans living inside the EU vs. 319 million US living in the US. If the size of the market was any indication of how many unicorns a market could create, Europe would be in the lead. So size of the market alone isn’t an explanation either – at least not by comparing the numbers.
What is the European market?
A problem with defining ‘Europe’ or the European Union as one market is that it really isn’t; it’s many markets. The EU and the EUR was established to make it easier for these markets to work together through harmonizing legislation and create an inner market. The reality however is, that this process is going to take years and a true inner market may not, post-Brexit, ever happen.
On top of that, these different markets speak different languages. 23 official languages and 60 indigenous regional and minority languages. So even if the laws were unified, there would still be language and cultural barriers for any entrepreneur who dreamt of expanding to all of Europe.
This might definitely be one key component in explaining why it’s hard to scale businesses in Europe beyond $1 billion+ valuations. But it leaves one important question to unanswered…
How do we explain that Europe historically have had no issues creating what in their time, might have been called unicorns?
There are 160 European companies on the Global Fortune 500 list vs. 132 US companies. These are of course mostly older companies and not part of the Unicorn category, but at the end of the day that’s just semantics. The fact remains, Europe has historically created some of the biggest companies back when there was no harmonization. Before the idea of a single market even existed.
Perhaps the question isn’t what’s wrong with the startups or the more risk averse European investors but what’s wrong with Europe.
How can that be? How come that Europe has historically spawned many global players, yet today apparently fails to produce anywhere near as many big players as their US colleagues. How come European companies are failing to innovate and establish these Unicorns despite the EU working hard to harmonize the market which should make it easier to expand?
Perhaps the question isn’t what’s wrong with the startups or the more risk averse European investors but what’s wrong with Europe. Why are investors risk averse? If it was just a matter of a different mindset, then why haven’t American investors just swept the market and started investing in promising startups?
Observation #1 – There’s a Disconnect between the needs of European politicians and startups
In order for EU to unify into a single market, the member states need to agree on the laws so they can get implemented nationally. That way, a French entrepreneur can establish a business across Europe and know that the rules which apply to the company in France will also apply to it in Spain, Germany, UK etc.
But with so many nations involved and all having to agree, it also means a lot of legislation that a specific country might have had because of some issues specific to that country, suddenly gets applied to all of the other Member states. In other words, harmonization is not just adjusting existing laws it’s adding a lot of new laws.
There are rules for the curve of the cucumber to the bendiness of bananas. Recently, large vacuum cleaners and incandescent light bulbs were banned. A proposal to ban inefficient halogen light bulbs will be implemented in 2018.. Two years ago, some EU-parlamentarians were looking into banning cinnamon used in cinnamon rolls because of a too high amount of Coumadin, known to be causing liver damage if consumed too extensively. There are rules about having to put a big fat disclaimer on your website and have the user approve the use of cookies. The EU creates a lot of new rules and the member states are mostly forced to adopt them.
Startups often benefit from change coming from the bottom up, but change created by politicians comes from the top and is rarely beneficial.
The need for the European politicians to continuously implement new legislation to harmonize the inner market creates a problematic environment for business innovation to happen within. Once a directive has been agreed upon in the council, an enormous pressure is put on the nation states to implement it; killing any attempt to try and challenge this from the smaller players in the private sector.
Startups often benefit from change coming from the bottom up, but change created by politicians comes from the top and is rarely beneficial.
Observation #2 – Europe has no Silicon Valley or New York
It might not sound like a big deal but it is. New York and Silicon Valley are centers of concentrated knowledge, money, experience and talent, which can be applied to almost any problem. Their ecosystems have been developing over decades now and ensure both constant influx of new talent from all over the world plus an alumni of experienced investors, entrepreneurs, lawyers and lobbyist ready to help navigating the many obstacles of building businesses.
Europa has none of that. If a city has the culture, it doesn’t have the money. If it has the money, it doesn’t have the culture. There is no repository of knowledge or a central hub of alumni. No fostering of new talent to go out there and build the next billion-dollar company. When someone finally do, there are very few people who can help them take the company from a small company into a mid-sized one let alone a large global company.
Furthermore, most EU legislation designed to help the private sector is focused primarily around the old industries. Those who have the money and power to lobby for their interests. Because the European startup scene is spread out so thinly, it’s hard to effectively educate politicians about the needs of the small growing companies. There are contenders like Berlin, London and Stockholm, but they all lack the full stack of an entrepreneurial ecosystem and access to funding.
Observation #3 – European startups ask for permission instead of forgiveness.
The truth is that in order for a company to truly innovate it has to break convention and sometimes go to the edge of what is legal and deemed acceptable. If you look at some of the US companies that are doing well like Uber, Airbnb, Kickstarter, LendingClub and Tesla; they are all fighting legal battles both with incumbents and within states.
The truth is that in order for a company to truly innovate it has to break convention and sometimes go to the edge of what is legal and deemed acceptable. For many Europeans this approach is seen as bad business behavio and instead of fighting the regulation they end up obeying them.
According to a new Immediate Edge review, for many Europeans this approach is seen as bad business behavior and so it’s very hard for any startup to gather any kind of moral, financial or legal support to fight these fights. The result is that Europeans too often end up creating predictable businesses within the confines of what the law allows them to do. Instead of fighting the regulation they end up obeying them. This might make for a good medium sized company, but rarely does it create truly groundbreaking giants.
Observation #4 – The EU is trying to fix problems that startups could fix
Any society who want to have a healthy public-private relationship, needs to establish some ground rules that benefit both parts. Europe seems less inclined to try and solve its issues by trusting it’s civil societies. Perhaps it’s just an ingrained mistrust of the private sector in general and perhaps that’s why unions, although they have lost a lot of power, are still very powerful. Maybe it’s the said harmonization process that’s creating this environment. Startups are normally very good at solving problems that emerge as society progress, but legislation rarely benefits startups but rather the incumbents.
So why is Europe failing to produce Unicorns at the same pace as the US again?
As always with everything as widely defined as this question there are no simple answers. I believe that a combination of the continuing harmonization process and lack of a proper entrepreneurial power center are the biggest factors. The claim that it’s because of of different cultures has some validity, but not as much as we Europeans would like to tell ourselves. As I hope to have shown, we didn’t use to have this problem back when the markets where even more fragmented and we do just fine when we start companies in the US.
Any society who wants to prosper needs to find a balance between letting progress rule and holding progress back. Humans love progress but we also fear change and at its core because progress disrupts how things used to be and forces us to reconsider if they could be handled differently.
The irony might be that in the process of harmonizing Europe’s markets we are making it harder for European startups and investors because the harmonization process in itself is disrupting Europe making it harder to establish these power centers. Maybe it was easier when you could do it country by country, hire locals, representatives who knew the market well and that’s why Europe used to produce more important companies. Maybe it’s just because Europe used to be a superpower which had the political power – and now, the US has taken over.
All of the mentioned observations definitely play a role. But more importantly I believe that it also shows us something interesting about progress and stability:
Any society who wants to prosper needs to find a balance between letting progress rule and holding progress back. Progress is always necessary, but all progress have consequences, there is just no two ways around that. Someone will always be affected negatively. As humans we love progress but we also fear change and at its core because progress disrupts how things used to be and forces us to reconsider if they could be handled differently. Politicians know this and they know that in order for a society to function, their primary job is always going to be to ease the effect of progress.
Unicorns might not be what Europe wants and we might all agree that chasing them is an unsustainable model. Even if it is, though, many of these companies will still be having a huge impact on societies all around the world. So Europe (and I know I have been using this term very loosely and somehow inconsistently) might need to take a hard look at the price of their politically controlled progress and whether it is affecting Europe’s ability to spawn new successful companies. One core question stands: The EU seems to be fixing a lot of its problems via legislation – who are benefitting. EU or the Europeans?
This essay was originally published on Black&white in 2015 and has been edited and updated for POV International.
Top illustration: https://upload.wikimedia.org/wikipedia/commons/c/c7/Unicorn_(PSF).png
Modtag POV Weekend, følg os på Facebook – eller bliv medlem!
Hold dig opdateret med ugens væsentligste analyser, anmeldelser og essays i POV Weekend – hver fredag morgen.
Det er gratis, og du kan tilmelde dig her 
POV er et åbent og uafhængigt dansk non-profit medie.
Har du mulighed for at bidrage til vores arbejde? Bliv medlem her
