Essay

Why is Europe Failing To Create More Unicorns?

Out of 108 startups with a valuation of more than
one billion dollars, 78 are from the US and only nine are from Europe. Whats going on?

Before you read on: This is a complex issue and I don’t claim to have the answers. In fact it’s going to ask more questions than it answers and I wasn’t even sure I wanted to publish it. It’s not even obvious why chasing unicorns is such a good idea. Now they are here though, lets at least have a look at why Europe has so few. Agree, disagree have some observations of your own? Please share them in the comment section.

It’s hard to to build a business no matter where in the world you do it; most businesses fail. So the entire premise for a healthy economy is that new companies consistently gets created. Over the last 10-15 years, a new type of company have emerged called Unicorns. These are companies on the private market that are valued at more than $1 billion and are primarily found in the tech industry. These are companies like Airbnb, Dropbox, Uber, Spotify and Square and data from some research 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?

On 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.

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 is going to take years.

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 a key component for 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 there was even an idea of a single market that the EU today is trying to establish.

How can that be? How come, Europe has historically spawned many global players, yet today apparently fail to establish anywhere near as many 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 whats wrong with the startups or the more risk averse European investors but whats 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

Disconnect between the needs of the European politicians and those of European startups.

In order for EU to unify under 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 adjust 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. There is now also a proposal to ban halogen light. Recently the EU was looking into banning cinnamon used in cinnamon rolls because of a too high amount of coumarin, 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.

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 have 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 thats 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 it can apply to almost any problem. Their ecosystems have been developing over decades now and ensures 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.

The 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 no 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 is 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 made 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 beginning companies.

There are contenders like Berlin, London and Stockholm, but they all lack the full stack 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 states.

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 allow 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 seems to be fixing the problems that the startups could fix.

Any society who want to have a healthy public-private julietta online casino relationship, need to establish some ground rules that benefit both parts. Europe seems less inclined to try and solve it’s issues by trusting it’s civil societies. Perhaps it’s just an ingrained mistrust to the private sector in general and perhaps thats why unions, although they have lost a lot of power, are still very powerful. Maybe it’s the said harmonization process thats creating this environment. Startups are normally very good at solving problems that emerge as society progress, but when they come as legislation it 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.

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 take it country by country, hire locals representatives who knew the market well and thats why Europe used to produce more important companies. Maybe it’s just because Europe used to be a superpower and had the political power and the US now taken over.

All of the mentioned observations definitely play a role. But more importantly I believe that it also show 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 by it. As humans we love progress but we fear change and at it’s core — progress disrupts how things used to be and forces us to reconsider if they could be 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 affect of progress.

Unicorns might not be what Europe want and we might all agree it’s 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 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 europes ability to still spawn new successful companies.

The EU seems to be fixing a lot of it’s problems via legislation. The question, to me at least—still stands as to who are it’s benefitting. EU or the Europeans.