Make Europe Great Again
With Trump in the driver seat, is this a chance to make Europe great again?
Europeans – Dutch, English, Spanish or Portuguese, were great entrepreneurs, discovering new worlds and trading with all sorts of different nationalities and cultures. Back in the days, the Dutch established VOC – the first global company for world trading. We created great global companies like Shell, Unilever and DSM. But, with the exception of Adyen, in the past decade we have not been able to create a global competitive company.
Where did we lose ourselves? Why are the Americans world dominators in the digital era with tech giants like Facebook, Google and Uber and not us (Europeans)? What are we doing wrong or what is their success formula?
I won’t zoom into the obvious topics like single market, one common language and cultural unification. The US has successfully enforced this system, even upon immigrants, adopting one language and way of life. European politics failed in doing so. That’s another subject and seems more for a politician to write about than an entrepreneur like me. In the time of the VOC we didn’t speak all local languages but were successful in trading with the world. So, what can we -- as entrepreneurs -- do to make Europe great again?
Politics don’t make economies turn, entrepreneurs do!
There are different conditions and success factors that apply when building a global tech company. In this article I will be addressing CAPITAL, the major differences between the European and US venture capital markets and the opportunity that “digital” and emerging tech offers Europe to become GREAT again.
A company, during all steps of its lifecycle, from idea to unicorn, has various capital needs. Everybody has heard of seed, early stage, later stage, A and B series of funding. The availability of cash plays a crucial part in building a successful global company. To accelerate growth, venture capital is a necessity. Amounts ranging from minimally 150 mln to a billion are also not so stuttering as a capital need during the whole lifecycle. Especially in this digital era, where growth is exponential and it doesn’t take 20 years for a company to become a global player.
This playing ground is new to European VCs. Europeans are the architects of the financial industry and have the banking mentality in their DNA. However, the culture is risk-averse because investments are being done with other people’s money. Regulated by compliancy and governance to the very last detail. But entrepreneurship is fueled by taking risks.
To learn how to walk you need to learn how to fall! While in Europe you are literally punished for failure as an entrepreneur by society, failure is the way to success for the Americans. If you have experienced failure, you won’t make the same mistakes again. This small contrast alone makes a world of difference.
In the US, Venture Capital was created by entrepreneurs, whereas VCs in Europe until today are mostly investment bankers or corporate finance people. People that know how to deal with finance but not how to build a company. Seed or early stage in the US starts with a brilliant idea and entrepreneur, whereas in Europe you already have to have a running operation with customers and a turnover of 500,000 to 2 mln. Risk-aversity against risk-prone investments. I call European VCs ‘Spreadsheet investors’ (or f@#^*rs). Luckily this is turning around and successful entrepreneurs are stepping into the European VC domain. And still we are far behind the US well-oiled VC machine.
As an entrepreneur in Europe, you are literally punished for failure by society, while the Americans see failure is the way to success.
So, what is the magic trick? What makes US VCs so successful?
I have been intrigued by the success of the Silicon Valley VC engine for 20 years now. Looking to find that secret formula, I’ve been analyzing, researching and talking to people, and instead of finding the sorcery of Palo Alto, I was totally shocked by my findings.
One rules all: there is an unwritten rule in the Valley, that when you become a multi-millionaire or billionaire, you put in 50% of your wealth back into the startup ecosystem. That scheme benefits both sides - VCs become richer and there is always capital available for the startups.
Sharing intel and co-investing are part of the golden rule. There is no hard competition between the VCs, but instead they work together -- organizing capital around one UBER instead of investing in 51 (European countries) UBERS. This way the odds of a startup becoming a Unicorn rise exponentially.
No fake news here: Size does matter!
A 500 mln fund is a small-sized fund in the US but in Europe it is considered to be HUUUGE! (silent ‘H’). This has a direct impact on the height of amount per investment.
Than last but absolutely not least is the role of the government in this equation. In Europe, we have a subsidy system, where only the R&D or innovation phases are subsidized by the government. This boosts a lot of inventions at corporates, startups and universities but it doesn’t create a global company. Inventions are not turned into companies and companies don’t have the access to growth capital. What happens is that stromen for US companies are here on the ground, cherry-picking and buying these inventions or early stage ventures for cheap a$$ prices.
The opposite is happening in the US, where the government implemented an interesting system. There private individuals and companies are raising billions of dollars for setting up funds. These amounts are doubled by the big pension and wealth funds. In Europe pensions do not invest in VC funds, but why do they invest in the US ones? The system works as follows:
Individuals raise the amount of 500 mln, pension funds are willing to invest another 500 mln in a risk-taking investment fund because the amount put in by pensions are guaranteed by the US government. So, when the fund fails, pensions fund are reimbursed for their investment. There is a zero percent risk for them but it doubles the availability of capital in the ecosystem. The chance that a fund blows up or doesn’t create one unicorn is minimal. At the end, it doesn’t cost the US government anything to attract the pension billions into the US economy. At the same time, Europe is wasting billions on subsidies in creating inventions that will be bought by the Americans.
How stupid is that? - You’d be surprised!
Look at the Dutch pension funds – unarguably one of the wealthiest pension funds in the world. Out of these funds, only 0.06% of our money gets invested in our own economy, mostly through listed companies. The rest goes to the Sequoias and other VC funds, investing into the tech domination of the next US tech giants.
If we want to make Europe great again we need to start changing this. Emerging technologies like Blockchain, AI, Robotics give a window of opportunity to create next generation European tech giants. These are new domains where Americans don’t rule yet. So, if we play our cards right and implement a smart system, where capital is organized around high-potential innovations and entrepreneurs, we have a chance to put “Europe first”. We only need to convince the big pension funds to invest in the European startup ecosystem.
We, at 2SQRS, together with Ariadne Capital created a pan-European investment platform to collaborate and organize capital in a smart way, around the right innovations and entrepreneurs. This will give pension funds, wealth funds, large family offices and high net worth individuals a way to invest in their own markets without too big of a risk. A system that makes sure that capital is available for companies to grow - from an idea into a European tech giant.
If you find this article insightful and share our ambitions on transforming the European VC marker, let's talk further. You can reach Xander via firstname.lastname@example.org