For pessimist I’m rather optimist.
*** Originally published in #adlrocha’s ***
Today I want to share with you my thoughts (and maybe open a more than needed discussion) about a topic I have always been really sensitive to. With the impressive amount of tech talent that we have in Europe (and even in Spain, if you let me), how is it possible for us not to have any global tech monster such as US’s FAANGs, or China’s Alibaba and Tencent. The closest we have to one of these in Europe is the Swedish Spotify, which our beloved FAANGS are already trying to gobble with their own analogous music streaming services.
The following tweet is the perfect illustration of how worrying this matter is: Germany’s (supposedly one of Europe’s current biggest powers, cradle of startups and knowledge) market size is now as big as Microsoft’s and Amazon’s market cap combined. How is this possible? What are we doing wrong? Why don’t we have our very own Google or Amazon? And more importantly, what can we do to fix this?
The root of the problem
Let’s be a bit self-critical for a moment, what are we doing wrong in order for us not to be able to build the next Netflix? After a few searches using my favourite search engine (indeed, I don’t use Google), and using my own experience in the process, these are a few of the things I feel are hurting us in our quest for tech domination:
- In Europe small companies and startups do not have the same access to investment as in the US. In the US, an average size investment round is of about $7 millions, while in Europe is $5 million. Where would a startup that wants to build a quantum computing (a capital intensive development) go to rise money, to the US or to Europe? Is true that we have more and more established VC firms in Europe, yet it is still easier to rise big rounds in the US compared to Europe. Add to this the tax burden for companies in Europe, and you have the perfect storm.
- We don’t know how to become global and attract global talent. US startups usually design their business models to fit a global scope, and consequently they rise enough investment, and define their strategy from scratch, to achieve this goal. In Europe we seem to launch with a local mindset and dynamically adapt to become global when applicable. This local mindset prevents many startups from hiring globally (I usually find more US-based than Europe-based remote companies) or reaching global customers. Again, add to all of this the complex regulation startups face, for instance, when offering stock options to early employees in order to attract and retain global talent, and another nonsense barrier for a future European FAAANG.
- Our tech and startup hubs are still evolving. VC firms are consolidating, investment is rising, universities are embracing entrepreneurship, ecosystems are being built all around Europe, etc, and this is good. Still, Silicon Valley started in the 60s with universities as Harvard and Stanford in its orbit, they are a few years ahead of us. It is true that we also have some of the greatest and oldest universities, we just need to progressively add the entrepreneurship factor to them (something we, fortunately, are slowly doing).
- Europe’s regulation, demographics or needs are not as homogeneous as those of the US or China. In China or the US it is easier for a company to massively grow thanks to the enormous size of their markets. Building something in these countries suppose the direct access to a potential market of around 320 million US citizens and 1.300 million Chinese, compared to the 70 million Europeans. Even more, the US and Chinese markets are single homogeneous markets, while the European market need to be seen as the aggregation of several small local markets, each of them with their own peculiarities, needs and limitations.
- European investors and entrepreneurs are more risk-averse than the average American citizen. Blame our educational system, our idiosyncrasy, the limited number of VCs in Europe, or whatever you want to blame, but European investors are more selective than American VC firms, and European entrepreneurs aren’t as eager to leave their comfort zone as their peers in the US (I apologize for this coarse generalization, I am trying to make a point here).
- Regulation, regulation, regulation. GDPR, VISA regulations, tax burdens, stock options, etc. All of these are barriers to the development and scaling of early companies and tech innovations. But not only this, European regulations are preventing tech companies from reaching a significant and international dimension to compete with the big ones, as if they were afraid of this (look at European Commission’s position around the merge of European telecom companies).
A more than needed solution
The solution to the problem is not easy, but I would definitely start with removing useless regulations, and instead of preventively over-regulating, start regulating once something is a reality. Why regulating the autonomous vehicle when it is not yet in the market? I definitely agree that we need to start iterating to build a clear legal framework around new developments but, why implementing those regulations before it is available or massively adopted? Why conditioning its development?
As one of my professors at University once told me (and is something I usually repeat myself in a daily basis), “early optimizations are the root of all evil” (my dearest European regulators, please, apply this cite to yourselves). Obviously, startups and tech companies need to follow existing regulations. We need to prevent them from abusing their power once they’re big. Nonetheless, we could relax the regulation around tech, innovation and early startups to allow them to scale and penetrate solving the needs they want to fix. The lax regulation around tech in the US and China have definitely benefited the rise of their tech sector.
Add to all of this measures for the homogenisation of the European markets, and to support for the internationalization of companies, and we could have the perfect breeding ground to start competing in the A league.
We have the talent, the ideas, and the skills. We are building the ecosystem, but we lack the money and the regulation. In my opinion, regulation is one of the big barriers to the development of our tech sector, and we need to fix this at two dimensions: Easing the regulation around startups and innovation, to promote their development; and relaxing the regulation around tech companies, we shouldn’t be afraid about a company becoming too big, with the right an healthy ecosystem, others will come to overthrow her. Companies, like trends, come and go.
And that’s it for today, I would love to hear (or read) your thoughts in the matter.
Disclaimer: I am no expert in regulation, startups or VC investing. This publication is all fruit of my experience and a couple of DuckDuckGo searches (with any errors and omissions I may have made in the process). My opinion is not written in stone and I may have made mistakes in many of my arguments.