The Economic And Political Blind Spot For Startups In Europe

Starting a software or web service company is pretty cheap these days. You can code an MVP over a weekend and building a simple app is a matter of just hours. It explains the Cambrian explosion of startups in all corners of the world with Valley-style entrepreneurs as the new poster boys. Being an entrepreneur (AKA co-founder) is übercool these days.

Why is creating a software or web service product cheap?

There is plenty of open source software available, scripting languages are widely used and web application frameworks are widespread giving developers access to an extremely powerful toolbox.
Another driver for creating software with a near zero-budget are APIs. Why coding all parts of your software yourself when you can connect to a myriad of cloud based point solutions for payments, sign-up forms, billing, customer support, hosting, back-end databases, monitoring and analysis? Just use APIs that let your data flow through a value chain of connected services.

What if you can’t program, design or create a website? In a flat world you can hire offshore programmers from the other side of the world for a fraction of the local cost using platforms that make the process of selecting, awarding and paying freelancers frictionless.

What about the startup business model?

The Business Model Canvas, Lean Canvas, Lean Startup and Customer Development methodologies are a perfect fit for startups. These models have three common attributes: well documented, tested and they can be freely used. They can be applied by all businesses but due to their nature it’s a perfect fit for software and web services companies where pivoting, iteration, experimenting and instant customer feedback is the norm. On top of it, startups require little capex and they use freelancers more often than not keeping the organization extremely lean.

The innovative feature of these new methods is getting to customers fast in order to recognize a failure early on saving valuable time and cost. In other words “fail fast, fail cheap and fail often” is the startup mantra.

There are similarities with the agile approach that is used for years in software engineering and finally found its way into the business arena. The 50-pages-business plan is obsolete just as the waterfall model is the dinosaur of software development. As Business model innovation is to businesses what agile is for software engineering, geeks are poised to embrace these new models better than most MBAs. In a way it’s causing a conundrum for the Big Four similar to the innovator’s dilemma for corporations.

Scalability of the startup business model

Last, and perhaps most importantly, startups are based on a scalable business model. A scalable business model is based on intangible assets. Think music, literature, movies, pictures but also patents, franchising and software. The main constraint of headcount businesses is simple: humans are not scalable. Economies of scale in a headcount based model has a marginal impact compared to the enormous levers of IP based business models. Or would McDonalds still have 34,000 locations in 119 countries if it was building, operating and owning restaurants instead of being a franchise based business?

A startup is a product-centric company that can scale to global proportions without linear dependence on human capital. A consequence is that startups don’t necessarily have a lot of employees on the payroll.

What about market opportunity?

We live in a world where software is not just powering everything digital but also eating every industry. Hence the reason why industry leaders in retail, video, music, telecommunication, travelling, hospitality, marketing, photography, payments, recruitment, news, translation, transportation and education are software (driven) companies.

Belgium is no exception. The largest real estate broker (Immoweb), radio broadcaster (Radionomy), classifieds (tweedehands/2ememain.be), cartographer (Tele Atlas), clearing house (SWIFT), Human Resource services (NorthgateArinso), Yellow pages (Truvo) and dating (Twoo) are all software (driven) companies.

While the software impact is already obvious for service oriented companies we already know how software will eat manufacturing too: robots and 3D printing. Software is not an industry anymore, that’s an old-fashioned mindset. It’s like categorizing all the 20th century companies under pen-and-paper companies because they wrote things down and did calculations on paper.

What about market entry?

It’s pretty simple, once online, you can reach 2 billion broadband subscribers, the majority are willing to interact with you in English. It used to be that only multinationals could export products or services to foreign countries. Nowadays even an individual can easily order or sell a product to the other side of the planet. As a consequence, startups from smaller countries often generating the lion share of their revenue from outside the country. Could Belgian startups such as Woorank or Engagor survive without “foreign” revenue?

While the (connected) world is your market, the flip side is that the world is also coming to you. You are competing globally from day one. It’s this global Darwinism that makes fast scaling a condition for startup success. While launching a startup is cheap, growing and scaling requires very deep pockets. Hence two of the reasons why the majority of startups die even if they have a sound business model: lack of capital to finance growth combined with a global cutthroat competition.

Revenue is revenue is revenue

With a high added value (think gross margins of up to 95%), innovation driven revenue generated from software is smaller but superior to volume-driven revenue from a large distributor where a big portion of the revenue is composed by the cost of buying goods and margins are low.

The trophies game

To summarize the above, a successful startup company is a Gazelle (scale or die), a Lion (export or die) and a value creation champion (economic profitability).

So how come you don’t see startups winning the prestigious Gazelle trophy from the respected business magazines Trends and Trends-Tendances? Simply because the main conditions to be eligible are based on job creation, revenue and they need to be cash flow positive. Exactly the three elements where startups underperform.

As startups create significant economic value with a relatively small team – often just the co-founders and a bunch of freelancers. Therefor they are not on the (biased) radar of the contest organizers. And yet, startups are by definition the real Gazelles in the business landscape.

The Export Lion is a renowned export-award in Flanders accenting the economic importance of export for the region by crowning the yearly king of export. Despite the fact that the concept of “export” is alien to startups – digital revenue is not passing customs and therefor “invisible” to government agencies – increasingly technology companies are winning these trophy. At least if you have enough people on the payroll.

Why should we care about mainstream trophies?

Simply because startups need more mainstream media attention. It will inspire our talent to become an entrepreneur in a way that a respectable and successful third-generation-family-company CEO never can.

We all know that we need more entrepreneurs in Europe. They create innovation and economic value despite not being recognized by these contests creating a “blind spot” in the mean stream media and therefor towards the socioeconomic and political decision makers in the country.

We need startups to be in the limelight as an example for young and not so young people to become an entrepreneur. If you are just graduated, chances are small that the last winner of the Gazelle, Export Lion or the Top Employer of the year trophy is an entrepreneurial role model. The only thing these trophies do is motivating you to work for the winners. That in itself is a good thing for the trophy-winners but we need much more than that. That’s why startup deserve the attention of the mainstream media too.

To end with the words of Thomas Friedman: every morning in Africa, a gazelle wakes up. It knows it must run faster than the fastest lion, or it will be killed. Every morning a lion wakes up. It knows it must outrun the slowest gazelle, or it will starve to death. It doesn’t matter whether you are a lion or a gazelle. When the sun comes up, you better start running

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