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The Startup Tortoise & The Economic Hare: Challenges Of The European Ecosystem

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The European Startup scene is growing steadily but still not at optimal levels, facing structural obstacles and impediments to financing. How will it overcome fragmentation, market localization and scaling challenges? Positive changes being implemented by the European Union must be complemented by the ingenuity of startups themselves, among which StartUs offers its own solutions.

Whither Europe?

Amid the waves of great socio-economic upheaval, taking the startup plunge can amount to a Odyssean navigation between the Scylla of hampered opportunity and the Charybdis of perpetual job insecurity. Positive indicators and encouraging assessments of the future of the European startup environment are tempered by some of the very real obstacles and social factors that can impede the survival of good business ideas – not because these are lacking, but because the European playing field remains chronically uneven, beset by obstacles and because the political and economic future remains so undefined. This is partly due to immense structural overhauls, and partly due to other (globalizing) sociological factors undermining the very foundations of the European project. The good news appears to be that European entrepreneurs appear undeterred, determined by choice or by circumstance to prevail, and, by their prerogatives, offer ways of righting the ship of European progress.

Gauging the performance of the startup scene at the broadly European level can prove perplexing, as the (relatively few, but increasing) large successes produced by the European ecosystem can easily be undermined, statistically speaking, by the vast amount of unheard-of failures, and as performance indicators can be evaluated in a variety of conflicting ways. Indeed, the much-touted galloping rumble of European Unicorns, combined with serious measures from the European Union to cut bureaucratic impediments and promote startup activity as an engine of its desired (yet gravely threatened) principle of “Ever-Closer Union,” have created a burgeoning sense of optimism in the European startup community. Conversely, European startups still face a number of serious challenges, particularly by comparison to their U.S. counterparts, and specifically as concerns attracting Venture Capital and achieving scaling and internationalization.

The recent first annual report from the European Startup Monitor (ESM) portrays these challenges in a positive light. According to its introduction by Günther H. Oettinger, the European Commissioner for Digital Economy and Society, the political effort to create a better playing field for startups is an integral part of the European project, and is well underway. The ongoing imperative of the European Commission Capital Markets Union is for legal regimes to be streamlined and easier to navigate, rendering access to finances and hiring talent easier, and connecting initiatives through people, technologies and regions in the development of the tech industry throughout Europe. To this end, Oettinger touts the EC’s initiative of the European Digital Single Market, which seeks to “expand the EU’s digital economy to offer consumers better services at better prices and to help businesses grow.” Indeed, the “startup” concept has predominantly come to mean businesses operating in the digital economy (of whom 16.4% provide software as service, and another 9.1% provide IT software development, according to the ESM), as opposed to SME’s and traditional mom & pop stores.

Ignoring the obvious political contradiction of prioritizing online business at the expense of other livelihoods, then (the structural overhaul of industry online and the comparatively diminishing support for non-digital SME’s being a central reason for domestic socioeconomic tensions), the objective determination of global industry towards the “Internet of Things” and the “4th Industrial Revolution” touted by Silicon Valley and global business leaders ensures diminishing options in the matter. The European Commission considers digital startups to be, therefore, simultaneously, a vehicle for Europe’s struggle out of its economic rout, and an engine for overcoming political deficits of its founding project (in light of other momentous challenges threatening its raison d’être). However, with sales and customer acquisition, raising capital and product development among the main challenges facing the average startup, and with European founders still awaiting better conditions for financial support and improvements in political regulations and bureaucracy, it is clear that transitioning to the Digital Single Market is still laboriously underway.

While it is encouraging that startup initiatives are supported at the highest political levels, therefore, in a context where Europe is increasingly politically incapable of safeguarding and creating traditional jobs or providing incentives for businesses and individuals who are not primarily online, there are actually diminishing alternatives to individuals becoming founders, freelancers or otherwise striking out on their own. Part of the challenge facing entrepreneurs is attempting to build a bridge between stagnating local economies and the globally competitive ideas gap between Europe and the United States. But the initiative still remains with entrepreneurs themselves, and their bottom-up imperative of changing the playing field through their own ingenuity. So what are some of the central challenges facing them, and what can be done to overcome these?

Ecosystem Challenges…

Following the globalizing trend of social acceleration, the period of time between founding a startup and achieving success or going bust may be diminishing. While a startup is defined as a business “younger than 10 years,” European startups are still hampered by attempting to corner local markets due to the fragmented European ecosystem, while competition for customers, investment and between ideas forges ahead unabated at the global level. An instructive example was the numerous European and other proto-social networks that existed prior to Facebook’s explosion in the mid-00’s, but which failed to scale beyond their countries of origin rapidly enough and were overtaken by the superior resources, consolidation and global integration of their American rival. The bottom line remains that if founding, funding and scaling for companies emerging from the European startup scene remains perennially harder than in the United States, then social acceleration at the global level ensures that the competitive disparity will remain. For, after all, who has “10 years” at their disposal to prove sustainable success and inspire investor confidence beyond the immediately local level, if they are still trying to corner local markets while simultaneously competing online almost immediately at the global level?

Complementing and compounding the scaling difficulties facing the generic European startup are talent acquisition, capital restrictions, and market fragmentation. Firstly, as European mobility is still relatively low and employment laws are still strict towards non-EU citizens in the Eurozone, finding and acquiring talent also still operates predominantly at local levels. This can result in a self-reinforcing bias towards home-market talent, which is not necessarily disadvantageous if the country is large, but which can conversely hinder smaller countries from expanding their talent pools. Currently 1/3 of startup employees are estimated to be international cross-border employees, but this figure is tempered somewhat by an average of 10 employees per startup (with the average target, according to the European Startup Monitor, of 13 paid jobs, including founders, after two and half years of existence).

Secondly, the pressure to internationalize hiring strategies on an uneven playing field is reflected in the difficulties of scaling more broadly. According to the ESM, more than half of startups serve international markets, with 4/5ths planning further internationalization “within the next 12 months.” Of these, 21.2% operate in neighboring or other European markets and roughly 30% operate on a worldwide (online) basis. But among the greatest difficulties posed by European market fragmentation is the number of supplementary costs that startups have to shoulder during the scaling phase. Companies can well eye the United States as a second market, for example, which has worked well in a number of cases, but this presents its own set of challenges. European and American customers and investors don’t usually know each other at the outset, making it difficult to create a transatlantic network and branding effect. Customers may well know others in immediately neighboring countries, but even then, they won’t necessarily speak the same language. Internationalization is a hard thing to accomplish which, ideally, would start once the home market is conquered, or at least locked-in. This, then, creates advantages for countries with large home markets, but contributes towards maintaining a Europe on a two- or even three-tiered development track.

A fragmented market, however, does hold some advantages specifically tailored to European startups. A small home market means the company is closer to the customer, can get cheaper, faster and easier word-of-mouth, and therefore achieve market dominance more quickly. This allows companies to enjoy position rents, and perhaps to monetize sooner. Faster monetization means more resources to expand to other countries. By optimizing internationalization from the outset, the company might also be in a strong position to expand. Expansion problems, however, remain: foreign customers might not have the same needs, or might not be enticed by the same messaging as on the home market. The dilemma is then whether to expand the home market first, or whether to choose a different expansion target for expansion. The disparity is already suggested by the smaller number of unicorns but the higher number of national leaders in an array of categories. In addition, lower development costs are often cited as one of the main benefits to doing business in Europe by comparison to Silicon Valley. Internet companies are generally cheaper to operate in Europe, due to the lower salaries of employees with web-development skills.

But does this compensate for the difficulties in finding funding? Raising large rounds of capital is still a major challenge in Europe, particularly by comparison with the United States. American VC models can work in the fragmented European landscape, but need to be coupled, in some ways contradictorily, with both a fast scaling mindset and patient investors simultaneously. European investors, for their part, also appear constrained largely to their own local markets At an investment of external capital estimated at €2.5 million (projected to expand to €3.3 million over the next 12 months, according to the ESM), private investors remain the primary kind (at 77.3%), but a glance at the major capital sources for startup founders can prove sobering: According to the ESM, of these Founders’ own savings and support from family and friends account for 69.1% and 25% of capital sources respectively, Europe-wide. Government subsidies (which obviously vary from country to country) come in third, with business Angels only bringing up the rear, in terms of capital sources.

There are, of course, too many variables to take into account to provide a definitive situational report for the generic European startup in this space, given the number of different challenges that will be involved based on the nature of the business itself. But the question remains as to what is and what is not a sustainable business model in the initial years of a startup’s activity, particularly in terms of some of the contradictions outlined above: Given the diminishing time frames in which to achieve scaling, VC and become globally competitive, startups will find themselves hard pressed to achieve just one of these, let alone all three, with an average of ten paid employees (and often many unpaid “internships” and other financially unsustainable roles for individuals), limited access to talent and VC, and a perennially uncertain economic environment in Europe. A good idea merits a good fight, however, so how can startups themselves address some of these problems, in awaiting the loosening of European restrictions and the promised European Commission initiatives?

… and Bottom-up Answers

The challenge, then can best be summarized as one of trying to overcome the gaps between local and international, determining where, when and how to scale, and getting access to VC. Among answers being developed by European startups, such as StartUs, are factors congruent with the European project itself. StartUs (for whom I work – full disclosure) is a platform working to bring together local talents, business opportunities and job openings with seekers on an internationally Europe-wide basis. It does this by fostering a community matching individuals and businesses across Europe directly, attempting to circumvent national borders, and engendering mobility and possibility by offering opportunity beyond immediately local markets. Among the main problems facing European entrepreneurship is its constraint by such borders, both real and intellectual. Businesses still rely too much on local talent, both because of a lack of social mobility across states such as in the U.S., and because of the often simply opaque nature of information that is online, which can do more to obscure contact between people in different countries or regions than to facilitate it.

The objective of StartUs is therefore facilitating the search to find the right individuals to sustain entrepreneurships, businesses, or indeed themselves. StartUs is currently developing software to support a “people and opportunity” search engine that is designed to function at a greater magnitude and provide more depth than anything currently operating in the European startup and innovators community. The point of this is to liberate the intangible information that resides within people, rather than just what is found generically online across the envisaged Digital Single Market, enabling them to communicate this directly with each other at potential and real professional levels.

In other words, StartUs tries to bolster the “know how” innovation ecosystem for Europe by solving the “know-who” problem, offering the resources making it possible to liberate this intangible information. For example, there might be individuals in all corners of Europe who are all professionally complementary to each other, but have simply not previously had the opportunity to find each other and discuss their vision directly, constrained by local circumstance. StartUs offers the platform to do just that, potentially engendering not just social mobility, but also helping to unify European innovation communities and making it possible to build strong hubs by making people aware of specialized hubs emerging across the continent they might not otherwise have had access to.

First, StartUs provides exclusive hub reports in the form of city guides Europe-wide, from Kiev to Birmingham via Mostar and Maribor, provided by entrepreneurs on the ground themselves. This enables individuals using the platform to gain an in-depth understanding of local conditions, and where exactly to go for their particular area of specialization. Second, StartUs provides a social network in which professional profiles are matched with talent and job offers Europe-wide. This is possible via its recommendation system that provides depth and understanding of individual profiles to the network and helps recommend specific people and suggest the next steps to take. Whether startups want to expand markets into new regions or whether they want to search for ideas to gain understanding of a certain industry, its platform will understand tailored needs to help make the right connections, and can be used as a promotional tool for businesses to attract investors and VC.

Given the many conflicting imperatives to be solved in the European startup ecosystem, it appears self-evident that the approach to solving them has to be multidimensional, to meet the multidimensional layers of performance to be attained. By helping to turn Europe into a level playing field for entrepreneurs, at least at the initial stages of creating opportunity and exploding localized mind-sets, startups help to sustain the imperatives of the original European project at a time of great danger to it, while promoting the entrepreneurial drive in and of itself through problem solving. Initiatives like StartUs’ may only be a good beginning, but an indication that the continent also needs a different kind of unification to provide for the aspirations and potentials of its citizens, through which immediate economic challenges stand a chance to be mediated and solved.

 

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