With More VC Funding Than Ever, European Startups Still Might Not Scale

Between EU government support and country-wide investment in innovation, Europe has made a serious effort to carve out its place on the startup map. And at first glance, the region really does seem to be headed in the right direction. Europe saw a record amount of VC funding in 2017 with €16.9 billion ($20.8 billion) in capital invested, according to an annual PitchBook report. Plus, startups are receiving higher VC rounds than ever before; in 2017, the median VC round hit a decade-long high.

But while many would be quick to assume that this flood of funding would push the European startup ecosystem forward, I’d argue that it’s doing more harm than good. Because if you take a look at the ecosystem, it’s apparent these startups aren’t necessarily successfully scaling up. Tech.eu reported that there were just 610 exits in 2017 worth $76 billion – a big drop compared to 2016’s 700 exits, worth $146 billion.

Similar to the dot-com boom, the European tech ecosystem is heavily inflated with funding – and I believe all this free money on the market has put it in an unhealthy state. Here’s what I see happening:

Too Much Money Can Hinder Startup Growth

Despite boasting enthusiastic entrepreneurs and innovative ideas, European startups face a number of unique challenges when attempting to scale. For example, Europe is heavily fragmented with different tax laws, languages, and cultures. But now to help companies scale at a higher rate, the EU has launched the Startup and Scale-up Initiative. This allows startups the chance to restructure early if facing financial difficulties, easier tax filing – and yes, more access to funding.

However, in my opinion, it’s excess funding that’s bringing the startup ecosystem down. In Europe, investors are putting too much money into startups, way too easily. In fact, I’ve seen investors not even request guarantees or collaterals – with many VCs not getting returns anyway, they might not see a need. In this, many entrepreneurs get money they don’t necessarily need to return.

And if they end up spending the money faster than planned, but fail anyway? Well, it wasn’t their money to lose in the first place. Innovation, prototyping and technology research is incredibly important. However, it needs to be done responsibly and sustainably – and with a keen eye for not wasting resources. Startups need to learn how to run lean. Because if all the VC money wasted in poorly controlled scenarios was put to use correctly, I believe Europe would see more successful products.

Consider Slovak startup Goldee, for example. The company, which designed smart light switches, was lauded by investors in 2013 when it first came onto the market and even raised $200,000 on Kickstarter in less than a month. However, when they shut their doors just a year later, they said it was because they had run out of money.

All This Money Is Changing The Entrepreneurial Mindset in Europe

Whereas American startups tend to focus on ‘growth first’ – they’re competing in a giant market and need a high level of penetration – European startups often inherently take a ‘revenue first’ approach. It’s true that in order to grow and reach new markets, they need to generate revenue to stay afloat. However, with all this funding on the table, I believe the entrepreneurial mindset has softened.

Being an entrepreneur years ago meant plenty of sacrifices. It meant 16-20 hour work days, investing one’s own money, and having to deal with failure that immediately affects one’s financial state. Think Steve Jobs, for example, he sold his VW bus for capital when founding Apple. But today, having more money to pay employees could mean less time worked by founders. And because they’re using an investor’s money to grow, it might not feel like a personal loss if something goes wrong with the company.

A startup flooded with funding might affect the mentality of employees, too. High salaries and office perks – things that can come along with big funding rounds – can attract the wrong kind of worker for an early stage startup. You want someone who is scrappy and willing to put in the extra hours. However, when salaries are high across the market, I believe workers tend to be less loyal to a company and its ideas – and well, they’ll jump ship easily if someone offers a higher rate.

The Labor Market Can Be Damaged When Flooded With Easy Funding

It’s no secret that there’s a global shortage of IT talent. According to a paper by ManpowerGroup, 40 percent of employers globally report talent shortages, with IT talent rated as the second hardest to find, just behind the skilled trades. This makes poaching rampant in IT; take that Netflix, for example, gives poached employees an average of a 167 percent median raise.

Europe is no exception. According to a study by Indeed, tech job postings in Europe far exceed searches on the platform – Germany has the most open tech jobs, with Ireland and the UK coming second and third. In this environment, the only way for companies to find new tech talent is to steal them from others, by either using head-hunting or creating proactive marketing campaigns to draw developers from other places.

And the reason companies can afford to do this in the first place? Many are getting high amounts of easy funding. In short: it’s giving them the means to pay employees exorbitant amounts. Not only that, but floods of funding actually make the talent shortage even more prominent. With the lure of investment, talent might be more likely to leave company roles to go off and create their own businesses.

However, there are a few long-term solutions to Europe’s funding woes. As our company’s founder and former CEO Michal Stencl says, we should be feeding companies with great people by offering quality education, and only once startups have these people, should they receive investment. Of course, this gives them a better chance of success – and well, startups that don’t have good business plans shouldn’t receive funding in the first place.

With high amounts of funding, the overpaying of talent and a high rate of startup failure, we could be headed in a direction similar to the dot-com boom – and well, have a market full of unemployed people when the funding runs dry.

I believe it’s time for entrepreneurs and investors alike to change their mindsets, and allow founders a little space to invest their own time and resources into growing their companies. Because with the lasting expectation of external investment, founders won’t have much of an opportunity to evaluate their own business mistakes. Instead, they’ll just find another round.

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