This week, all eyes are somehow simultaneously focused on the US while also being rolled back at its ineptitude to lead the free world. As such, this is a good time to talk about Europe. Many matters are currently being discussed, all worthy of time: refugee crises, Eastern authoritarianism, Brexit’s will they/won’t they, the Euro’s stability, demographics, Greece, Islam’s place in society, the Eurovision, England’s inevitable world cup blunder.
Two months ago, technology investor Peter Thiel said that “there are no successful tech companies in Europe” and blamed Europe’s ongoing efforts to regulate tech companies on jealousy of larger companies in the US (as opposed to, you know, common sense). One would be remiss not to point out that success may mean high dividends on one side of the Atlantic while referring to advancing society on the other, but that’s another ball-game entirely.
The Great European Digital Divide
A historical sore spot in the European tech scene is indeed the region’s lack of tech behemoths large and influential enough to match the likes of Google, Amazon, Baidu or Tencent. European governments have responded by throwing money at the problem. In the past several months, the European Union, France and Britain have announced that they would spend billions to support the creation of new venture capital firms and start-ups. In-so-far as entrepreneurship is enabled by access to cheap capital, that is good news.
It is important to note that these efforts are mostly done by individual nations. The only way Europe (pop: 500M, arguably the Western world’s largest and wealthiest consumer group) will ever compete with the US (pop: 325M) and China (pop: 1 400M) is by working internally to create infrastructures and systems that benefit everyone. Most start-ups are now birthed online/digitally. However, Europe is facing a rarely-addressed tech divide which will impede its ambitions, as visible here.
People and companies in Northern Europe have cheaper access to the internet and as such are on average better accustomed to the digital world than their Southern and Eastern counterparts. They shop online more often (1 in 2 people shopped online in Germany last year Vs. 1 out of 8 in Romania) and adapt to new technology at a dizzying speed. Logically then, they bat far above average when raising venture capital funds or creating and sustaining new tech companies (ever heard of Spotify?).
Southern Europe’s high barrier to entry, however, coupled with the painstakingly slow roll-out of high-speed networks can have long-lasting effects on participation in the digital economy. Policymakers in capitals across Southern Europe have tried to keep up with those in the north, but it is an uphill battle — one that will only become more one-sided if Europe does not recognise the compounding effects of the digital disparity.
A multi-speed and multi-tier Europe is a mistake that it would pay for. If Europe wants unicorns, it should build cell towers in Bulgaria. It is not sexy, but sometimes you have to get gritty and muddy to get a win.
The Education Fight
Building an entrepreneurial Europe also requires a redesign and rethink of the entirety of its education systems. The most common reason that researchers promote when discussing entrepreneurial education is that entrepreneurship is a major engine for economic growth and job creation, not to mention innovation on an individual, corporate and societal level, as well as joy and engagement at work.
European schools are still based on the format founded 250 years ago, designed to train an army of bureaucrats and engineers, as opposed to a nation of innovators. Indeed, subjects organised in silos do not necessarily get young people to be entrepreneurial, as compartmentalisation is the opposite of what entrepreneurship so often aims to achieve.
What is needed in an increasingly automated world are young women and men able to work in a collaborative way, solve inherently complex problems and manage not only people but also robots. This would require the development of “soft skills” such as empathy, communication and the ability to connect people, as well as emotional intelligence. Europe’s plan to concentrate on digital literacy which is both late and simply not enough.
Not that toddlers should be taught what VCs are. But schools should at the very least teach high-schoolers that their app idea is worth squat without a market and a pain points analysis.
The Rigid Legal Mumbo-Jumbo
There are hundreds of wonderful things about living and working in Europe: clear legal frameworks, free healthcare, strict labour laws against working employees to death, equal right, early retirements… As such, the following might seem antithetical to what was just enumerated. One can have the cake, eat it and marry the baker too; the following should only apply to companies less than three years of age, less than 20 employees that are not yet profitable — a small yet vital part of the economy.
Social charges in parts of Europe are often as high as double the salary of an employee, something the entrepreneur is personally responsible for. If one fails to pay these social charges because of a tough quarter, one is personally liable and indebted for who knows how long. This alone discourages many, and the government should be more lenient vis-à-vis personal bankruptcy.
Another common legal obligation is state-mandated severance pay packages. This is a direct impediment to startups for a simple reason: most startups fail. Europe should allow smaller companies to offer stock options instead of a severance package to employees, hence implementing a high-risk high-reward mentality many (young) people would be very happy with. Not only are forced severance pay packages a problem because most startups fail and they still have to pay them, but also because startups are constantly trying out people, which quickly becomes a very costly concept.
Finally, Europe should relax some of the legal mumbo-jumbo. Amazon was started out of a garage. Less known is the fact that Amazon would never have been able to see the light in Europe. Why? Because it is illegal to work in a garage. A little leniency for very small companies could go a long way.
The Financing Puzzle
Investors like Europe. They just do not like it as much as Silicon Valley. 2017 was a record year for Europe’s venture ecosystem, with €16.9bn in capital invested. This is not nearly enough to close the gap with the US, which saw $70bn of funding. And therein lies part of the issue: Europe start-ups all-too-often rely on debt-financing, whereas VC funding is far more common in the U.S.
Entrepreneurs often lack the right assets that could be used as collateral, making it prohibitively expensive, if at all possible, to borrow. Analysts may claim that Europe’s lack of access to a virtually unlimited amount of money may have helped the region’s start-ups to avoid some of the excesses of Silicon Valley, but this Lagom-like philosophy may be no more than something held onto to rationalise Europe’s role of third fiddle in the world.
Encouraging VCs to visit Europe can be hard, but is very much needed. Showing them, that Europe is willing to be flexible finance-wise would go a long way.
Protectionism rightfully elicits plenty of strong emotions. Many argue that trade protectionism “kills” innovation and productivity. That is true. How can start-ups compete with Silicon Valley’s infinite cash? How can they resist the urge to be bought off and discarded? By forbidding some outside players from entering the market, Europe could foster and nurture its pedigree of companies, then opening the doors when they can stand on their legs to allow for healthy competition, which would only let the strong survive.
It is a 10-year cycle, and it works. What do you think China did for 40 years before it got Tencent and Alibaba? Facebook is still banned there, along with hundreds of other platforms and services currently being incubated (an incubator is etymologically the ultimate form of protectionism) in-house, and with great success. Why should Europe not do this on a much smaller scale? Why not start with FinTech?
Protectionism is seen as a cuss word. Yet nothing is ever as black or white as it may seem, and Europe’s policy agenda should be guided by a phrase recently offered by French President Emmanuel Macron: “protection, not protectionism”.
There are 50 Shades of Protectionism. And Europe should be all up for the shade that asks Silicon Valley to wrap it before it taps it.
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