Hike&Fly Interview

Differences between American and European technology companies

Hike&Fly – the video interview

A hike to the Hohe Kugel, a 1645 m high mountain in the extreme west of the Bregenzerwald mountains. We talked about the differences between the technology companies and start-up worlds of the USA and Europe. If anyone knows about it, it’s Luke.

In the late afternoon, we then flew from the top of the mountain into the St. Gallen Rhine Valley.

Lukas Sieber focuses on technology scouting and location promotion for governmental organizations, technology and life science companies in Europe and North America. Lukas established the Greater Zurich Area office in North America and is a former employee of the Swiss Federal Government in Washington DC. Loves paragliding, climbing and running.

European entrepreneurship: No chance against Silicon Valley?

Despite all the similarities, the differences between the technology and start-up worlds of the USA and Europe outweigh the differences between them. As always, there are two sides to this coin and where there are a number of advantages, there are also disadvantages.

US and European start-up scene

As an entrepreneur, one should therefore carefully consider which ecosystem might be the most suitable for the planned project: If Silicon Valley, as a synonym for the fulfillment of the American dream, attracts people with big stories and immense capital, the cost of living is on a level all of its own. European hotspots, on the other hand (except Zurich), are much cheaper, but have it much harder when it comes to global players. The bottom line is that mentality also plays a role – and here the two worlds drift far apart. All the more important to deal with both ecosystems.

While Europe is producing more and more of the world’s most promising technology companies, the giants of the industry come mainly from the USA and China.

The question of money

Capital resources often enough determine the success or failure of technology companies and start-ups – and this is the case in every location in the world. Even though Europe has caught up in terms of financing opportunities, it is in a completely different position when it comes to capitalisation for young companies: There are certainly strong investors for start-ups and early-stage businesses, but the situation is rather poor for growth financing.

In 2018, a total of USD 254 billion was invested in ~18,000 start-ups worldwide via venture capital financing – an increase of 46% over the previous year – with 52% (USD 131 billion) ending up in the USA alone.

This large plus then declined somewhat in 2019. And with COVID-19 a lower growth rate can be expected in 2020.

Global risk capital financing by stage: 2010 – 2018, Source: KPMG Venture Pulse

The European hotspots, i.e. in addition to Zurich, Berlin, for example, also London, offer a strong environment for the start-up community: both energetic and imaginative founders as well as talented IT specialists, competent business angels and institutional investors are active here. But then the similarities already stop: According to a new study, Zurich is the most successful city in the world for social and economic inclusiveness. The Prosperity & Inclusion City Seal and Awards (PICSA) Index defines inclusive prosperity “as a measure of economic productivity that reflects the extent to which all segments of the population are able to contribute to the economy and share in its benefits.

Berlin, on the other hand, can score points not only with the cost of living, but also with start-ups that have made it onto the international stage and an interesting pool of developers. But London is still a few lengths ahead of Berlin, where some first-class VC providers also support start-ups in the late stages.

It is precisely at this point that many European start-ups are considering going abroad: as interesting as the environment for start-ups may seem, there is a lack of strong venture capital firms that can turn promising start-ups into global players – with their capital, their know-how and, of course, their experience. Silicon Valley is so attractive for entrepreneurship not least because huge financing rounds are the order of the day here. Founders and investors take completely different risks in the USA, which is not opportune for the European counterparts even if the young companies are already generating relevant sales.

While American start-ups can expect to receive capital after just one month, European ones wait up to half a year – and this time can be crucial.

A question of culture

However, it is above all the understanding of entrepreneurship that makes the ecosystems of Europe and the USA very different: American start-ups initially focus on growth, as they not only have a gigantic market ahead of them, but also have to compete strongly.

The faster they penetrate the market, the greater the chance of asserting themselves against possible imitators. It is not without reason that founders invest enormous sums in marketing in order to have their company launch accompanied by the media and thus reach a high number of customers or users in the shortest possible time.

Despite centuries of intercultural exchange and trade agreements, the European and US start-up world are very different ecosystems.

This strategy is based on the hope that this momentum will suffice until a critical mass is reached. This is where venture capital providers support those who lavishly equip promising start-ups for the growth phase – another great story could be written like Facebook, Airbnb or Uber. The result: a whole series of young companies that receive a seven-figure rating, but lag far behind in terms of sales. But three or four of these start-ups make it into the ranks of the global players every year – and it is this prospect alone that drives investors: 80 percent of the start-ups financed are doomed to failure or barely reach the break-even point, while the remaining 20 percent secure their returns.

In contrast, European companies focus on generating sales – not least the lack of capital for a targeted growth spurt contributes to this development: Companies have to earn money much earlier in order to survive at all. But it is precisely here that there are enormous opportunities for investors to write their own success stories a la Spotify.

Ultimately, the European ecosystem for start-ups means that young companies first have to prove the viability of their business idea. Only if they offer something that people buy or use, can they survive the start-up phase at all. At the same time, European founders often remain autonomous and independent, and their equity capital is not threatened with as much dilution as is inevitably the case in the USA.

The fact is that this makes Europe particularly suitable for start-ups that operate in a market niche or want to subject their concept to a realistic test.

Of course, these sweeping statements are not intended to hide the fact that in the USA there are certainly sales-oriented young companies and in Europe there are also growth-oriented start-ups.

If you want to make it in the USA, you will have to juggle large sums of money when entering the market in order to have any chance at all.

A question of the market

This point should not be neglected either: The European market is fragmented into smaller ones, which in turn are very diverse – which logically slows down the growth of start-ups.

If you want to operate beyond your own national borders, you have to deal with several languages, mentalities and local peculiarities within Europe. This localization limits the growth in the respective market, the effort is much greater compared to the US-American requirements.

But there are also two sides to this coin: If you implement your European market launch in several stages, this can also promote growth.

As a young company, you can initially concentrate on the domestic market, so that you can successively make the necessary adjustments and, above all, develop optimal processes. During this phase, the competitive pressure is kept within limits so that you can build up a dominant position in the market. At the same time, this approach allows you to gain sufficient experience to prepare for entry into the next market.

With this expertise you are ahead of your US colleagues: Even Amazon had problems opening up new markets. But if, for example, you expand from Germany to Switzerland, from there to Austria and other European countries, you can optimize the market launch approach step by step and, over time, implement regional business models faster. Especially with limited resources, this is the more sensible way.

But even the US-American start-ups, which are richly endowed with capital, reach their limits when they have to fight on the most diverse fronts at the same time. The fact is: If your company is building on local markets, Europe may be the better choice for you.

A question of talents

Another aspect that should not be underestimated is the prevailing lack of relevant talent in Europe: While companies in Germany, Switzerland or other high-tech countries in Europe have traditionally sought proximity to talent, these companies are doing less and less well in a global comparison:

The World University Ranking for 2018/2019, for example, showed that only three European universities made it into the top 10 – the remaining seven are US-American and occupy the top places.

So it is only logical that even the brightest minds are looking for a way to the USA to advance their own career.

Conclusion – there are strong arguments in favour of Europe

There are many arguments to weigh up when it comes to the optimal location for starting a business. It is not only the business field and the entrepreneurial goals that play a role, but above all the characteristics of the respective market.

At a glance: Location USA vs. Location Europe

  • High capitalization required – also feasible with less capital
  • Growth has top priority – sales are more important
  • Size of the customer base is decisive – rapid proof of concept
  • Preferably suitable for products without geographical reference – local component very strong
  • Massive market to be conquered – fast entry into local markets

Even if the stories of entrepreneurial success in Germany, Switzerland or other European countries are perhaps less dazzling than in the USA, there is much to be said for entrepreneurship in Europe.

Business concepts are subject to market scrutiny much earlier, the equity base is stronger – and this opens up enormous opportunities for investors to enter the growth phase.

This requires some courage to look beyond the conventional horizon, to break new ground and thus to be interesting for outstanding talents.

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