Despite hundreds of years of cross-cultural exchange, whether through bayonets or trade agreements, the European and United States startup worlds are vastly different ecosystems. The days of the mobile-powered "nomad entrepreneur" are arriving, offering new founders the chance to start companies far from home. When deciding on the place to get started, understanding the pros and cons of the two most attractive entrepreneurial continents is critical for the decision process. While Silicon Valley will tempt many freshly-minted entrepreneurs, the costs of living may make survival prohibitive over time. As investors grow their involvement in Europe on the tide of highly successful recent startups, here's what you should know about Europe versus the urban hotspots of the United States.
The ability to raise money is often pivotal in the success or failure for high-growth startup regardless of location. Other than in the US, most startup environments struggle with either limited or very diffused funding options, despite the rise of crowdfunding and presales. Europe has many strong players in seed and early stage funding but is not blessed by access to growth stage funding.
The 3 main startup capitals - that is, London, Tel Aviv and Berlin - all possess a strong network of important players for a startup community. These include the startups themselves, the talent of software engineers, the mentorship of business angels and the funding of institutional investors.
However, London is the only city with enough late-stage funding options due to the presence of high level VCs like Accel Partners or Index Ventures.
Tel Aviv is strong on technical talents and has, over time, attracted more later-stage investment.
Berlin is currently trending due to low living costs, a large pool of international developers, and many internationally-known startups powered by company builders like Rocket Internet or Project A Ventures. As soon as those growth stage startups need funding, however, going abroad is still the best option.
This situation explains why not many startups plan to settle down in Europe but instead tend to enter the US market as soon as they reach a certain stage.
Europe has a strong demand for later stage investors, but already has the makings of a high potential startup environment that can nurture growing startups into flourishing global players. Now is the time for strong venture capital companies to leverage their experience and make an impact in the European startup community. If you're an entrepreneur, however, expect to make Europe a starting market, with the necessity to look for funding outside of the continent to take things to a major scale.
2) Revenue First vs. Growth First
The most important difference in startup approaches in Europe versus the United States is in a single question: revenue first or growth first? US startups compete in a giant market and need a high degree of market penetration in order to gain a competitive advantage over potential imitators. Hence, growth and traction are the main success factors as seen by both investors and startup founders.
Many US startups launch with a boom, creating massive media coverage, getting thousands of users within the first weeks and continue their growth marathon as long as they can on the hope that the momentum will be enough to reach critical mass. That movement is funded by VCs, who pump rounds of money into promising growth-stage startups in the hope that they become the next Facebook, Uber or Airbnb. This has created a stable of paper Unicorns in the US: startups with +$1B valuations whose revenues are not reflective of their realistic expected market value. The few startups that succeed - usually 3 or 4 each year - end up being the most valuable tech companies in the world.
The issue with this approach is that focusing on the lifeblood of startups - that is, cash flow - is postponed until a huge user base is created or funds are running out. A lot of money is put into business ideas which eventually fail because they do not succeed in creating revenue. From a VC perspective, this is not shocking since 80% of backed startups are supposed to fail or barely break even, while only 20% are responsible for the returns. Being a sizable part of a Unicorn investment like Uber will suffice to compensate all the other failures of a venture capital fund. This is a prestige that the US has over Europe.
With less later-stage funding available, European startups cannot spend massively on growth but need to generate revenue earlier in order to stay alive. Investors could see this as a great chance to give European startups the resources to dominate other European competitors and create the next Spotify by solving the bottleneck of growth-stage funding.
To the credit of Europe's startup ecosystem, generating revenue is the only way to prove that the business is creating something that people would pay for and hence, proves product-market-fit. Given the scrappiness necessary to stay alive without the need of continuous fundraising rounds, European founders often enjoy more autonomy and less equity dilution. Entrepreneurs that want to explore serving a niche market or get a market proof of concept might find Europe more interesting for starting their business.
An important note: we're generalizing here, as there are many growth oriented startups in Europe (Delivery Hero, HelloFresh etc.) as well as many revenue-focused startups (mainly B2B SAAS) in the US. However, given the market size, the competitive landscape as well as the risk of a new market entry backed by a lot of funding, it is more critical in the US to go big or go home.
3) Sequential Go-to-Market Strategy
The slower growth speed of European startups is also due to the diversity of Europe's markets. With the necessity to translate products into several languages as well as building up partnerships in different countries, there growth is naturally bottlenecked by localization. In short: it is impossible for a marketplace, social network or other platforms to access all European countries at the same time. Since these tend to be the multi-billion dollar opportunities, it once again becomes clear why there are fewer Unicorns in Europe.
However, the separation into smaller markets could be seen as an advantage. A sequential go-to-market strategy can also benefit company growth in other ways. Namely, a startup can focus on reaching product-market fit and setting up proper processes in its domestic market before spreading out to other countries for growth. In fact, a limited market is seen by Warren Buffet’s Value Investing strategy as an economic moat. By becoming the dominant player in the home market a startup does not need to fear other competitors on its local turf during expansion plans. It can then focus all its resources on entering the next market and gaining the same position.
The experience in entering new markets is an expertise that European startups gain more quickly than US startups. Many highly successful US tech companies like Amazon have had a very hard time entering new geographic markets due to lack of experience - especially in localizing processes, forming new partnerships and adapting products. By improving the go-to-market approach more frequently through smaller market entries, European startups gain a strong advantage in regional business models.
Going step by step and learning from each conquered market is the superior approach for a startup with limited resources. Alternatively, many US startups fight on all fronts simultaneously. As an entrepreneur with a strong local component (like local delivery) starting in Europe should be considered a more feasible option than starting in the giant US market.
Whether starting a business in Europe is the better choice or not depends on the type of the startup but on the goals the entrepreneur sets for herself. Your priorities decide which market is better for your start:
Europe vs. US:
- Less vs. more funding required
- Revenue first vs. growth first
- Fast proof of concept required vs. user base is everything that counts
- Strong local component vs. geographically independent product
- Entering new markets quickly vs. conquering one massive market gradually
Investors can take these criteria and evaluate whether the business they want to support might not be better off starting in another country. Also, backing a startup and observing its capability to conquer its domestic market before increasing the investment can serve as a proof of concept and save a lot of money. Hopefully this analysis was able to show that European startups have certain advantages and can be a feasible investment option in their growth stage.