Europe, the grand old lady of the civilized world, is starting to look a little tired lately. Its single currency model is under threat, economic growth is but a fond memory, and worse, nobody seems to have any great ideas for reviving the region’s flagging fortunes. In contrast, the world’s technological sector continues to thrive, with web-centric startups going from zero to multimillion-dollar heroes in the space of mere months. An obvious solution to Europe’s present malaise, then, is to encourage more of these startups to take root within its realm and to thereby capture some of the exponential growth that the web is driving. After all, there’s no reason why companies like Airbnb, Netflix, and Instagram should sprout up and succeed in the USA and not in Europe, is there?
Recognizing Europe's failure to properly capitalize on its vast resources — an educated workforce, widespread broadband penetration, and a population that remains well off by global standards — the European Commission recently set up a Leaders Club of influential entrepreneurs and investors. EC Digital Agenda leader Neelie Kroes describes the group as her "crown jewels" and hopes to use their expertise to iron out some of the challenges posed by Europe's multiplicity of cultures, languages, and business regulations. She also wants to promote the Club members as role models for aspiring young entrepreneurs, believing that the key to unlocking Europe's potential lies in fostering a more daring entrepreneurial spirit across the continent.
What can Spotify and Angry Birds teach you about doing business on the web?
A leading light on Kroes' all-star advisory board is Niklas Zennström — co-founder of Kazaa and the $8 billion Skype — and his assessment echoes that of the Commissioner. He argues that the web is a global marketplace, so your starting location doesn't matter. You just have to have a compelling product and funding will pretty much find you by itself. But is that really the case — does Europe only need to be shaken out of its risk-averse state in order to properly compete with the startup-sodden USA?
The answer, predictably, is far more complex than that. While it’s true that any web startup’s potential audience is the entire population of the internet, there are obstacles that restrict at least the initial addressable market for EU startups. Consider one of Europe's biggest successes of late, Spotify. Most of that music streaming service’s history has been limited to operating in the Scandinavian nations and the United Kingdom. Constrained by the need to negotiate licensing rights on a per-region and per-country basis, Spotify didn’t enter the crucial US market until long after its inception. More than long enough to sink companies that might not have the same sort of financial backing that it did. Imagine how much more quickly the company could have evolved had there been a uniform music licensing system across the EU.
"A lot of the legislation we have is designed in the old world."
Deepening the problem for any prospective new web startup is the issue of regulatory fragmentation. At that same Leaders Club event, Neelie Kroes smiles wryly when asked about the idea of a harmonized European legal framework — that’s always been the goal, she says, but in reality the continent remains more divided than united. One salient example she provides is of a 14-year-old entrepreneur who found himself having to move from Spain to London because in Spain he still needed his father to sign all contracts for him. While that case is somewhat benign, the worrying thing is that Kroes’ Digital Agenda team lacks the authority to do anything to rectify the issue.
Contract law remains, to a large degree, a matter of national jurisdiction, meaning that if Kroes wants to see substantive changes in it, she’d need to first contact the single market minister Michel Barnier, who in turn would have to lobby local legislators to effect that change. Even then, some alterations to Europe’s regulatory patchwork may be impossible to enforce due to their potential side effects on other industries. As Niklas Zennström admits, "a lot of the legislation we have is designed in the old world. Designed to protect large companies with large staffs." Sat alongside him on the Leaders Club, Boris Veldhuijzen van Zanten of The Next Web expresses agreement, pointing to Europe's greater burden of bureaucracy and asserting that the continent is "not just more risk-averse, there is actually more risk."
Easier to build an app for New York and New Orleans than for York, England, and Orleans, France
Even though the EU's total population of 500 million is well ahead of the United States' 311 million, that number is often severely limited by the continent's cultural, social, and linguistic heterogeneity, quite aside from its regulatory inconsistencies. It's easier to build an app that simultaneously serves the needs of users in New York and New Orleans than it is to make one that achieves the same for people in York, England, and Orleans, France.
The picture that emerges is a conflicted one of market-segmenting fragmentation and unhelpful commercial interconnectedness. You can’t modernize the legal and economic environment because of the complex knock-on effects that could result in other areas of commerce, but neither can you exploit the full European market without making some changes. As Kroes herself says, "a lot is happening and can happen in Europe," but first and foremost, the EU needs "to get more sincere attention" to the problem of why the cultural and creative talents of Europeans are not being transformed into prosperous web companies more often.
The European Commission knows what needs to be done, but lacks the necessary powers
It’s not like the continent is bereft of entrepreneurial competence. German author Hermann Simon has written an entire book on the subject of "hidden champions," which he defines as low-profile but market-leading companies that were started up around the task of doing a single thing extremely well. Though Simon's work is primarily concerned with manufacturing firms, the lessons from their success can be easily transposed to the online world. He urges a tight focus on solving a particular problem, which narrows down your potential market, but offsetting that limitation by moving to internationalize rapidly. In other words, do one thing better than everyone else, and then sell it to as many people as possible.
Two Berlin-based startups that have followed Simon's prescriptions are SoundCloud and 6Wunderkinder. One is an excellent music streaming and sharing portal, the other competes for the title of best to-do app with its much-lauded Wunderlist — and both have served up their software to the broadest possible audience by making it available on the web, the desktop, and via mobile apps. SoundCloud crossed the 10 million users mark last year while 6Wunderkinder now counts some 8.5 million people using its service.
"The fairy tale is that it's all happening in Silicon Valley."
In concluding her Leaders Club presentation, Neelie Kroes remarks that "the fairy tale is that it's all happening in Silicon Valley." She counters that presumption by pointing to the tech hubs that are emerging in some of Europe's biggest cities: from the likes of Stockholm and Amsterdam on a smaller scale to the grander and more coordinated efforts witnessed in Berlin and London. The British capital, in particular, has pushed hard to become the preeminent location for anyone seeking to start up a technology company in Europe, replete with its own Silicon Roundabout.
Both Google and Facebook recently made significant investments in London, acknowledging the "vibrant local startup community with lots of great technical talent" and commending the potential the city offers for their continued growth. Microsoft's Lift London studio goes further by serving as an incubator for entertainment startups that could contribute to its service ecosystem. Even the London Stock Exchange recently launched a High Growth Segment sub-market, designed specifically to make investment capital more accessible to smaller companies.
There’s good evidence to show that you don’t necessarily have to be in one of these honeypot locations to develop a compelling product. The husband-and-wife team behind the wildly popular Alfred launcher for OS X work out of their home in Cambridge, England, while music streaming service Deezer has prospered in France, in spite of that country’s onerous tax and employment laws. Nonetheless, argues Berlin-based Matthäus Krzykowski, co-founder of app search engine Xyologic, there’s a natural pull toward concentrations of talent, information, and funding such as the one present in Silicon Valley. He explains the American advantage thusly:
"These Palo Alto lunches between investors and the upper management of the web top 5 (Apple, Google, Microsoft, Facebook, Amazon) just don't happen in Europe. This means that at this point it's hard for local investors to assess the risk and upside of European tech-driven companies."
Being able to quickly match up capable designers and programmers with willing investors can make all the difference at the early stages of developing a business idea. Harnessing Europe’s inventive streak will require a similar coordination between interested parties so that the present trend of isolated case studies can morph into a cohesive entrepreneurial movement and culture.
Neelie Kroes believes Europe can overcome both its unemployment woes and its deficit of new tech companies by inspiring and informing its population about the possibilities open to them. As she puts it, "just go for it ... test your own wings." The largely symbolic Leaders Club may achieve that goal, but encouragement is only one part of the puzzle. If Europe wants to make the most of its prodigious talents, it will have to ease the regulatory burden it places on small businesses and fully exploit the economies of scale that places like London and Berlin offer. The result need not be a copy of Silicon Valley, but it will certainly have to compete with it.