Entrepreneurship and ambition: Europe has a lot of catching up to do
Entrepreneurship is the most important driver of our economy. People who dare to leave the security of a salaried job and start their own company are probably the greatest source of innovation, growth and creativity. In addition to ideas, market knowledge and leadership skills, founders need two things above all: a willingness to take risks, and ambition. And it is in these aspects that entrepreneurial projects differ the most. Of course, a hairdresser who opens his own salon or a designer who starts her own small agency are entrepreneurs. But are they in the same group as the software entrepreneur who wants to create a globally dominant product, or the biotech professor who wants to bring a potentially world-changing innovation from his lab to market as a university spin-off?
SMEs are not enough for strong growth
Small businesses are, of course, essential to any economy. Entrepreneurship of this kind should therefore be encouraged at all costs. The differences between countries clearly show what a difference institutional frameworks can make. While the number of startups in Germany has been declining for years, startup statistics in Switzerland swing from record to record. But even in entrepreneurial Switzerland, the majority of startups are small and micro-enterprises. According to the Swiss Federal Statistical Office, over half of new businesses are sole proprietorships, and 82% of new firms initially create only one job. While every new company is desirable for the economy, this is not enough as a growth turbo.
A look at other regions of the world shows where Europe has a big gap: Of the world’s 10 most valuable listed companies, nine are based in the USA and one in Taiwan. Seven are active in the information technology sector. Seven were also financed by venture capital in their early growth phase. Nine of these top 10 companies are less than 50 years old.
Europe has nothing comparable. Our rankings are headed by traditional corporations, some of which are well over a hundred years old. Of course, established companies can also be innovative, but their market realities speak for themselves: Europe is represented in the global rankings by traditional corporations such as Nestlé, LVMH and Roche, all around 20th place. Our most successful technology company in Europe is the Dutch chip equipment manufacturer ASML, currently in 33rd place, while SAP, the most successful European software company, is in 102nd place. What is the reason for this dramatic gap?
What is missing in Europe?
Of course, Europe has to deal with some structural disadvantages. The still fragmented market with its numerous languages, different legal systems and different business cultures makes scaling an aggressively growing startup relatively difficult. In addition, the reflex of European politics to always want to regulate all new technologies — currently on display with artificial intelligence and online services — is not ideal for giving new technology companies enough freedom. But a key problem lies elsewhere.
In my career, I’ve had the good fortune to help build several startups in both Europe and the United States. On both sides of the Atlantic, you can find good ideas, innovative technologies and talented employees. One could even argue that European technology is more innovative and sophisticated on average — a good illustration is the strength of European research in topics like AI.
But one difference is extremely pronounced: The level of ambition and risk-taking. And this is reflected at a young age. In my experience, talented students at the University of St. Gallen (HSG) or ETH Zürich are still primarily concerned with the question of which major corporation or consulting firm they want to join after graduation. At MIT, Harvard and Stanford, on the other hand, the primary topic is which startup idea you want to implement. When you talk to HSG students, many see their dream job “in strategy departments” — whatever that means. Young MIT engineers, meanwhile, are busy pushing their personal software projects forward to build a sellable product. Globally dominant companies like Microsoft, Google or Meta have emerged from exactly this mentality. At least there are some signs that things are slowly improving in Europe. Student initiatives like START Global, which organizes a leading European entrepreneurship conference, are experiencing a big upswing. Founding a startup has now not only become a plausible career path, but is even considered “cool.”
Thinking big is still difficult
The difference in ambition continues with startup founding teams. In my job as a venture capitalist, I see thousands of pitch decks and talk to hundreds of startups every year. On the positive side, some young European companies are now developing very healthy ambition for global growth.
However, a large percentage are still thinking far too small. First of all, they intend to conquer their national market before they dare to develop any greater ambition at all. The question of international expansion plans often remains unanswered, and the crowning achievement of entrepreneurial ambition is to become profitable after a few years of solid growth. The desired result is a healthy SME, not the next Google.
American startups are quite different: There, the question of whether they want to build the globally dominant product in their category does not even arise. Of course they want to. And of course you need a lot of capital, maybe even hundreds of millions of dollars. Is that risky? Sure. But the role models for young American founders are Elon Musk, Bill Gates, Steve Jobs and Mark Zuckerberg, not the middle-class SME company owner from your circle of acquaintances.
Put the Venture in Venture Capital
Of course, venture capital investors in Europe are partly to blame for this gap. European VCs are, on average, much more conservative than their American counterparts. They often care more about reducing potential losses than about the maximum upside that can be achieved, and accordingly prefer to fund lower-risk startups. Part of the problem is the industry’s self-image: In Europe, VC is mostly seen as an offshoot of the financial industry. In the U.S., the VC industry sees itself much more as the financial arm of the technology industry, and VCs with a background as founders or startup employees are the norm. Making big, risky bets with a high level of ambition is probably easier when VCs not only understand financial aspects, but also know technology and markets up close.
In addition, the investors in European VC firms are often much more risk averse than their U.S. counterparts and put much less capital into VC. For example, it is still very uncommon for European pension funds to invest in VC. The result is a lack of venture capital, especially for the later, capital-intensive growth stages. There are hardly any VC firms in Europe that could lead a financing round over a hundred million Euros.
The gap is filled by international capital, especially from the US. Most top American VC firms have now established European offices and are investing in the best startups in this area. Even though this fact often leads to an outcry in politics, the presence of American VCs in Europe is highly desirable. They bring not only capital, but also expertise that is far ahead of the European ecosystem by about three decades of experience. The “American mindset” in VC is also likely to drive a higher level of ambition on our continent. Top international VCs do not invest in startups to create the market leader in Germany. They immediately push their startups towards global dominance.
The first results are visible: Up until 2016, Europe produced just 50 “unicorns” — startups that reached a valuation of more than one billion Euros. In 2021 alone, there were nearly 100 new startups that managed that level of success. Admittedly, this was also a function of an overheated market, but it can be seen at all levels that the European startup ecosystem is becoming much more ambitious and successful.
Full speed ahead for Europe, too
There are many reasons for optimism. Europe has a strong foundation for more and especially more ambitious entrepreneurship. Thanks to rapidly advancing digitization, it has become much easier for European companies to expand globally at an early stage. The increasingly frequent European success stories are also likely to create better role models for young entrepreneurial talent to follow.
Success in entrepreneurship does not happen overnight. We will need patience until we see the next European tech startup that is a global leader, but the necessary ingredients are there.
This article was originally published in St. Gallen Business Review. This is a translated (by DeepL) and slightly edited version.
Originally published at https://innospective.net on October 21, 2022.