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Jul 28th 2012 | BERLIN, MADRID and PARIS | from the print edition
THE St Oberholz caf in eastern Berlin is as hip as any of the area s bars:
graffiti-covered doors, in-your-face art, edgy fashion and the Beastie Boys in
the background. It is not at first blush the sort of place to look for magnates
in the making. But their presence makes a lot of sense. Europe s culture is
deeply inhospitable to entrepreneurs; wanting to grow a start-up into a
behemoth is quite as countercultural as piercings and performance art.
The Oberholz has become a centre for Berlin s young start-up scene, which has
enterprising types flocking to the city from all over the world. The clientele
starts out on the first floor, where computer programmers mingle with potential
bosses over coffee in the ko-work-ing area. Once they attract capital, they
move upstairs, where the caf rents out office space cheaply. A business taking
off may move into one of the caf s apartments, often using the beds as desks.
SoundCloud, a five-year-old audio-sharing website, spent its early days at the
Oberholz, as did Brands4friends, an online private-shopping club. Txtr, a
fast-expanding e-book platform, still has programmers in one of the apartments.
It is an enticing place to begin a business. Which is all to the good, because
Berlin s fresh-faced hopefuls will get little enough enticement and
encouragement elsewhere. They will struggle to hire professional managers to
help their firms grow, because European executives are extremely risk-averse.
Their young firms will quickly find that established European companies tend
not to like dealing with tiny ones. Most sources of capital will shun them.
Regulations will shackle them. And when they fail, as most are sure to do, they
will not be allowed just to dust themselves off and start all over again. In
Europe, a business blow-up leaves a lasting stain, akin to a moral failure.
The giants are all ageing
Data show that continental Europe has a problem with creating new businesses
destined for growth. According to the Global Entrepreneurship Monitor, which
compiles comparable data across countries, in 2010 early-stage entrepreneurs
made up just 2.3% of Italy s adult population, 4.2% of Germany s, and 5.8% of
France s. European countries are below in many cases well below America s 7.6%,
let alone China s 14% and Brazil s 17%.
Few in number, European entrepreneurs are also gloomy about their prospects. A
study by Ernst & Young, an accounting firm, showed last year that German,
Italian and French entrepreneurs were far less confident about their country as
a place for start-ups than those in America, Canada or Brazil. Very few French
entrepreneurs said their country provided the best environment; 60% of
Brazilians, 42% of Japanese and 70% of Canadians thought there was no place as
good as home. Asked which cities have the best chance of producing the next
Microsoft or Google, Ernst & Young s businesspeople plumped for Shanghai, San
Francisco and Mumbai (though, to be fair, London got a look in too).
For all this, Europe produces plenty of corner shops, hairdressers and so on.
What it doesn t produce enough of is innovative companies that grow quickly and
end up big. In 2003, analysing Europe s entrepreneurial gap, the European
Commission cited a study which showed that during the 1990s, 19% of mid-sized
firms in America were classified as fast-growers, compared with an average of
just 4% in six European Union countries. The Kauffman Foundation, which
promotes entrepreneurship around the world, argues convincingly that one reason
America has outstripped Europe in providing new jobs is its ability to produce
new, fast-growing companies such as Amazon, an online retailer, or eBay, an
online auctioneer. And in terms of jobs, new small firms have an added
advantage. They are less likely than existing giants to outsource a lot of
their labour to cheap providers in Asia.
Europe was not always so laggardly. When Britain s industrial revolution spread
to the continent after 1848, ambition and access to capital could take a young
man far. August Thyssen founded ThyssenKrupp, a German steel group, Eug ne
Schueller founded L Or al, a French beauty empire, and A.P. M ller set the
course for A.P. M ller-Maersk Group, a Danish shipping giant. The vast majority
of Europe s big companies were born around the turn of the last century. So was
much of the German Mittelstand, and clusters of manufacturers from Lombardy to
the Scottish lowlands.
After the world wars, Europe never regained this fecundity. The devastation
made Europeans more risk-averse than they had previously been. Markets that had
been closely linked before 1914 fell back into fragments, says Leslie Hannah, a
business historian at the London School of Economics. That limited the ability
of new firms to build scale and grow into giants, especially in the decades
before the European Union s single market. According to an analysis of the
world s 500 biggest publicly listed firms by Nicolas V ron and Thomas Philippon
of Bruegel, a think-tank, Europe gave birth to just 12 new big companies
between 1950 and 2007. America produced 52 in the same period (see chart 1).
Europe has only three big new listed firms founded between 1975 and 2007. Of
those, two were started in Britain or Ireland, which are closer to America in
their attitude to enterprise than continental Europe. Europe s big privately
held firms, too, mostly date from before 1950, often a very long time before.
If Europe were more entrepreneurial, says everyone from the commission down, it
would not have been such a poor producer of big businesses. And it would have
produced more successful new technology firms. Entrepreneurship doesn t have to
be channelled through the tubes of the internet, but over the past few decades
a great deal of it has been. That an economy so copiously provided with the
technically educated as Germany s has not produced a single globally important
business-to-consumer internet company suggests a big problem with
entrepreneurship.
Why was Google not made in Germany? asked Konrad Hilbers, the former chief
executive of Napster, an online-music service, in a talk last year. The lack of
a risk-taking entrepreneurial culture was part of his answer. Firms such as
Skype, an internet voice- and video-calling firm founded by a Dane and a Swede,
Spotify, a Swedish online-music service, and Wonga, a British online lender,
suggest that the picture is not as bad as it could be. But Europe s
entrepreneurs are still underrepresented on the internet. Though there are
some signs of life, says Yossi Vardi, a veteran Israeli high-tech entrepreneur
and angel investor, the region is semi-dormant .
Too few Virgins; not enough Red Bulls
Europe does have entrepreneurial success stories. The richest is Spain s
Amancio Ortega, who started work for a clothes store at the age of 13 before
going on to found Inditex, a fast-fashion empire. Austria has Dietrich
Mateschitz, who started Red Bull, an energy-drink maker. France has Xavier
Niel, who this year started a mobile-phone revolution by offering consumers
extremely low prices; Britain has Sir Richard Branson. But the list is short.
And many European entrepreneurs Sir Richard not included hide their success. Mr
Ortega has never given a media interview; there appear to be just two published
photographs of him. Ingvar Kamprad, the billionaire founder of IKEA, a Swedish
furniture retailer, assiduously avoids any hint of plutocratic airs.
Many aspiring entrepreneurs simply leave. There are about 50,000 Germans in
Silicon Valley, and an estimated 500 start-ups in the San Francisco Bay area
with French founders. One of the things they find there is a freedom to fail.
If your firm goes under in France, says Dan Serfaty, the French founder of
Viadeo, a fast-growing business-networking website, you don t get a second
chance.
Trying to discover what holds back entrepreneurs, the commission last year
examined insolvency regimes and found that many countries treat honest
insolvent entrepreneurs more or less like fraudsters, though only a tiny
fraction of bankruptcies involve any fraud at all. Some countries keep failed
entrepreneurs in limbo for years. Britain will discharge a bankrupt from his
debts after 12 months; in America it is usually quicker. In Germany people
expect it to take six years to get a fresh start, according to the commission;
in France they expect it to take nine (see chart 2). In Germany bankrupts can
face a lifetime ban on senior executive positions at big companies.
A second important hurdle is finance. Getting seed capital up to 1m ($1.2m)
from friends, fools and family is pretty easy. Technology entrepreneurs such
as Germany s Samwer brothers, Oliver, Marc and Alexander, made fortunes in the
first dotcom boom and then became angel investors in such very young start-ups.
In Germany seed money has roughly quintupled in the past five years, says
Hendrik Brandis of Earlybird Venture Capital, a venture-capital firm in Munich.
For the 1.5m-4m that firms need to work an idea up into a real business model,
though, money is in desperately short supply. Institutional investors such as
pension funds regard European venture capital as a bad asset class. European
venture-capital firms lost money during 2000-10 after the bursting of the
dotcom bubble. The total money invested in European venture capital halved from
8.2 billion in 2007 to 4.1 billion last year. Much of it now comes from
governments rather than from private investors.
Some people argue that if there were enough ambitious entrepreneurs with
brilliant ideas in Europe, the money would come from America and elsewhere.
There is some truth in this. But investors who put money into very young firms
tend to prefer operating in their own language and culture, so start-ups depend
mostly on backers from their own country.
For the third stage of funding, when firms are looking to raise up to 20m or
so to build on what looks like success, American money is increasingly
available though since they depend on big hits to offset dozens of failures,
American funds are still more likely to back entrepreneurs at home, where such
things are known to happen, or in high-growth emerging economies. And anyway,
most European entrepreneurs have hit the buffers long before they get to the
20m stage.
The third big obstacle is labour law. If young firms are to survive
near-terminal mistakes, or fluctuating demand, they need to be able to reduce
staff costs quickly and cheaply when necessary. That is far harder in many
European countries than elsewhere. The complexity and cost of firing people in
Europe is a big concern for American venture capital, says Georges Karam, the
chief executive of Sequans Communications, a French chipmaker for smartphones
which went public on the New York Stock Exchange last year. A fund in Boston
recently pulled its investment in a start-up which its French founder had
intended to begin in America but then had to bring back to France for family
reasons.
The cost of paying out large severance packages (six months of severance pay is
typical even for very recent hires) can be a huge drain for a small company.
In San Francisco and in China, a communist country, I pay one to two months,
says a beleaguered French chief executive who does not want his name attached
to such a sensitive subject. Big severance packages also make it much harder
for start-ups to recruit the professional managers that can take them into the
big league. Experienced executives are loth to forgo such reassuring goodies by
resigning.
Anil de Mello, who started Mobuzz, a Spanish online-video firm, in 2005,
watched his fledgling company implode with the onset of the financial crisis.
He thought bankruptcy would give him a new start. But after business creditors
were dealt with, Spanish social security pursued him for five more years to
extract repayment of severance money it had paid to the firm s employees on his
behalf. Mr de Mello nearly gave up being an entrepreneur entirely. Instead he
started his next company devoted to bringing down roaming tariffs for
mobile-phone users in Switzerland, where the labour laws are less of a
deterrent.
And European business founders find it difficult to wield the entrepreneur s
main weapons: the stock options and free shares that make start-ups attractive
to employees. The legal complexity of giving new hires free shares is
prohibitive, says one entrepreneur who is currently trying to poach someone
away from Google, which routinely hands out Google stock units. Everyone
advises not doing it, he says. That further limits entrepreneurs ability to
tempt people into a risky career move.
All these limits have left the continent with a dearth of the sort of
entrepreneurial successes which would serve to inspire others; very few people
think that going to work for a loony in a garage offers a long-shot at
millionairedom. Parisian opinion is convinced that if Sergey Brin s father had
picked France instead of America after leaving Russia, the son would have
become an ivory-tower computer scientist instead of co-founding Google.
With the odds so stacked against them, the flickers of enterprise seen in
Berlin, London, Helsinki and a few other places offer cause for seemingly
disproportionate hope. If the requisite wild spirits can survive in these
conditions, how might they flourish if not held back?
Yearning to be free
Though they have suppressed demand and made financing ever harder, the great
recession and the euro crisis may also mark a long-term change in Europeans
perception of risk. For executives, joining a start-up is less of a gamble when
big companies are shedding staff. Since the crisis began in 2007, says Martin
Varsavsky, an Argentinian serial entrepreneur who has founded a number of
telecom companies in Spain, it has been noticeably easier for his current
venture, Fon, a global Wi-Fi community, to recruit. The engineers he wanted to
hire used to spurn him for Telef nica, a telephone giant, or Prisa, a media
company; now those firms are firing people, well-qualified people are more
willing to join a new company.
In a presentation to Spanish entrepreneurs last year called Why you should not
move your company to Silicon Valley , Mr Varsavsky pointed out that salaries
for software engineers are currently 70% lower in Europe than in California.
There are millions of young people looking for work. And Europe has far fewer
lawyers waiting to make life difficult for young firms and lots of protected,
uncompetitive sectors ripe for disruption.
Governments are paying attention. A few years ago entrepreneurs were not a
priority for politicians, says Mathieu Carenzo, head of the centre for
entrepreneurship at IESE Business School in Barcelona. Now, he says, government
heads and royalty turn up to promotional events. States are trying all manner
of tricks to boost business creation, for better or worse, and there is a whole
industry of consultants devoted to the task. There are schemes to create
clusters of start-ups, to get academics to hate business less, to expose
schoolchildren to entrepreneurial notions. Germany and other countries have
recently set up state-backed agencies to send enterprising Europeans straight
to Silicon Valley, knowing that successful founders often recycle their money,
contacts and experience into start-ups back at home.
The French government has done some useful things for business founders; Mr
Karam cites a measure that offers tax relief on research. But France s real
problem, he goes on to say, is its rigid labour law. Nothing governments offer
by way of assistance, say entrepreneurs, is as helpful as simply removing the
hindrances they currently impose. Germany s government has made four big
attempts in the past 13 years to help entrepreneurs, says Dietmar Harhoff, the
director of the Institute for Innovation Research, Technology Management and
Entrepreneurship at Ludwig-Maximilians University in Munich, but they have
mostly failed.
The branches of government that try to boost entrepreneurship are not powerful
enough to do anything about the real problems for entrepreneurs, such as labour
rules. Again, the depths of the euro crisis may allow change that was
previously stymied. Mario Monti, Italy s prime minister, says he will lower the
administrative cost of starting a company from 10,000 to 1. Italy and Spain
are both taking steps to make it somewhat easier to fire workers.
Berlin s rapid rise and international appeal about half of the business
founders in the city are not German make it an object lesson in what really
matters in an environment appealing to entrepreneurs. There has been zero help
from the state; the city is simply too poor to lavish money on the usual
schemes. But it is a cheap place to live and work, and it is relatively easy
for foreigners, who are especially likely to start companies, to set up shop.
This is in contrast to Britain, where targets for net immigration have been
slashed after rates rose to record levels.
In the St Oberholz caf , among the bars and shared offices and kaffeeklatsches,
there is also a soundproofed cupboard. It offers a place to make private calls
and to cry when you miss a deal, jokes Philipp von Sahr, the founder of an
online store for organic food. Europe s entrepreneurs, like all entrepreneurs,
will do their fair share of crying in the years to come. But their governments
could do a great deal to help them get out of the cupboard and back into the
game.
from the print edition | Briefing