Home: Issue 3 2008 › Lead Story › Celebrate the differences
Celebrate the differences
04/07/2008 | Channel: Business, Finance
Charles Armstrong believes its time for Europe to escape the shadow of Silicon Valley
I've been an entrepreneur for most of my 36 years. At the age of six I spotted an opportunity renting erasers to other students at my primary school in Cornwall, who always seemed to need them but never had them. More recently (in 2003) I formed Trampoline Systems to develop software that would help large enterprises understand and make better use of their social networks. We've got several big-name customers and a strong position in a newly-emerging market. In financial terms Trampoline raised two angel rounds in 2003 and 2006 then completed a £3 million Series A financing with the Tudor Group of Boston, Massachusetts, in March 2007.
Over the past few years I've met entrepreneurs, investors and policy makers from all over the world. Putting together their testimony with my own experience a consistent but puzzling picture emerges of the state of entrepreneurship in Europe.
Since the 1970s a consensus narrative has grown up that exercises an iron grip on journalists, policy makers and others. It runs something like this: Europe is locked into perennially low levels of innovation, entrepreneurship and venture finance because the European social model stifles entrepreneurship and European cultures are innately hostile to risk-taking and entrepreneurship. For evidence to support this thesis people point to reams of statistics from the USA and in particular Silicon Valley.
A lot of European policy makers seem to subscribe to this thesis and believe the continent is doomed to fall ever further behind its global competitors. Senior figures I've met at the European Investment Bank and the European Commission are notably pessimistic. They spend their days poring through statistics and fine-tuning a panoply of schemes designed to remedy the situation, but few of them seem to believe the initiatives will make much difference. In most cases they are probably correct.
European and national policy makers have an almost neurotic fixation with Silicon Valley. Indeed many of their efforts seem to be geared to re-constructing it in Europe. There are two main thrusts to this. First, getting more money into research and development. Second, the formation of industrial clusters. On the face of it thesesound like good ideas but alarm bells start ringing as soon as you look in a bit more detail.
Putting extra money into R&D is surely a worthwhile aim. The problem is that European governments see themselves as the right people to decide where the money goes. The EU has an official objective that the public sector should invest three per cent of GDP in R&D. That's a lot of money. And where does it go? Certainly not to entrepreneurs or start-ups, which are far too risky. No, the bulk of the EU's R&D investment goes to industrial giants, the only players able to commit the resources needed to engage with the byzantine state funding mechanisms. I think this is indicative of a lingering tendency for European governments to place their trust in 'national champions', an unhealthy hangover from the dirigiste industrial policies of the 1960s. The available research is clear that these huge players are the least likely to come up with disruptive innovations. So our governments are directing scarce R&D resources away from the people most likely do something useful with it. Not good.
What about creating clusters? One of the most obvious reasons why Silicon Valley (and California's Bay Area more generally) is such a powerhouse of innovation and value creation is its unparalleled concentration of high-quality universities, corporate research labs, investors and startups. European governments concluded that creating similar clusters would lead to more innovation, so for 30 years they've been pouring tens of billions of tax dollars into the creation of such clusters. Has it worked? In the admirably succinct words of the Economist: "It has been an abysmal failure". Successful clusters are emergent phenomena. They stem from a complex mesh of interconnected factors. They can't be planned or artificially created. Governments can help create favourable conditions and remove obstacles but anything more than that is likely to be counter-productive.
On the subject of creating favourable conditions I can't resist mentioning the UK government's recent announcement that it's raising the tax claimed from entrepreneurs when they sell or float their businesses from ten per cent to 18 per cent by abolishing Taper Relief. If the Treasury was looking for a way to send entrepreneurs scurrying away from Britain's shores just as fast as the Eurostar will carry them, they've really hit the nail on the head with this one.
Moving on from the role of government players, how do the central tenets of the consensus narrative stand up? People point to the 'European social model' and its stifling effect on entrepreneurship but in my experience the picture is much more nuanced. It's certainly true that an inflexible labour market is a serious impediment to starting and growing a business. Here in the UK there's a relatively open labour market but two years living in the south of Italy disabused me of any illusion that the rest of Europe was organised the same way. But it's important to realise that Europe's relatively generous social security provision is also a safety net that enables entrepreneurs to take risks. If my own business failed tomorrow I'd still have access to decent healthcare and I'd be able to claim unemployment benefit until I found other work. In the US a failed venture can leave its founders completely destitute, with no healthcare or income. So the European social model has both pluses and minuses for entrepreneurs.
As for wider cultural factors, attitudes to failure are frequently cited as an important difference between Europe and the US. Historically this might have been the case but nowadays I think the argument is wearing thin. All over Europe I meet young entrepreneurs who are no more fazed by the risk of failure than their American counterparts. What's more, they're often surrounded by family and friends who fully encourage what they're doing. This is an area where the culture is changing in a positive way.
One significant issue that doesn't figure at all in mainstream narrative is the difference in scale of a typical European venture capital fund compared to its US counterparts. Whilst the US has many funds with $1bn or more under investment, in Europe funds of this size are thin on the ground. This is important since the size of a fund has a direct bearing on its appetite for risk. A large fund is much more likely to give a business the support it needs to become a world-beater, resisting the temptation to sell out earlier on. In contrast a smaller fund is under constant pressure to exit its investments and recycle the capital into new ventures, which creates a tendency to go for earlier exits rather than holding out for the big win. An ambitious entrepreneur naturally wants to work with an investor who shares their ambition. At present this is likely to mean a US investor. We need to see more large funds in Europe.
For me the biggest barrier to setting up a business wasn't access to finance or skills. It was the difficulty of finding experienced people who could talk to me about how they'd set up their businesses, offer feedback on my ideas and give me pointers to the next steps. Europe has far less infrastructure for aspiring entrepreneurs than the US. Happily some promising initiatives are starting to spring up to address this. One noteworthy example is the g2i (Gateway to Investment) scheme established by the London Development Agency and delivered by a coalition including consultancy Grant Thornton and investment research firm Library House. The scheme helps support London-based entrepreneurs through the first crucial steps of planning, funding and executing their businesses. Let's see initiatives like this replicated across Europe.
In conclusion I think we need to stop being so gloomy about European entrepreneurship and wake up to the fact that we actually have some significant advantages. Foremost amongst these is a long-standing comfort working across different civilisations and cultures, acquired through our continental and colonial history. Many of the success criteria for twenty-first century businesses are tied to subtle cultural and organisational factors. This is an area where Europe is strong.
As part of this change in outlook we really need to get over our fixation with Silicon Valley. Yes, it's a remarkable phenomenon but it can only be understood in its historical and geographical context. There's no reason to believe that the same phenomenon could occur under other circumstances. Europe is different. It's high time we put our effort into discovering where our differences give us advantages and stopped wishing we were Californians.
Charles Armstrong is CEO of Trampoline Systems. Trampoline Systems provides social intelligence for business. Trampoline's SONAR Suite is 360° enterprise social computing for employees and managers. Metascope provides advanced analysis and visualisation for ONA/SNA professionals. Trampoline's clients include the Raytheon Company, a top five global management consultancy and the UK Foreign Office. Accolades include the Red Herring 100 Europe 2008 and Oracle's EMEA Innovation Award 2007. Trampoline raised $6m in Series A investment from the Tudor Group in March 2007 and was named a 'Cool Vendor' by Gartner in 2008.
For more information please visit www.trampolinesystems.com.
Over the past few years I've met entrepreneurs, investors and policy makers from all over the world. Putting together their testimony with my own experience a consistent but puzzling picture emerges of the state of entrepreneurship in Europe.
Since the 1970s a consensus narrative has grown up that exercises an iron grip on journalists, policy makers and others. It runs something like this: Europe is locked into perennially low levels of innovation, entrepreneurship and venture finance because the European social model stifles entrepreneurship and European cultures are innately hostile to risk-taking and entrepreneurship. For evidence to support this thesis people point to reams of statistics from the USA and in particular Silicon Valley.
A lot of European policy makers seem to subscribe to this thesis and believe the continent is doomed to fall ever further behind its global competitors. Senior figures I've met at the European Investment Bank and the European Commission are notably pessimistic. They spend their days poring through statistics and fine-tuning a panoply of schemes designed to remedy the situation, but few of them seem to believe the initiatives will make much difference. In most cases they are probably correct.
European and national policy makers have an almost neurotic fixation with Silicon Valley. Indeed many of their efforts seem to be geared to re-constructing it in Europe. There are two main thrusts to this. First, getting more money into research and development. Second, the formation of industrial clusters. On the face of it thesesound like good ideas but alarm bells start ringing as soon as you look in a bit more detail.
Putting extra money into R&D is surely a worthwhile aim. The problem is that European governments see themselves as the right people to decide where the money goes. The EU has an official objective that the public sector should invest three per cent of GDP in R&D. That's a lot of money. And where does it go? Certainly not to entrepreneurs or start-ups, which are far too risky. No, the bulk of the EU's R&D investment goes to industrial giants, the only players able to commit the resources needed to engage with the byzantine state funding mechanisms. I think this is indicative of a lingering tendency for European governments to place their trust in 'national champions', an unhealthy hangover from the dirigiste industrial policies of the 1960s. The available research is clear that these huge players are the least likely to come up with disruptive innovations. So our governments are directing scarce R&D resources away from the people most likely do something useful with it. Not good.
What about creating clusters? One of the most obvious reasons why Silicon Valley (and California's Bay Area more generally) is such a powerhouse of innovation and value creation is its unparalleled concentration of high-quality universities, corporate research labs, investors and startups. European governments concluded that creating similar clusters would lead to more innovation, so for 30 years they've been pouring tens of billions of tax dollars into the creation of such clusters. Has it worked? In the admirably succinct words of the Economist: "It has been an abysmal failure". Successful clusters are emergent phenomena. They stem from a complex mesh of interconnected factors. They can't be planned or artificially created. Governments can help create favourable conditions and remove obstacles but anything more than that is likely to be counter-productive.
On the subject of creating favourable conditions I can't resist mentioning the UK government's recent announcement that it's raising the tax claimed from entrepreneurs when they sell or float their businesses from ten per cent to 18 per cent by abolishing Taper Relief. If the Treasury was looking for a way to send entrepreneurs scurrying away from Britain's shores just as fast as the Eurostar will carry them, they've really hit the nail on the head with this one.
Moving on from the role of government players, how do the central tenets of the consensus narrative stand up? People point to the 'European social model' and its stifling effect on entrepreneurship but in my experience the picture is much more nuanced. It's certainly true that an inflexible labour market is a serious impediment to starting and growing a business. Here in the UK there's a relatively open labour market but two years living in the south of Italy disabused me of any illusion that the rest of Europe was organised the same way. But it's important to realise that Europe's relatively generous social security provision is also a safety net that enables entrepreneurs to take risks. If my own business failed tomorrow I'd still have access to decent healthcare and I'd be able to claim unemployment benefit until I found other work. In the US a failed venture can leave its founders completely destitute, with no healthcare or income. So the European social model has both pluses and minuses for entrepreneurs.
As for wider cultural factors, attitudes to failure are frequently cited as an important difference between Europe and the US. Historically this might have been the case but nowadays I think the argument is wearing thin. All over Europe I meet young entrepreneurs who are no more fazed by the risk of failure than their American counterparts. What's more, they're often surrounded by family and friends who fully encourage what they're doing. This is an area where the culture is changing in a positive way.
One significant issue that doesn't figure at all in mainstream narrative is the difference in scale of a typical European venture capital fund compared to its US counterparts. Whilst the US has many funds with $1bn or more under investment, in Europe funds of this size are thin on the ground. This is important since the size of a fund has a direct bearing on its appetite for risk. A large fund is much more likely to give a business the support it needs to become a world-beater, resisting the temptation to sell out earlier on. In contrast a smaller fund is under constant pressure to exit its investments and recycle the capital into new ventures, which creates a tendency to go for earlier exits rather than holding out for the big win. An ambitious entrepreneur naturally wants to work with an investor who shares their ambition. At present this is likely to mean a US investor. We need to see more large funds in Europe.
For me the biggest barrier to setting up a business wasn't access to finance or skills. It was the difficulty of finding experienced people who could talk to me about how they'd set up their businesses, offer feedback on my ideas and give me pointers to the next steps. Europe has far less infrastructure for aspiring entrepreneurs than the US. Happily some promising initiatives are starting to spring up to address this. One noteworthy example is the g2i (Gateway to Investment) scheme established by the London Development Agency and delivered by a coalition including consultancy Grant Thornton and investment research firm Library House. The scheme helps support London-based entrepreneurs through the first crucial steps of planning, funding and executing their businesses. Let's see initiatives like this replicated across Europe.
In conclusion I think we need to stop being so gloomy about European entrepreneurship and wake up to the fact that we actually have some significant advantages. Foremost amongst these is a long-standing comfort working across different civilisations and cultures, acquired through our continental and colonial history. Many of the success criteria for twenty-first century businesses are tied to subtle cultural and organisational factors. This is an area where Europe is strong.
As part of this change in outlook we really need to get over our fixation with Silicon Valley. Yes, it's a remarkable phenomenon but it can only be understood in its historical and geographical context. There's no reason to believe that the same phenomenon could occur under other circumstances. Europe is different. It's high time we put our effort into discovering where our differences give us advantages and stopped wishing we were Californians.
Charles Armstrong is CEO of Trampoline Systems. Trampoline Systems provides social intelligence for business. Trampoline's SONAR Suite is 360° enterprise social computing for employees and managers. Metascope provides advanced analysis and visualisation for ONA/SNA professionals. Trampoline's clients include the Raytheon Company, a top five global management consultancy and the UK Foreign Office. Accolades include the Red Herring 100 Europe 2008 and Oracle's EMEA Innovation Award 2007. Trampoline raised $6m in Series A investment from the Tudor Group in March 2007 and was named a 'Cool Vendor' by Gartner in 2008.
For more information please visit www.trampolinesystems.com.
