On Bridges, Part 2: Why Should Europe Care for Silicon Valley

Bridge_drawingThis post is 2nd of 3 discussing ways Silicon Valley and European tech scene could get closer to each other. The series are an expansion of a short speech I gave at Slush conference in November 2013 – video of which should be online soon. I believe this topic calls for more discussion and thinking along than 15 one-directional minutes on conference stage. As an intro, see Part 1 here.

Europe’s tech scene is buzzing. Those of us who have been on both sides can attest that the people innovating there, business models attempted and technologies applied in Europe are very much aligned with what’s happening in Silicon Valley, despite of the separation. So it would make sense to link up more, right?

As a healthy sanity check before jumping to that conclusion, let us ask: why would we need stronger ties? Looking from Europe, that is.

As witnessed in Part 1, Silicon Valley is not spending much mindshare outside and the pull for tighter relationships has been on European side. Yet, I have been surprised how often I meet European founders who are still planning to buy a plane ticket or have already landed in SFO but can not answer this simple question: why? I mean, selfies at Infinite Loop Drive and group pictures at Facebook and Google campus logos are nice and all, but beyond that – what’s in it for your startup’s success?

Arguing Silicon Valley for yourself

Even walking through a list of obvious external influencers and checking their relevance could be enough for a sane answer.

Is it about the climate? (And believe me, coming from the European equivalent of Alaska — I could actually see and acknowledge this point alone).

Is it about the expectedly omnipresent buzz, geek celebrity sightings and the hope for striking gold by just being at the right place at the right time?

Or, getting slightly more serious – are the companies that matter in your space already in Silicon Valley? The ones you want to compete with, learn from, partner with or steal bored employees over from?

Speaking of talent – is hiring what you’re here to accomplish? The sheer brain power graduating or dropping out Stanford and Berkeley is amazing. On more seasoned front you find people who have not just built for three companies but scaled them to hundreds of millions of users (and I’m afraid — in a repeatable way). And San Francisco breeds the culturally unique combination of hipster-engineers. All true. Yet all these people get 5 headhunter calls a week and you better have something to sell them between pre-IPO jobs at the next Facebook or Airbnb or Pinterest or Twilio — or the $500k seed funding with their own startup’s name on it.

Is it about building your story then, or more Earthly: public relations efficiency?  While you can spend about the same amount of time telling your story to a reporter or blogger in Barcelona or San Francisco, it is true that in the latter case your message will be spread from TechCrunch or Wired or Buzzfeed to people you want to reach in 200 countries around the world and among them – you would get the the Barcelona coverage as a side effect. Less localized and personal, maybe, but more efficient – for sure.

What about the users of your product, your customers? Sometimes what you’re building can be designed specifically for the consumers or companies of US and it makes all the sense to be located close to them. In other cases I see Europeans looking at US as a better-wired (not sure I agree to this one as a consumer on both continents), credit-card enabled, tech savvy market they believe will boost their take-off faster than their home country – alternatives they were comparing as stepping stones for their eventual global dominance.

While both of these arguments could be valid for many cases, more intriguingly there are some other business ideas coming from Europe that would actually not have a good fit with US as a launch market. There would have been no sense in Skype selling SkypeOut first to Americans in 2004, if majority of the calls in US stay inside one area code or state. Nor no sense in Transferwise attempting to convince American consumers to buy foreign money from their peer-to-peer currency exchange, if they only need any once in 2 years, compared to British retirees who need Euros for their Pounds every month to pay for a summer cottage on the coast of Spain.

Besides the market match for a startup’s business, European entrepreneurs have to frankly evaluate their location choice with the personal strengths of themselves and their founding team in mind. Speaking from personal perspective, I am currently lucky to be an EIR at Andreessen Horowitz, one of the top venture firms in the world. Yet, the relative advantage over thousands of other fresh immigrants I get in form of a friendly temporary home on Sand Hill Road doesn’t change the fact that I have been building software companies for 16 years in Estonia and worked most with teams around Scandinavia, in Prague or London much more so than in San Francisco or Mountain View. Europe still is where the best engineers I know are, it is the core of my network, my actual unfair home court advantage. Pragmatically, whatever I end up doing next will have an important European component – and if I were to be personally based stateside for some time more, this decision better outweigh the distance from the strongholds I’m leaving behind.

Only after this honest reflection can you decide the role Silicon Valley should play in your effort to build a great company in addition or instead of Europe. It might well be that relocation makes sense and you believe Palo Alto just has to be your new home to win. Or it might be you need a sales outpost in a more manageable half-way timezone, say in Boston instead. Or an annoying quarterly recurring flight to do that one specific thing you need to do in US, without moving your family. Whatever the outcome is, you have to know and believe in the logic that took you there.

Wait, what about the cash?

By now I’m sure smart readers have noticed that I’ve carefully left the topic of funding for last, even though this too often tends to be the #1 thing to come over founders’ lips when asked why they’re in the Valley.

There is a simple, sobering reason why companies should have the logic for their “home” location locked down before discussing money: you will be far more successful raising seed and early stage VC financing close to home, on whichever side of the Atlantic it may be. It’s a fact.

The internationalisation of VC industry has been well on the way and one can draw quite pretty graphs of the $ flow into startups increasing over the last dozen years and so forth. Without going into all of that, I’d like to just leave you with one near-realtime data point from this year, 2013. Looking at closed early stage deals listings in Pitchbook, American VCs still invest in US and European VCs still invest in Europe, loud and clear:

EU-US invest.007

There are some notable exceptions who are swimming agains this current (like Dave McClure with his Geeks on a Plane movement and resulting above-average geographic diversification of 500Startups portfolio), but in my overall experience, the “stay close to home” mindset applies to most institutional investors in a clearly structured way and is a notable behaviour pattern even for private angels on AngelList.

Successful tech investors — especially so on the “fat VC” side, but I’d argue across the board — believe that there is much more than they bring to the table than just money. No matter how much video calling has improved over the last decade, helpful actions such as committing time for board seats, opening hiring networks, pushing corporate development efforts and just making quick (unscheduled!) calls still work so much better with the investor and entrepreneur in a close location & timezone. Vast majority of investors fail at doing all this over distance, and don’t invest if they can’t do these things.

And further more, just the mere attempts by European startups arriving to Silicon Valley to open a conversation with trying to raise money to another continent hurt potentially larger relationships they could be building.

Think of it as an example of the query theory fallacy in action: our judgments are constructed based on the responses to a series of mental questions. These queries are processed serially (as opposed to simultaneously) and earlier queries produce a larger and richer set of responses compared to later queries (due to both cognitive processing limits and interference of the first queries’ responses on subsequent queries).

Now, if an European founder walks to a Silicon Valley investor, skipping “hello” to ask “would you invest in my seed round?”, they are very likely to get a “no” for all the right reasons that have nothing to do with their startup, but everything to do with  how the investors run their business. And this conversation gets a “no” too early in the serial query, it never even gets to any potential mutually useful bridges we could be building across Atlantic.

In the final post of this series we will further discuss what these other, non-financial bridges between Silicon Valley and Europe could be.

Continue reading: On Bridges, Part 3: What Can Europe Give to Silicon Valley? >>


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  • http://blog.kwiqly.com/ James Ferguson @kWIQly

    >> Europe still is where the best engineers I know are, it is the core of my network, my actual unfair home court advantage.

    Here you have triggered a passion in me …

    There are whole industries that have toy-town versions of the real thing in the US. I’ll save the best to last but to illustrate areas where the US is not on the map.:

    Trains – Who commutes by rail in the US ?
    Languages – Enough said.
    Architecture – Yes old cities are quaint (but also diverse and functional)
    Sports – Rugby, Cricket, Football, Skiing (OK they have a few skiers). And for fun who-ever heard of these sports in the US…

    From Estonia ! http://www.youtube.com/watch?v=o6ugc3MmeDg – Kiiking (not so much an industry as a cool distraction) and even more obscure
    From Switzerland http://www.youtube.com/watch?v=GdIHOV6VGNU – Hornussen

    So what happens when you take the best engineers, mix them with an huge growth industry where the US has long been a cultural laughing stock, and combine a need for deep domain knowledge, to be applied in the context of emergent big data technologies.

    – There you find Energy Efficiency – not cleantech requiring massive hardware or weird new unproven technologies, but cold, hard analytical software engineering.

    Now add some cultural diversity where for example our Estonian and Alpine Buildings use completely different heating technologies, and you see the US as an intellectual backwater. In energy efficiency in buildings, the US is so backward it isn’t even a laughing matter, in fact, it’s probably not even PC any more to use the term “US” and “efficiency” in one sentence.

    So, yes while we visited SF for example to present and win at O’Reilly’s fluent conf, it was only because we knew we could – and it helps web exposure a little !

    For serious things e.g. to develop, hire, establish traction, diversify product and to scale are all things where cultural homogeneity are distinct disadvantages. And that’s why we, like skype don’t need to start with Stanford graduates or US pay-scales.

    Europe was the home of education (universities), philosophy (greece), the industrial revolution (uk), real automation (germany) and from a VC perspective it may be down – but it isn’t out.

    Wait until a few more European unicorns are seen, the tide will turn.

    • http://sten.tamkivi.com Sten Tamkivi

      Ha, thanks for the contribution, James – I’m afraid you’re giving away with where I’m steering towards with the upcoming Part 3 post… ;)

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  • didzis

    I consider startups as early adopters for location agnostic business. Work in the cloud is not the privilege of freelance translators only. Online community and network becomes the primary environment, Seedcamp network is a good example in Balaji’s article (http://www.wired.com/opinion/2013/11/software-is-reorganizing-the-world-and-cloud-formations-could-lead-to-physical-nations/)
    Is Grabcad Estonian or US startup? What defines the origin, country of incorporation, homeland of founders or the location of HQ?

    • http://sten.tamkivi.com Sten Tamkivi

      In my personal experience (managing multi-site teams at Skype), to be truly effective you have to build relationships in person and then you can maintain & evolve them using cloud tools. That is bound to evolve, as Balaji predicts, but I’d say this is the current state of things, say 2005-2015(20?).

      If you believe that startups are the growing extension of their founders idea+execution, you can follow the logic that in the early days the startup is where the founders are, physically. Whom they hire personally, how they lead their growing team on site, etc will have the largest impact of the culture and success of the company later. Some founders manage to share their time (Hardi from GrabCAD, and many other his peers spend time between Estonia & US), others settle down on one site – and that’s where eventually the senior leadership will gather and the heart of the company will be. Country of incorporation, hosting locations & other technicalities are completely irrelevant here, I’d say.