The Economist recently published an extensive piece on the obstacles faced by European entrepreneurs. The data is gloomy, but the authors do highlight signs of growth coming from the Internet industry. For instance, while most start-ups find it hard to attract top-tier American venture firms, the audio and sound sharing platform Soundcloud has bucked the trend, receiving funding from Twitter-backer Union Square Ventures.
The Economist points out that, "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." Access to capital is a core challenge for start-ups, especially in Europe, where attitudes toward venture capital investment differ. In an Ivey Business Journal article last year, Hatim Tyabji and Vijay Sathe explained:
In 2001, a survey comparing the practices of 104 VC firms in Europe with 67 American VC firms found that the former had a smaller percentage (38 percent) of early-stage investments in their portfolios than the latter (50 percent). However, the difference was greater for older VC firms (those established prior to 1997; 31 percent for Europe vs. 48 percent for America) than it was for younger VC firms (45 percent for Europe vs. 53 percent for America).
The authors go on to conjecture that this is largely due a culture of EU investors who are more averse to risk in the US investors, and as such, they are more inclined to invest in established ventures.
Thus, attracting top-tier VCs en masse to a new venture is particularly difficult in the EU, but it may not be necessary. A 2009 study by Harvard Business School researchers examined the relative success rates among entrepreneurs and venture financing in the US. They write:
… entrepreneurs in second or later ventures have a 4.1% higher probability of succeeding than first-time entrepreneurs. At the means of the other variables, entrepreneurs in their second or later ventures have a predicted success rate of 25.0%, while first-time entrepreneurs have a predicted success rate of 20.9%.
This finding is consistent with the existence of learning-by-doing in entrepreneurship. In this view, the experience of starting a new venture—successful or not—confers on entrepreneurs some benefits (skills, contacts, ideas) that are useful in subsequent ventures.
The authors note that presence of top-tier VCs matters when it comes to first time entrepreneurs and entrepreneurs whose previous venture failed. But with EU investors favoring more mature businesses over infant start-ups, perhaps a jolt of expertise to cultivate a community of successful entrepreneurs could create a positive feedback loop in which success breeds success, thus changing attitudes toward investment in early companies.
Look at it this way: if Europe can create a healthy base of entrepreneurs like those that started Soundcloud, then the money will follow. Success will, too.
Derek Slater is a Policy Manager at Google.