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The Associated Press April 18, 2012, 08:18AM ET

Italy struggles to foster startups culture

Erik Lumer decided to launch his new social network, CircleMe, from Italy -- a country better known for artisanal furniture and eyewear makers than technology startups -- in part because initial costs were cheaper and it was his home.

A French-American entrepreneur with startup experience, Lumer secured Italian venture capital and found a core group of tech experts at wages lower than he could expect to pay in technology centers.

But as the number of users grows and the business seeks to expand, Lumer needs more capital than Italian investors may be willing to bet. In the end, he says, that could mean emigrating to the bigger stage of Silicon Valley.

Under its new technocratic government, Italy is eager to change its reputation as a tough place to start a company. It wants to cut red tape, lower business costs to create much-needed jobs in a time of financial crisis, as well as introduce measures to attract foreign investment.

But the constraints -- in Italy as well as several other European countries -- seem to be as much legal as cultural, particularly as economic turmoil makes investors and business people more risk-averse.

With a strong idea and solid track record, Lumer and his partner Giuseppe D'Antonio raised (EURO)2 million ($2.5 million) from Italy's main venture capital fund, Innogest Capital, to design the interface for CircleMe and launch a test phase. Lumer had previously run the Internet TV platform Babelgum, and D'Antonio worked at Google.

CircleMe seeks to create groups of users around shared interests and location, and not friendships or acquaintances -- in a sort of cross between Pinterest, the online "pinboard" for collecting and sharing photos, and location-based social networks such as FourSquare. For instance, CircleMe users can use their mobile devices to mark places on maps and "plant" items like songs or pictures for others on the website to find.

In Milan, users have marked places for good American pancakes and a spot for sunbathing -- creating surprises for others to find as they wander the city. And during Milan's Design Week, CircleMe is presenting virtual exhibits whose multimedia contents can be accessed at specific sites via the social network's iPhone app.

Inital reception has been good. In the first four days after its mid-March launch, CircleMe had doubled its closed 6-month Beta group of 10,000 users. Lumer hopes it will be profitable in a year.

To get there, Lumer needs to secure funding for the next phase of growth and that will likely mean moving to the United States, where he will find thriving technology ecosystems in the form of bigger investment funds, industry connections, and a broader pool of technology professionals to tap.

European governments are starting to realizing the loss of potential growth from emigrating startups and trying to create better conditions for small businesses. Britain is trying to foster a technology center in London through tax incentives, while Berlin has become home to many startups, particularly in the gaming industry.

The economic advantages are clear. In the United States, 11 percent of all private sector jobs are the result of venture capital in fields like software, semiconductors, biotechnology and telecommunications. Venture capital jobs have proven more durable during slowdowns, shedding 23 percent fewer posts from 2008-2010, according to the National Venture Capital Association.

For every venture capital dollar invested in the United States from 1970-2010, $6.27 of revenue was generated in 2010 alone. One third of the U.S. venture capital funding during those four decades -- a total of $489 billion -- went into Silicon Valley enterprises.

Such figures strengthen the argument that Italy, which is among the European countries that most desperately needs economic growth to lower state debt, has to improve conditions for startups.

The new Italian government headed by Premier Mario Monti has already passed measures to simplify bureaucracy ---- commonly cited for the low level of foreign investment, and it is considering a task force of experts to come up with ways to promote startups, especially by young entrepreneurs, including channels to tap sovereign funds.

Above all, the culture of startups faces big hurdles in more traditional, risk-averse societies like Italy's. Its economy relies of manufacturing of physical goods like Fiat cars or Ferragamo shoes, and entrepeneurs find it difficult to find investors willing to put money into a company as quickly as many startups need, without short-term guarantees of return.

Setbacks in the early stages of a product's development, which entrepreneurs in Silicon Valley accept as a temporary hurdle on the path toward success, carries a much larger stigma among business people in Italy. In purely legal terms, a company that loses money in consecutive years -- a common trait among startups for the first years -- is automatically redflagged for money laundering by Italy's financial police.

Italy's venture capital industry is nevertheless growing, said Vincenzo Capizzi, director of the Executive Master in Corporate Finance and Banking at the SDA Bocconi business school. But in a sign of its relative infancy, there are still no official statistics on venture capital funding. Capizzi noted seed money is relatively small -- from about (EURO)300,000 to (EURO)1 million ($400,000 to $1.3 million).

"Silicon Valley has the deepest investor pockets and the deepest talent pool anywhere in the world," said Michael Brown, a general partner in Boston-based Battery Ventures, which has generated nine capital venture funds since 1984.

Brown said Europe is great for early stage and growth-oriented investment. But he agreed that eventually, many ventures seek at least a foothold in the United States -- including the France-based Neolane software company, in which he invested, and which has opened a Boston office. One exception is e-commerce, which tends to operate on a regional basis.

As Brown emphasizes, the key to any success is a great product.

One of CircleMe's potential money-spinners is music. The site's users can "plant" a song in a specific spot, inspiring others to listen to a sample of a favorite song. This, Lumer believes, offers the potential for CircleMe to hook up with music libraries, like iTunes, so that when people download a song via the site, the venture shares a part of the revenue.

Whether they stay in Italy or move to California, Lumer said startups like CircleMe remain an example of enterprise with a global ambition, something Europe badly needs now.

"I think it is nice that it would come out of Italy and Europe, in the context of this economic and social crisis," Lumer said.

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