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Springtime For Startups? (Int'l Edition)


International -- Cover Story: Europe: ENTREPRENEURS

SPRINGTIME FOR STARTUPS? (int'l edition)

Michael Skok is still seething. The ambitious young Briton, who founded a software publishing company six years ago, was looking to expand in 1993. So he spent three months courting a major British investment firm in the hope of getting a $750,000 loan.

The day of the meeting came--but within minutes, Skok was cut short by the venture-capital partner. As soon as the partner realized Skok's company would lose money that year, he got cold feet. Instead, Skok's team turned to U.S. investors to raise $1 million, a risk that has paid off. In its latest fiscal year, Skok's European Software Publishing group almost tripled its sales, to $10 million. Says Skok: "Sometimes, I question why I'm putting so much effort into building a company in this country rather than moving to the States."

SOCIAL OUTCASTS. Skok's tale sums up the plight of entrepreneurs in Britain and on the Continent who dare to pursue the golden ring of high-tech success. Europeans know the thrilling tales of Steve Jobs and Bill Gates, and they've heard about all those dynamic small companies that give the U.S. economy a vital boost. But encouraging similar successes on their own soil is another story. Risk-averse financial institutions often treat promising companies like pariahs. Sometimes, Europe's high-tech hopefuls even pull up roots completely and move to America. They grow weary of psychological barriers as high as the financial ones. One opinion poll in Scotland ranked entrepreneurs below plumbers and bus drivers on a list of admired professions.

Gradually, however, many Europeans are recognizing the need to create a new climate for technology entrepreneurs. One compelling reality is simple: the need for new jobs. "The major problem in Europe today is job creation," says Maurice Tchenio, managing partner of the Paris office of Apax Partners, a big venture-capital firm. Midsize and large European businesses had a net loss of 700,000 jobs between 1988 and 1993, according to the European Network for SME Research. Small businesses of all kinds, in contrast, produced a net gain of 2 million new jobs in those five years.

Although some governments and the European Union have programs to spur entrepreneurship, technologists and financiers are increasingly turning to more U.S.-style private-sector solutions to create niche companies. No statistics exist on high-tech startups, but new-business registrations of every kind in Europe held steady during the recession--at about 300,000 a year. Even so, companies, such as Madge N.V. in Britain, Business Objects in France, Morphosis and FAST Multimedia in Germany, and Orthofix International in the Netherlands, are springing up.

GROVES OF ACADEME. More money is also becoming available to help startups, which in Europe have long had to rely on expensive bank loans--more so than their U.S. counterparts. More than $6.6 billion was raised last year by European venture-capital funds--a 46% rise from 1993's $4.5 billion and a five-year high.

As with American universities, Europe's academic community is getting involved in the nurturing process. The region near Cambridge University, for example, boasts about 1,100 tech startups, thanks in part to the university's technology-transfer program. The Max Planck Society, Germany's renowned group of research centers, has recently helped four of its scientists obtain funding to start a company. And in November, Germany's research community started a data bank to give smaller companies better access to its ideas. In addition, many of Europe's new technologists have worked for U.S. technology companies in Europe or across the Atlantic, or else studied in American universities, which are much more gung ho about spawning upstarts.

Financial techniques also are crossing the water. Officials from NASDAQ, America's small-capitalization stock market, are advising Europeans about the possible launch next year of a Europewide market for startups, dubbed EASDAQ. Some market experts are skeptical that Europe's securities industry can create such a market, which might pose a threat to established national bourses. But resourceful European startups are finding a market anyway: The number of European companies listing on NASDAQ jumped 27% last year, reflecting the difficulties of listing at home.

In venture capital as well, some European corporations consciously want to emulate the more hard-driving investment style of their U.S. counterparts. Says Michiel A. de Haan, general partner at Atlas Venture in Amsterdam: "We like to call ourselves Americanized Europeans."

All this is encouraging. But Europeans still face a hard slog before an entrepreneurial culture truly takes root. The main tasks involve directing more low-cost, "patient" capital to companies, ending the strangulation of red tape, and debunking the myth that large companies are better than small ones.

Getting venture capitalists to increase the flow of seed money is crucial. In the past five years, only 7% of all European venture-capital funds were invested in the critical startup stage of young ventures, compared with 24% in the U.S. The remainder of Europe's venture capital goes into less risky buyouts and expansions of existing businesses. The paucity of German venture capital, for example, drove Morphosis, a German biotech outfit, to seek 90% of its funds outside the country. It took Anton Risseuw almost six years to get backing for Getronics, an electronics-equipment distributor that he transformed into one of Europe's leading systems integrators. "We could have grown even faster if we hadn't had such a problem starting up," said Risseuw.

NEW RULES. A key way to boost the amount of risk-capital available is to make it easier for startups to float shares, both to repay initial investors and obtain capital for further expansion. The European, NASDAQ-like market now being planned could ease that problem, if it gets off the ground. Yet in the meantime, other rules could be changed. One possible strategy is to lower the capital-gains taxes across the board, thus encouraging investors to diversify into riskier startups. Other statutes need revamping or outright elimination. In Germany, for instance, institutional investors aren't permitted to invest in companies that aren't traded on the main exchanges. Likewise, many investment funds in Britain aren't allowed to invest more than 5% of their money in unlisted or unquoted stocks.

Inside the companies themselves, labor costs must be cut, and labor flexibility increased. Small companies now bear heavier costs relative to their larger brethren because of certain social-security rules and other benefits. For example, a costly paid-leave provision that is manageable for a large company often turns out to be crippling for a small one. The current labor laws also offer few incentives for workers and executives to cast their lot with a startup. As Leendert J. Van Driel, head of the Dutch venture-capital firm Gilde Investment, puts it: "People are handcuffed to their pension programs," which can't be rolled over in the Netherlands and other countries.

Lightening the bureaucratic hand is also an essential step. Daniel F. Muzyka, a professor of entrepreneurship at French business school INSEAD, says that in order to set up his own consultancy, he had 32 exchanges of letters with assorted French authorities and associations over a two-month period. Various European committees are studying the red-tape issue, but no one expects that there will be a quick solution.

Efforts are now being made to upgrade the poor image of entrepreneurs. For the past two years, Ernst & Young has awarded a Grand Prix de L'Entrepreneur award in France--an idea imported from the U.S. As Jean Charles Raufast, a partner at E&Y in Paris, recalls: "When we decided to launch our entrepreneur-of-the-year awards here, many people told us it would never work, because people don't want to admit to making money." But not only does E&Y plan to continue the program, it may also expand it to other European countries.

NO "JOB FOR LIFE." Although there is obviously huge resistance to startup companies, there are broader trends at work in European economies that could help over time. As corporate hierarchies flatten and jobs disappear, the security of working for big companies such as Philips Electronics or Volkswagen is vanishing. "For people my age, it's a question of not if, but when, they'll be out of work," says Walter Herriot, the 51-year-old director of Britain's St. John's Innovation Center in Cambridge. "There's no longer such a thing as a job for life."

This hasn't been lost on the younger generation, who have watched their parents lose jobs. That may be why twenty- and thirtysomethings are more willing to consider self-employment. Indeed, at INSEAD and other European business schools, enrollment in courses on entrepreneurship has never been higher, professors say. At INSEAD, 78% of this year's graduating students have taken at least one elective in entrepreneurialism--up from 37% three years ago. "The perception of risk has changed," explains Sue Birley, a professor of entrepreneurship at London's Imperial College. "These days, risk is working for a large corporation."

The risk for Europe is that its first glimmerings of technology entrepreneurship won't be sustained. A blossoming won't solve Europe's economic problems by itself. But the steps necessary to nurture entrepreneurs, especially high-tech ones, are the same steps needed to loosen up Europe's entire calcified economic structure. Cutting red tape, boosting innovation, creating incentives, pushing for a sense of possibility--these are what all Europeans need, not just the executives at Madge, Business Objects, and Morphosis. "We have been discussing this for 20 years," says Wolfgang Hasenclever, general secretary of the Max Planck Society. "But it might be different this time." For Europe's sake, it had better be.

Creating More European Entrepreneurs: What Must Be Done

PROMOTE INVESTMENT. European startups badly need equity investment. Solution: Lower the capital-gains tax to encourage investors to diversify their portfolios into small-growth companies.

ENCOURAGE PUBLIC LISTINGS. Relax rules and regulations on stock exchanges to encourage small, not-yet-profitable companies to issue shares. That would provide an "exit strategy" for some venture capitalists to take profits, giving them an incentive to provide early-stage financing.

BOOST IDEA FLOW. U.S. entrepreneurs thrive on access to universities. European universities should promote connections between their own research labs and entrepreneurs and offer advice to startups.

CHANGE LABOR LAWS. Heavy social-welfare taxes and stiff rules on hiring and laying-off create huge expenses for small companies. They need relief.

CELEBRATE ENTREPRENEURS. Europeans need more "model" entrepreneurs to hold up as examples. Business schools need more courses on entrepreneurship, the press must cover the issue, and new databases should track the best entrepreneurial companies.

DATA: BUSINESS WEEKBy Julia Flynn in London, with Linda Bernier in Brussels and bureau reports


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