Startup success in Europe versus Silicon Valley: myths and facts

Reading the same old myths over and over can make you think that there could be some truth behind it, after all. Like: if you’re a startup, you’d better move to Silicon Valley or at least the US – there’s a better chance that you’ll IPO, and more chance of finding an acquirer with deep pockets.

This “Atlantic divide” is a very persistent myth about European entrepreneurship. Any study trying to present facts instead of perpetuating myths should be welcomed, like this one from Dr. Ulf Axelson and Milian Martinovic of the London School of Economics (for the British Venture Capital Association).

To determine the success of VC funding in Europe and the US, the authors of the report used survival analysis – a technique generally used in medicine for clinical trials. Survival statistics can tell you which circumstances and characteristics increase or decrease the likelihood of survival.

Here survival analysis is used to investigate whether the physical location of a startup – US or Europe – increases or decreases the likelihood of a successful exit. Success is defined as either and IPO or an acquisition by another company.

The study is based on 35798 startups receiving VC investments between 1980 and 2011. The data sets from Europe have 12315 records and start in 1995. Distribution of deals per region is here:

Myth 1: Likelihood of startup success is better in the US compared to Europe

If you define success as “startup does an IPO”, then no meaningful differences in success between the US and Europe can be found, as you can see in the graph.

If success is defined as selling your company to another company, then there are differences between the US and Europe:  the chance of selling your company as a US startup is about 8 percent higher than it is as a European company.

Mind you: this is about the chance that your company gets sold at all, at any price. The valuation of the companies wasn’t compared, probably because reliable numbers about M&A activity is so hard to find.

If you wonder why both lines go down to zero so sharply after 2005: this is logical – the more recent the funding event happened, the less time companies have had to either IPO or sell.

The median time to exit (either sale or IPO) is 4 years after receiving VC investment, but that doesn’t really say much: there are huge individual differences in when companies get sold or IPO. Most exits take place somewhere between 10 months and 7 years after the initial VC investment. And even that doesn’t say much: twenty percent of all exits occur more than 10 years after the initial investment.

Myth 2: “The European stigma on failure harms European entrepreneurs”

The myth that Europeans have a much harder time than US entrepreneurs because of cultural aversion of failure is very persistent. It dates back to at least 1998, when the European Commission wrote:

„In Europe, a serious social stigma is attached to bankruptcy. In the USA bankruptcy laws allow entrepreneurs who fail to start again relatively quickly and failure is considered to be part of the learning process.”

“In Europe those who go bankrupt tend to be considered as „losers”. They face great difficulty to finance a new venture.” (European Commission, 1998)

Not true, says the study. A failed entrepreneur has the same chances to find funding for a new venture in Europe as in the US. Maybe things changed the last 15 years.

Myth 3:There is “something special in the US” – which is good for startups and Venture Capital in the US and bad for Europe

Again, the authors found nothing special in the air that harms startups in Europe or helps startups in the US. VC success has the same foundations in Europe and the US. And one of the main factors is experience – both for entrepreneurs and VC’s.

Experienced entrepreneurs perform better, the study shows, and there’s no difference in how much better they perform between the US and Europe.

The US do have one advantage: the proportion of firms with a serial entrepreneur is higher in the US (35 percent) than Europe (15 percent). This makes sense – the US started developing startup ecosystems earlier and now the US has a bigger pool.

Be advised that ‘serial entrepreneur’ does not mean that everything went fine the first time. The study shows that a serial entrepreneur who failed at his last company performs at least as good as an average entrepreneur the next time starting a venture (if they can find someone to give them venture fundinga second time around).

The study also measures specialization of VCs and the impact of relevant experience.

Experience of a VC could

  • a) come from a better technical and final Due Diligence process and picking experience and also
  • b) come from value added services during the investment time, such as bringing in a knowledge network, advise and continuous monitoring.

Both types of experience have the same effects in the US and in Europe: for VC’s, more experience leads to more success. In this graph, you can see that Europe is about to come on the experience same level for VC’s as the US.

So to sum up the findings of the study: for startups and VCs in Europe and the US, the same rules apply.

  • For entrepreneurs: finding a VC with excellent due diligence and a supporting investment family will help your startup get successful.
  • For VC’s: finding an  entrepreneur with some industry mileage will help your investments bear fruit.

I would summarize this study as: VC in Europe versus US: it’s deuce, égalité, Einstand  (although some Twitter folks said it was suspicious that the authors didn’t include graphs showing the profitability of European VC firms versus US firms!)

Do female entrepreneurs “underperform”? 

The study also concludes

“… we also find that female entrepreneurs … tend to underperform. …”.

This, in my opinion, is the wrong conclusion, because of the definition the authors used. If one female member and 9 male founders blow it – the female entrepreneur is “guilty” and “underperforms”.

But of course the larger the team is, the higher the chance is that it has a female member. Which means that “underperforming”  would have less to do with having female entrepreneurs on board and more with the team size. Another argument against this hypothesis is that the reported negative impact of female entrepreneurs  has a weak statistical significance.

Let us know what you think in the comments!

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About the author

Thorsten Zenker

Thorsten Zenker has 25 years experience in IT, venture funding and M&A projects. He is CEO of TZ Consulting and specialist for due diligence with special focus on intellectual property and technical debt. You can visit his website and follow him on Twitter.

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