As Europe falls apart financially and otherwise, the start up scene in Europe thrives. This new era of start ups makes sense because the new European survival strategy must rely on entrepreneurship, and now it is up to every individual in Europe to be at least an entrepreneur of their own lives. In this new world two winning cities emerge: London and Berlin. They are great for different reasons.
Berlin has low rents, low housing costs, lower salaries, a high quality labor force, great engineers and it is a fun and creative place. It would probably lead Europe if it weren’t for some key drawbacks. Compared to London, Berlin has two big negatives: access to funding and a tax/labor framework that fails to recognize the uniqueness of start ups.
The natural aversion of Germans to risk makes it hard for their financial system to find a good way to consistently finance failures. And as Silicon Valley has shown, you need a financial industry willing to finance failures until the successes come. While the British themselves do not have amazing VC firms willing to take American style risks, the largest US VCs go to London and pump the eco system up. Even the Continental European VCs like Atomico go to London because the UK also has the best tax/legal regime for start ups. Moreover, the new tax and labor law in the UK makes it easier to give stock options and hire and fire, which is in the nature of start ups. Start ups try talent out as frequently as they try themselves out. So even if salaries and rents are higher in London, financing and the ability to “try things out” make London a more favorable place. And as cosmopolitan as Berlin is, the German language is still a barrier for many who have not grown up with it.
I see good prospects for both cities but if I had to bet on the winner, I’d choose London to follow Silicon Valley and NYC as the third best start up hub. While Berlin has some of the qualities that a city needs to attract start ups, London, although behind the USA, still has more of what it takes to compete with its American counterparts.
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While not all Americans love Europe, many do. Quite a few people in San Francisco or New York City dream of spending part of their life in Italy, France, the UK, Spain and other European countries, and some do make it over. This is what I did in 1995 when I left NYC and moved to Madrid. As a tech entrepreneur, I found Europe, in general, and Spain, in particular, to be very fertile ground for me. The European market is huge, bigger actually than the US market in terms of GDP. This has not changed with the crisis. While in Europe, I built Viatel: a company that I started in NYC, but later on moved to London and in which I invested a few hundred thousand dollars to start in 1991. When I sold my shares in a public offering in 1999 the company was worth $1.2bn. In Madrid, I built Jazztel: Spain’s second largest publicly traded telco (now worth around $1.8bn), and Ya.com, in which we invested around $50M and sold for $700M to DT. I also co-founded Eolia Renovables, an alternative energy company now worth around half a billion. And for the last six years I have been building Fon out of Madrid and London and it’s become the largest WiFi network in the world, still private. I also started one of the first European cloud computing companies called Einsteinet where I lost about $50M mostly for being too early in the cloud-computing world.
So much for my credentials, now let’s go to what it’s like to build tech companies in Europe and how this is different from doing the same in the USA where I live now.
Europe is great for an American tech entrepreneur because wealth is better distributed. More consumers can buy your products and services, people are more educated on the average so you can find very good employees and there are less competitors, less people wanting to be entrepreneurs (Europeans have ambivalent feelings towards entrepreneurs and being an entrepreneur is not as well regarded). But the European market is less homogenous than the American market. While in theory employees and goods can move anywhere in Europe and most of Europe has the euro as a common currency, cultures are very different and that in itself is a barrier to building a pan European venture. And there are also other pros and cons that I will now describe.
There are very important legal and cultural differences that make it harder to work in Europe. The first one is the legal interpretation of business failure that gives entrepreneurs less of a limited liability. For example, in Europe, and this is everywhere in Europe, there are very high social charges associated to every job. While in the USA you have to add say 8% to a salary of $50K in social charges, in France, Spain, Italy a salary of $50K means at least $75K or more in costs to the entrepreneur. But if you fail to pay these social charges because your start up is doing poorly, and you are the administrator or person responsible for your start up, you are personally liable and indebted for the rest of your life for these charges should you fail to pay. Not paying them is considered a crime from which you are not protected. In most of Europe there is no concept of personal bankruptcy and unlimited personal liability, or even of shielding your home from personal bankruptcy that exists in some states of the USA. So beware of personal liability when you establish a start up in Europe and should it go badly give up before you run out of money to pay social charges and mandated severance pay.
Another legal obligation that is very common in Europe and unheard of in the USA is state-mandated severance pay packages. This is a direct impediment to start ups, the reason being that most start ups fail and in the USA there is an understanding of this. In the USA employees demand stock options as upside should the start up succeed knowing that there will be no severance package should the start up fail. But I have yet to find a place in Europe where employees or governments truly understand this. Not only are forced severance pay packages a problem because most start ups fail and they still have to pay them, but also because start ups are constantly trying out people and the concept of trying out people is very costly in Europe. In some countries like France, forced severance packages of people who have been with you say only half a year can be as high as double their earnings during that time. For most Europeans stock options are considered a scam to pay them less. Now the laws vary throughout Europe, Germany and Spain for example have lowered mandated severance pay packages.
When starting a company in the US, informality rules, we all know the story that HP was started out of a garage. Now in Europe work is so regulated that you can’t start a company out of a garage because you can’t legally work in a garage. I did not know this at the time and started Jazztel out of my garage in La Moraleja, Madrid, fortunately nobody filed charges against me and soon we had an office in La Castellana. But in general, the intense regulation of work is something that I found extremely annoying as a US-trained tech entrepreneur. In Germany, where I built Einsteinet, for example, there are rules that state how many meters an employee has to be from a window. Many of the workspaces that are used in NYC are illegal in Germany because these employees are far from windows and in very small desks—prohibitively crowded environments by German law. In Berlin there are many start ups who break these rules but I don’t know how long this is going to last. I hope Germany goes the way of Berlin in adopting further flexibility for start ups. There is no formal way to start a company and start ups in Europe have to live by the rules of old and established companies. This can’t go on. Europe needs to deregulate companies with less than three years of age, less than 20 employees that are not yet profitable. While I am not against many of the European labor laws as applied to large profitable companies, they are a clear obstacle for start ups.
Now on the positive side. There are two areas that I find wonderful in Europe compared to the USA. One is that lawyers cost much less and do much less. Especially in Continental Europe. The UK and Ireland are more like the US in this case, but in the rest of Europe legal costs for a start up can be 90% less, and I really mean 90% less than in the USA. Lawyers are needed less, are used less and charge less. Savings can be enormous. There is much less frivolous litigation. There are few legal minefields while operating in Europe. The rules are tough, but they are clear. Also there are less types of patents allowed.
Another positive is in health care. Most Europeans have state sponsored health care or plans that make health care for start ups a non issue. In the USA a start up can pay up to $800 per employee for health insurance. Or not offer it, but that is pretty sad should anything happen to an employee. In Spain, France, Italy, health care is free. Employers generally provide no insurance. Now on the negative side: in many places in Europe, and I would say this is more common in Southern rather than Northern Europe, medical care is used as a bargaining tool in labor relations. Spain for example is one of the countries with the longest life expectancy and yet one of the countries with the most sick days in the world. You could argue that it is healthy to take sick days but unfortunately what happens here is that patients ask doctors for medical justifications for paid leave of absence. A friend of mine was fed up with an employee who worked poorly and told him that if he didn’t work harder he would fire him. This employee went to see a doctor, told the doctor that work depressed him and he was declared a mental patient; as a result, my entrepreneur friend had to pay him for a year of doing nothing. So while health care is free or almost free by US standards, in many places in Europe, there is some abuse of the health care system to work less. In the USA, by the way, the opposite happens: many times there are employees who are truly sick, but continue to work because they fear for their jobs. This is just as bad.
Then there are issues related to taxation. In the USA the general concept is that people should be rewarded with lower tax rates when they put their savings to work or invest. And gains on investments have lower tax rates. This is the same in Europe. But in the USA it is also understood that the same is true of stock options, which are taxed at capital gains rate. In most of Europe (except recently in the UK), on the other hand, capital gains are taxed as ordinary income, and what is worse many times out of the money stock options are deemed as income, with both implications towards taxation and part of forced severance pay packages. So if an employee cashes out on stock options in one year it may become unaffordable for the company to fire him or her the following year. Forced severance pay packages in Europe are not based on average earnings but on the last year earnings of employees. This makes it hard to give stock options if only for that reason, the same thing happens with bonuses.
Bonuses in Europe are a very tricky subject. Again this concerns how incredibly regulated the labor market is. So if you pay a bonus either you have a very specific contract that explains how that bonus was earned or the employee can demand the same bonus next year even if he or she did not do what he or she did the year before or even if the company is doing much worse. It was a shock to me to find this out and it cost me dearly. In the end what many European employers do is not give out stock options and give tiny bonuses. What these laws do is make employers go for low fixed compensations and not expect outstanding work. This is bad for the European economy in a world in need for excellence, but it is the way it is. Less overall pay and less overall results. Related to this are regulated work hours and forced vacations. In Europe there is a common belief that work is punishment and that the role of government is to protect people from overworking. As if working in a start up was akin to working in a coal mine. So there are many rules that make it hard to work the 12 hours per day that a start up may need in its initial months. To work hard, to work long hours, is actually illegal in Europe. Yes, I know, it sounds strange, but it is illegal not only for an employer to ask an employee to work long hours and not take vacations but it is illegal for an employee to do that even if this person truly prefers to be at work rather than at home or on vacation. Again there is a problem here between what start ups need and what Europe regulates. Without counting stock option earn outs, engineers in the USA earn between two and three times what they earn in Europe. So it is hard to see how engineers are protected by European labor laws, and especially engineers in start ups.
In the USA there is a great deal of conversation about equal opportunity, but Europe goes further–in Europe equal opportunity is not enough, instead what Europeans expect is equal results. Surprisingly the educational system in European nations is highly competitive and discriminatory, based on grades. Much tougher than the US high school system for example. So as students, Europeans are ranked and divided, but once they reach adulthood they are expected to mostly work the same and earn the same even if their performance is different. So from this perspective there is something anti-European about the Silicon Valley culture of personal reward. I experienced this at Ya.com where in two years we distributed around $70M in cashed stock options among 20 employees. Later on these employees told me that it was culturally tough to get rich. That being the richest person in your family, or among your friends created a backlash that affected their personal lives. So if being rich is frowned upon what is the driver of success? Fortunately in Europe there are many people who have a tremendous work ethic and pride in what they do. To me the best testimonial of this is the open source movement. Europeans were and are the major driver between open source software development, a work many times done for free but with enormous sense of pride. So if you are an American entrepreneur going to Europe you have to understand that Europeans are different and learn to live with their mentality. Focus less on making your employees rich, which they will appreciate but rarely say that their aim in life is to get rich and, instead, focus more on creating an environment of excellence where people can be proud of what they do and get a higher than average but near average take home pay. And you also have to understand and respect that Europeans have a life outside work, and that may actually partly be why on average they live four years longer than Americans. And that may be why you, yourself, the American entrepreneur, may actually enjoy your life in Europe. I did not move to Europe from NYC looking for work. I moved there looking for a life. And I found one. And that’s why many Americans move to Europe. Even in the USA now I am not the person who left. Europe changed me for the better.
And lastly there is the “can-do” attitude of Americans that is hard to replicate in Europe, that Europe truly needs but rarely gets. Americans believe that they can conquer the world with their products and services. Some Europeans do as well but that is less common. In all of Europe only one company has emerged among the most valuable in the world in the last 30 years and that is Spanish Inditex, the fashion company behind Zara. Other than that, most European companies among the world’s most valuable are very old. Contrast this with Google, Facebook, Amazon, all new companies among the world’s most valuable. And the problem with this is that it is harder to convince a group of Europeans that they are out to conquer the world in their field. It is cultural. That is why many world-class European tech companies like Skype end up in American hands. Spotify will probably soon follow. It is easier for Americans to believe and bet on them. Also there are very few world-class European VCs (exceptions Index Ventures and Atomico); there are no European companies with piles of cash as Google, Apple and Microsoft have, thus providing a string of exits for start ups. The last company who did that and bought two of my angel investments was Nokia, now on the ropes. Bottom line is that a company in Berlin is likely to be worth less than an identical company in Silicon Valley. Sad but true.
So if you are an American entrepreneur, should you move to Europe? Well some did and did quite well. My friend Zaryn Dentzel founder of Tuenti is one of them. But do not make a significant move before truly understanding how different Europe is from the USA. Other than France, which seems to be moving in the opposite direction, Europe is changing for the better. It is making it easier to be an entrepreneur, and in a Europe in crisis, entrepreneurs are finally getting more respect.
(Photo: Drive-In Mike, Flickr)
The majority of start ups are not competing against other start ups. They are competing against the indifference of consumers, many of which couldn’t care less about their innovation. And this is true even when you, the founder, thinks that what you have come up is something totally revolutionary that will greatly help people. Look at our case at Fon. Fon is a huge success in countries like the UK, Belgium, Japan and others and with 7.5 million hotspots we are now the largest WiFi network in the world. Now what is the paradox of our technology that turns everyone’s WiFi into public WiFi? Fon happens to be an innovation that almost everyone wants if given to them but very few will do anything to get it. So at the beginning Fon was a consumer company who gave away or sold WiFi routers that shared WiFI and we almost failed as a consumer company. When we asked consumers to share a little WiFi at home and roam the world for free connecting to other Foneros or WiFI sharing members we only got 300K people around the world to do this. But when we pivoted and we started working together with telecom companies like BT, Belgacom, SFR, Zon and others, these companies made Fon a standard feature of their DSL/Cable WiFi services (meaning that people became Foneros by default) and if they did not want to be they could opt, out almost nobody opted out! And the telcos started working with us because they saw that we lowered their capex, their churn, their customer acquisition costs and increased their ARPU. So the partnerships keep growing around the world. Consumers benefit, we benefit, the telcos benefit.
So the paradox of WiFi everywhere is that if people are asked to do something to have a big benefit, to roam the world for free, they don’t. But if it’s given to them without asking and then asked the opposite, if they don’t want to be part of a WiFi everywhere community that gives them free global roaming, almost everyone wants to stay in. This “opt in vs opt out” paradox (a phenomenon proven highly relevant in the market for organ donations) symbolizes the struggle of start ups, even those who have truly innovative and beneficial products such as Fon.
As innovative as people think they are, there is only a small group of us geeks who enjoy testing and using whatever is new. For massive success indifference is the biggest enemy of start ups, and your role as CEO is to fight this indifference, to evangelize, to reach people in the best possible ways so they finally find themselves using your innovation and liking it. Your most important role is to fight indifference through whatever channel works best to promote your innovation.
This article was also published in LinkedIn. You can follow Martin by clicking below
On Monday we celebrated Nina’s birthday in the desert of Arizona. I love deserts, I proposed to Nina in another desert, the desert of Southern Morocco. I have been trying to understand the appeal of deserts to me and I think I have come up with something meaningful.
As opposed to a jungle, in the desert, you get the feeling that each plant, each cactus was a huge accomplishment. Each plant in the desert is…a start up!
Growing up without water, that’s what building a company feels like to me. Especially my start ups, in Spain, a desert in entrepreneurship. And that’s why I appreciate the gigantic cacti in the pictures. They grew up against all odds. Like Jazztel, Ya.com and now Fon.
I have 5 children. They go from 21 to a 6 month baby. My 21 year old daughter, has come up with an idea for a start up. She is implementing it. This was a surprise for me because until recently she had not shown interest in the start up world. She studies history at Columbia College in NYC.
I will not go into detail on what her Internet start up as that is for her to share and she will at the right moment. What I can say is that I heard what the plan is and it looks very feasible to me. And this is only partly because I think all my children are stars. It is actually a great, original idea and she could execute it very well. But while not sharing with you what her business is I will share with you what I said to her.
My daughter, I said, what you have is the “start up bug”. It is a bug so powerful that once infected with it you carry it for life. The dream of turning an idea into a company that millions use and enjoy never goes away. I don’t know if this start up will be successful but what I do know is that sooner or later you will be. Go for it!
I just spent a week in NYC. What the city did vis a vis crime reduction between the 80s and 90s it did vis a vis start ups between the 00s and the 10s. It’s a whole new tech scene here. And it’s very new.
I remember when I invested in the first round of Tumblr with John Borthwick the tech scene in NYC was minimal. And that was as recently as 2007. On this trip I visited General Assembly and it was buzzing, and they are not the only nurturing grounds for entrepreneurship, there are many as well as many start ups who are making it big. Also what has happened in the last decade is that now Brooklyn is not a lesser cousin but an integral part of NYC as well and there are a lot of start ups and tech people who live there. It is interesting to see how Brooklyn has made it and NJ has not considering that they are both a river crossing away, but Brooklyn has a history and beauty that is tough to compete with.
Here’s a short and random list of reasons why I believe NYC is making it:
-when you leave work you have a lot to do.
-NYC is more environmental than the life in your car Silicon Valley. The ecofootprint of a New Yorker in his high rise apartment is lower than that one of a SV techie in his house in Palo Alto.
-NYC is way more than tech.
-NYC is half way between SV and Europe and SV is in theory closer to Asia but flying times are the same.
-Bloomberg, who had his own financial internet before the internet really gets it and is promoting NYC as a tech town every week, indeed this week he was at Tumblr promoting his tech friendly policies.
NYC is now a true rival to Silicon Valley and that is great news. Chicago is also happening I hear, thanks to GroupOn, not my favorite start up but still a force. And then there is London with Spotify, Badoo and many others. Overall I think that what happened to USA in the last few decades is happening to Silicon Valley now. SV is still number one but in relative terms shrinking in relevance. NYC, London, Berlin, TelAviv, Tokyo, Shanghai/Beijing/Taipei, Bangalore, all valid alternative places for tech start ups.
I lived in NYC for 18 years, between 1977 and 1995. Now when I visit I realize that I owe a lot to that city, my education, my first successful ventures. Would I move Fon to NYC? Well we decided to open our US office there and not in SV. But for us, the engineering talent we find in Spain would be hard to replicate in NYC. Spain as troubled as it is, is a great place in which to have your start up. With 47% youth unemployment and many talented young people if you have a great project you can get the engineers you need for it. It is true that Spanish work ethics are not as good as the American work ethic, but people are realizing that either they truly work or the country will sink. And the attitude is better now than a few years ago. So while I won’t move back to NYC for now I will go more frequently. There are too many admirable people there!
Correction, after writing this post Daniel Ek contacted me to say that NY has become so attractive for Spotify that now they have more employees in NYC than London. I also forgot to mention that large companies like Google and now Facebook have very sizable offices in NYC.
My answer generally centers around the fact how I have a great team of managers, that they are so good and reliable, that Fon has an amazing pool of talent, I also talk about how much I delegate, and that is all true.But there is another side to this question that I have not told journalists. I have not done it because I fear sounding obnoxious, elitist, or just weird. But this is my blog so if I don’t do it here where else? So here’s the other answer, the more private answer of how I have managed and manage my time.-I don’t watch TV, that alone gives me 14 years more of life for doing other things! If I watch anything it’s Netflix or Youtube, that’s where I get my TV content and movies from. I rarely go to movie theaters and watch all movies in our home theater with the family.
-I am not interested in professional sports, another activity that seems to consume endless hours of many people including most of my guy friends. The Super Bowl went unnoticed. I only watch the World Cup and that is once every four years. Not watching sports, nor commenting or talking about them, is a real time saver.
-I read less books, I just don’t have 30 hours to devote to each one of them. I read a lot on the net, and some magazines also short stories during flights. But just like I practice sports much more than I watch sports (I mountain bike around 8 hours a week) I write much more than I read. I read a lot in my 20s, now it’s my time to contribute to others by writing. Yes I did read the Steve Jobs bio, or some Nick Hornby, Martin Amis recently. But reading whole books takes too much time for me to be able to do it on a daily basis. I read when I am on vacation, when I sail. That’s when reading feels great and is a real pleasure.
-Personal grooming: many top business people spend a great deal of time selecting their clothes, getting haircuts, manicures, pedicures, massages, and all sorts of time consuming personal grooming activities. I instead sometimes cut my own hair, dress simply, wear sneakers and jeans, never wear ties or suit. My wife chooses my clothes. This alone saves me 83 minutes a day according to some estimates.
-Logistics and commute (this part is only useful for entrepreneurs): I sometimes drive, but I have a driver and while I go anywhere, I work in my car. I don’t need to look for parking. This is clearly a luxury but it is a time saving luxury. Also by design my home is 10m from my office and 20m from the airport, also near my kids schools. I pick up my kids from school every day and spend the afternoon with them. When I travel, we have homes in New York, Paris and London. This is partly because I don’t like to pack nor check in hotels, in those homes I find all I need. I can go in and out quickly. I also have another special luxury which is a small private jet and therefore spend much less time at airports and travel more efficiently point to point. The Citation V increases my environmental footprint but I have built a lot of wind farms to pay for my sins
-Even though my company’s name is Fon I rarely make phone calls. I communicate over every imaginable platform, Facebook, bbm, whatsapp, Skype, Google Talk, you name it, but phone calls are for family and friends . In business I prefer electronic media or in person meetings.
-I don’t drink. Yes this one is a shocker but I rarely drink, if anything a glass of wine with a meal. I dislike beer and liquor. Drinking is something that consumes an incredible amount of time in the lives of other people and renders them useless for a lot of other activities for a significant percentage of their lives. Not drinking has put me in difficult positions doing business, especially in Japan. Same with drugs, I tried many, but didn’t like any. Cigarettes, cigars, I don’t like any drugs. Being sober at nights, on weekends, already puts me ahead of most of the population in terms of productivity.
-I rarely do business lunches and dinners and spend most meals with family and friends who I really care about. Business meetings are at the office and in the morning. I work from 9 to 2. Afternoons are for family and sports. Evenings for family and friends. My business meetings instead are invariably short. I am always online and work online. But I don’t like to be at the office just for being at the office. When I am at Fon, my door is open and people can walk in for short meetings. People at Fon know that I treasure my time, but they also know that I am there every time when I am really needed. Of course I do show up for emergencies, road shows or those moments of the year when I am needed all day. But that is an exception not a rule like with anyone else who does spend their afternoons at the office. Being CEO allows me that benefit. If I was anything else I would have to be at the office all day.
-I am punctual and have little patience for those who aren’t. I don’t make others wait, I don’t wait for others. The word must have gotten around on this because we all tend to be on time. I don’t waste time waiting.
-I make social media work for me, sometimes people say, how do you get work done if you spend so much time on social media, but I use social media to take notes, like I have an idea for a business and I blog it, I share it, I work collectively with people, social media looks like a waste of time for others but it saves me time, I recruit on twitter, I brainstorm on Google+ or my blog, I work inside social media, get ideas, its a sanity check many times, crowdsourcing saves me time. When tweeting I use Tweetdeck to time my tweets so they appear at different times of the day when I am doing other things. This allows me to tweet across time zones although sometimes it angers people when they think I don’t answer and I am asleep. I also developed an Android app to listen to my social media on my bike. It’s called Radiome and it reads your social media while it plays music, it’s perfect for my bike.
-Against what many think I sleep and I sleep well, 8 hours or so. Sleeping is an important time of the day. I sleep much better with my wife than alone when I travel without her. Lately I sleep with our 5 month old baby and I still manage to sleep reasonably well because we are lucky enough to have a baby who sleeps 11 hours almost every night. She sleeps much better than my older kids and I think it’s because we adopted co sleeping.
-I go to a couple of conferences a month. What I like about conferences is sometimes the content, like at TED, but mostly the fact that I get to see a lot of people all at once there. Many think conferences are a waste of time. I find them a very efficient way to have a lot of in person meetings in the same place.
-I say no to a lot of formal invitations, events, dinners and business meetings. I see time as sailors see wind or photographers see light, as something to use, manage and shape, not as something to be a victim of, or to see go by. I rather stay at home with my wife and kids than go to some useless business meeting.
-I take a lot of vacations. Around 10 weeks a year of vacation. But only one week in which I am truly disconnected and on vacation. My other 9 weeks of vacation are devoted to family, friends, sports and meditation. Meditation in the sense of thinking deeply about some problem that I am trying to solve. Like my best ideas for work I have while on vacation. Maybe because I think my work is a vacation. Because I love what I do.
And yes, I do have a great team of people who work for me and help me out and I am very, very thankful for what they do.
The kind of intelligence that you need to succeed in business goes mostly undetected at school. Its a sense of leadership and strategy that is not what teachers reward. Entrepreneurs tend to antagonize teachers, they are in class wishing they were in charge and teachers hate that. That’s why so many drop out or do poorly at university only to thrive in real life.
This was surprising, I was speaking at a conference in Zurich and somebody from the audience came up with this video of Mark Zuckerberg and I in 2008. That was superkind of this person, to shoot this video I mean. You can see how Mark Zuckerberg was going around the world promoting Facebook, this was the Spanish launch at it took place at a theatre I owned in Madrid called Teatro Lara. The video starts in Spanish and I speak, then switches to English and Mark speaks.