In this blog I have criticized Europe’s way of doing business on different occasions. But as I continue to build Fon in Spain and reject the possibility of moving the company to USA, I feel I owe an explanation as to why we are staying put.

But first let me go over the obvious reasons why Fon, a tech company, should be in Silicon Valley. Silicon Valley is the epicenter of the global buzz machine and since Fon has become the largest WiFi network in the world based on word of mouth, it would much easier to create positive buzz from there. Indeed the few times that I manage to deal with the 9 hour jet lag and go to Silicon Valley for a few days, we end up getting great coverage for Fon. As sad as it is, Europeans and the whole world mostly buy what Silicon Valley blogs tell them to buy. And US bloggers and journalists have a great nationalist bias that many times is not so obvious to them. The second reason to be in the Bay Area is that so many brilliant minds are there. While everyone competes with each other, there is also tremendous collaboration, and Fon is left out of this creative flow.

But aware of these positive factors, I have estimated them against the costs of moving to USA and have decided against the move as there are three huge negatives of doing business in the USA. They relate to the three unreasonable burdens faced by the American entrepreneur: legal costs, medical costs and yes, military costs. Allow me to explain.

Calvin Coolidge said in the 20s that “the business of America is business”. After having done business in the USA for 20 years I would say, the business of America is business…provided that lawyers say so. And even if they say so, it is an unstable and incredibly expensive legal environment to do business in. I have built start ups in USA and in Europe and have enough data to make the comparison. In the life of a start up, legal bills in Continental Europe are, I estimate, 75% lower than in the USA. In Continental Europe, legal systems are based on written codes derived from Napoleonic times that are very clear on what is legal and what is not. When I do business in the States I have to pay lawyers over $600 per hour to spend endless hours and never give me a clear answer. I don’t blame them. Case law is just very expensive to study and its outcome is uncertain. In Europe the same lawyer may cost us $200 an hour and spend a maximum of say 3 hours to give us a yes or no. As a result my legal bills at Viatel for example were around $600K per year and the legal bills of Fon are around $90K per year. And not only are business lawyers cheaper. A typical tax filing, lawsuit of any kind in Spain may cost a pittance compared to what it would cost in USA. When I lived and managed companies in USA, I always felt that I had a legal Damocles sword hanging over my head. Here when people pour hot coffee on themselves they don’t sue the McDonalds. They just say “mierda”.

But not only is the legal system in USA a terrible burden on business. There’s another enormous “tax” on US business and that is health care. In Spain, for example, Fon’s employees go to state hospitals and get treated for free. Fon has no medical costs as a company. As this report shows, in the USA the average cost to a company per employee is close to $10K per year. In Spain, an engineer fresh out of university may cost $40K all inclusive to the company. If we had to pay another $10K of medical expenses that would mean that 20% of our costs would be to provide medical care for this new hire. So in Spain, and many other places in Europe, not only are total employee costs lower than in Silicon Valley for a very well educated population (not lower than in Texas for example but lower than Silicon Valley), but we don’t have to pay medical expenses.

And lastly, there is another burden to the American entrepreneur that is hard to quantify, but it is there. And that is the fact that USA spends close to half of what the whole world spends on the military. What does this mean to the average entrepreneur in Europe? In simple terms that we don’t pay a “defense tax” every time we do business. In the USA, military spending is 21% of the budget and an estimated additional 8% in other parts of the budget that are affected by the military with a big part being taking care of veterans. In Germany, Spain, Netherlands the military account for less than 7% of the budget. And who supports these huge efforts? For an entrepreneur, it is a real cost of doing business. Less services more costs for the company. The best example is education. Education in general and university education and training in Europe is mostly free. Education and training in the USA is occasionally free but frequently extremely expensive. In the end, the entrepreneur in the USA has to pay salaries that allow his/her employees to educate their children. Moreover expensive education spills over in other areas of society. Europe has an incarceration rate of less than 100, USA has an incarceration rate of 750 people per 100K inhabitants. In my view there is an inverse correlation between spending on education and incarceration that favors Europe. If all US prisoners were moved to a city they would overflow Madrid. Maybe spending less on the military and more on free education would have a more beneficial effect on society. Another example is public transportation. Most employees at Fon come to work in public transportation which is lacking in many American cities. Not having a car means great savings. Also, Europeans who have cars pay much less in car insurance because the legal system in Europe, while giving awards in case of accidents, does not find it fair to distinguish between your leg and that of Leo Messi. As a result, European employees make less after tax income but have less expenditures because our government here spends much less on the military and have almost 18% of their budgets more to spend in social services.

Should it surprise us then that European GDP is 30% greater than US GDP , $18 trillion Europe compared to $14 trillion USA? Why is it that this continent that Americans consider so 20th century, is holding its own without a common language and with many barriers to business that don’t exist in USA? Or why is it that entrepreneurs like my friend Loic LeMeur moved to Silicon Valley only to hire and fire people in USA and ending up being a Silicon Valley company with European employees? In my view it’s these three factors, legal costs, medical costs and military costs. These three abnormal burdens to the daily life of the American entrepreneur, explain a great deal of the European advantage. It is not that we are better. It is America’s self inflicted damage that sinks its currency and helps us in relative terms. Until the Obama administration addresses these three burdens and effectively lowers health care costs, establishes a system of limits on legal awards and spends less in the military, the USA, in spite of its unparalleled ability to innovate, will continue to struggle.

US accounts for almost half of global military spending

US accounts for almost half of global military spending

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Ernesto on December 1, 2009  · 


It reminds me when Paul Graham said that the only way to have a running startup is having it in Silicon Valley….you provide a good answer to most of what he said in his articles.

The useños needs to learn some thing to improve and you’ve been very clear.

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juan dominguez on December 1, 2009  · 

I don’t understand the military part too well. How does it affect entrepreneurs? Is it a direct cost of any sort? Or is it that you think that the money should be spent on, for example, health and transportation? In any case, a lot of money going to the military usually spreads to the many companies selliing products and services to the army, which is also a technological hub of great importance.

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antoin O Lachtnain on December 1, 2009  · 

The military-industrial complex is also a great source of funding for innovation in America. The US government funded the development of the Internet, for instance. The develpment of radio technologies (for instance) was largely military driven for decades. The military is a major customer for technological innovation and this is a major advantage to US tech firms. (Or at least was, before tech became so consumer driven.)

(On the other hand, the world wide web arose out of a peaceful research project in Europe. Maybe that was the signal of a change.)

I think that American marketplace has a great appetite for tech products and innovation that Europe, particularly southern/Catholic Europe doesn’t have to the same extent.

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Martin Varsavsky on December 1, 2009  · 

@antoin @juan while the military is a source of innovation if it happens it is an unintended side effect. We can all agree that the same R&D money when used for civilian purposes is more likely to yield products that are useful to society. Moreover the military produces an enormous amount of goods that are not consumed, no multiplier effect. And if military goods are consumed it is much worse for society. But other than this when society uses an enormous amount of its budget on the military it taxes businesses. It fails to provide the services that businesses need to operate, transport and education being to examples. More money to the military less money for public goods. Defense if anything is a necessary evil. Countries that spend less in the military can do more for its citizens. If they don’t business has to fill the gap.

Enric on December 1, 2009  · 

I totally agree with you in some points but don’t in public transportation. Public transportation in Spain is very expensive, and frequently more expensive than going by private car.

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Felipe on December 1, 2009  · 

Good post. The arguments about lawyers and health care are quite convincing.

You didn’t mention a good point for USA: the much lower tax pressure, and their lower ratio Budget/GDP vs. Europeans.

That USA spends 21% + 8% of the budget and Europeans 7% seems large difference. But if USA budget is 25% of the GDP while Europe is 50%, then we have that USA spends 7% of the GDP and Europe 3.5%, which is less significant.

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antoin O Lachtnain on December 1, 2009  · 

I wouldn’t say that military goods aren’t consumed. They just aren’t always consumed in one big ‘bang’. They are consumed in the sense that they depreciate, require maintenance, testing and staffing, eventually have to be dismantled, disposed of and replaced, and so on.

For sure, the whole thing is pointless. If you do go to war, which is supposedly the point, all you are really doing is taking resources and jobs from your own economy and ploughing them into the economy of the bad guys who you are supposed to be trying to stop.

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antoin O Lachtnain on December 1, 2009  · 

What do you think about the British legal system (which is a lot like the US one but with a few more european aspects.) Does it fall in the middle?

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Riccardo on December 1, 2009  · 

A very interesting article, thank you!

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pep on December 1, 2009  · 

@Eric: I am sorry to say that as a person who have lived in Barcelona and Madrid, it is much more expensive to have a car that to go with public transport. And in most of the cities in the country is the same.
@Martin: Very interesting article, but I would also comment about the cost and time of starting a comapny in the US, which is far better than in the EU.

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Pelle on December 1, 2009  · 

Having had startups in the US and EU I’m starting to agree with some of your points. I would make one small point to the costs part. Spains taxes actually seem relatively reasonable. It is very different when you go up to Scandinavia where the costs of the tax wedge (not just the tax you pay directly, but of your suppliers, their employees etc. etc.) is prohibitively high.

I recently moved to Miami from San Francisco and my cofounder from Denmark to Uruguay. I originally moved to SF for many of the reasons you mentioned above, but we are not looking for funding so the community aspect of living in the valley is the most important thing. Once you do know people and are part of various groups I find the community aspect less of a problem.

San Francisco and the valley do have one great problem you don’t mention directly, which is the insularity of the group think. People come from all over the world and then oddly all start thinking the same, which means amongst other things only imagining their users as typical San Francisco/New York hipsters. Besides better weather this was a huge reason for me moving to Miami. Miami has a small but growing internet industry, which looks outwards. Most startups here are creating services to be used in the rest of the US, Latin America and Europe. I have to say that most internet startups in Denmark (my country) are focused exclusively on the local market, but there is a lively community of European startups focused on Europe and the world.

An example of this mindset is when you go to tech conferences outside the valley. I am generalizing here but the visiting valley crowd tends to stick together while everyone else mixes around. Don’t know if this is because they are internet famous, but I’ve seen this time and time again.

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Pelle on December 1, 2009  · 

I forgot to comment on the legal system. Firstly the British, Canadian and Australian all have that problem inherent with the common law system. What makes the US different though is that it is more litigious than most so you run a greater risk. So it is definitely more expensive in the US than in the UK legally speaking.

Coming from a civil law system I was initially baffled when I took my required introductory law course at university in the UK, but I actually now prefer common law of civil law. While it may be more predictable it is also less likely to change as society moves on. The difference is like the difference between Linux and Windows.

Linux is constantly evolving in all different directions depending on new technology and innovations, different judges (Linus, Mark Shuttleworth) allow these changes in to their jurisdictions (kernels and distros) where windows instead is decreed from above and doesn’t change until the higher beings want it to.

Common law can start from a small local ruling in a local city court and move upwards to the supreme court. I was always fascinated in my law class of all these important rulings in British corporate law made 100 years ago that came out of small cases in Canada, Hong Kong or New Zealand. In Europe (- UK) you often have to wait years for new legislation to pass through the EU or national parliaments to deal with new technological issues. Just look at the heavily bureaucratic digital signature and e-money legislation in the EU that are poorly thought out and decreed from above after years waiting, with then another 5 years waiting for a bad fix (as in the e-money legislation).

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Dani88 on December 1, 2009  · 

Enric #5, public transportation in Spain is super-cheap, and better (broader coverage, more frequency) than most other countries: definitely better value than UK, US, Germany, etc.

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Conor Neill on December 1, 2009  · 

A great rational addition to a debate that I, as a Spain-based entrepreneur, regularly engage in. For the past 30 years the USA has grown at 2% more per year than Europe – this means that on pure GDP/capita terms, the US citizen of today is twice as rich as the European citizen of today compared with our parent’s generation… but this misses some big life factors. A “great night out” with friends in Barcelona can cost €25 versus €60 in London or at least €90 in the US major cities (restaurant, transport, drinks, club). Health care costs are brutal in the US.

However there is a massive benefit of the US – belief. If I am at a dinner with friends in Spain and I say “I have a great idea”… the rest of the group will pile in with “no way” “that’s already been tried” “you could never compete with Amazon/eBay/Google/Walmart…”. In the US, the same statement is responded to by “cool” “wow” “do you need help” “I have a friend in High Place/VC/Client”… I need 2-3 anual trips to the US to re-ignite the passion and belief that it is possible for one man to change the world. I don’t get that in Europe. (key question then is how do we bring the “belief” eco-system to Barcelona/Madrid?)

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Jim Lukas on December 2, 2009  · 

You make it sound like its Silicon Valley’s fault that you get jet lag when you fly there. In fact, if you had started your company in SV in the first place, there would be no jet lag. If you had started your company in SV in the first place, there would be no cost of moving it there.

You make it sound like SV is only good for buzz. Do you mean to imply that companies like HP, Apple, Oracle, eBay, PayPal, Google, etc. etc. are only successful because of buzz? If the EU is so great, tell me what they have innovated to compare with these giants? Half the world’s VC flows into SV.

Lastly, is Fon’s CEO really so bad at math as to cite EU’s 30% larger GDP, while not mentioning its 50% greater population? I’m sure Spain has advantages, but the legal system in the EU is hardly unified, and I’ve heard a lot of complaints about difficulties faced by entrepreneurs in say, France.

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Martin Varsavsky on December 2, 2009  · 

Jim please read the article that I link at the beginning in which I explain to US entrepreneurs all the dangers of doing business in Europe and go through the problems that Europe has. There are many. Having said this I stand by what I say and most US entrepreneurs agree. In USA legal costs are too high, health care costs are too high, education costs are too high, transportation costs are too high and all this affects business. If you want to move a company to USA how much more do you have to pay employees who are used to free education, subsidized public transport, free health care, etc?

And regarding population that is another debate. What happens here is that Europe recently took close to a 100 million more citizens of EU that greatly lowered GDP per capita stats. What we did is equivalent to USA joining with Mexico. But the standard of living of the founding members of the EU is very high especially if you give value to such things as health care for all, low incarceration and homeless rates and other social benefits.

Lastly France is indeed the worst country in Europe in which to start a business, we agree on that. Germany used to be but it’s changed a lot. I now rank Germany as one of the best places in the EU to start a business.

NINA on December 2, 2009  · 

thx for this Article.. I realy need information like this 😀

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Fredrik Wengelin on December 2, 2009  · 

Fat chance to get the US legal nightmare changed with two lawyers in the White House (again…)

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Elliott on December 2, 2009  · 

You are absolutely correct on the cost of the US legal system. System is based on the right to sue anybody with no damages if you lose & payments based upon hours rather than results.

You seem to live in Nirvana where there are no costs for health care or education. That is true for direct costs of a startup where there are no profits. But, the population and businesses must pay the employees of the health care & education systems and their capital costs. There is a cost to running a city or country and it is paid for by its citizens or foreigners if you are an export nation.

Although the US has made many strategic military mistakes in the last 65 years, the rest of the world has lived under the umbrella of a Pax Americana without paying their fair share in $ & lives for maintaining it. I agree with Antoin that military R&D has produced many technological innovations that affect our everyday lives: jets, NASA, medical innovations, radar, commercial logistics systems, etc., all of which could have been developed within the commercial arena, but weren’t because of the perceived urgency & importance of military development, especially in war time.

Basically, today one can build a company where one wants to live, communicate readily worldwide as evidenced by this blog & have product manufactured where one can best quality at best price and ship to where needed on Buffet’s Burlington Northern.

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Philipp on December 3, 2009  · 

I spent lots of time in the US, for college and for business. While there is absolutely no doubt that especially California is a special place to be and that Europe should envy America for its spirit, positivism and pride; I started my last company in Sweden and will be starting the next one in Berlin: low costs, nightmare bureaucracy and taxation, solid talent and eco-system … unparalleled fun and quality of life! This is of course a matter of taste – and that again is the reason why some of us live in the US and some of us don’t.

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ED on December 4, 2009  · 

Should it surprise us then that European GDP is 30% greater than US GDP , $18 trillion Europe compared to $14 trillion USA? Why is it that this continent that Americans consider so 20th century, is holding its own without a common language and with many barriers to business that don’t exist in USA??????
You look at this Military spending as a topic not looked into very far.
Those figures are only what the US government spends (and the only real constitutional spending of major proportion is military)
We have US FED taxes, (your figures) …they are about %50 of total taxes.
The rest are:
School District
and now even, community “neighborhood” taxes.
If you take all the 50 States, and thousands of “Las Vegas” City tax rolls, tax picture looks very different.
I’m not trying to argue, nor proud. Taxes are way too much.
My city gives 10 million dollars to schools in Cambodia. ???????. What about our schools?
We have a guilt complex here in the US.
We feel guilty every time we do not give money to a non-white country every few months.
…….I just don’t Know…….Euorpe probably donates money everywhere also, but come on…..How many Water-Well in Africa do we need to spend 1 million on? They should have a water fountain every 5 meters….
OK—OFF topic, but main point is, that is the fed budget. About %50 of USA Tax dollars. Only 1 percent or so of the rest is military

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