Advice for US entrepreneurs who move to Europe
Published by MartinVarsavsky.net in Entrepreneurship with
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)
Europe: United we stand, Divided we Fall
Published by MartinVarsavsky.net in Economy with No Comments
Before you read my post, you must read this Economist article.
Are you done? Do you now understand how terrible the future looks not only for the periphery of Europe but for Germany as well? Is it clear that as we stand we are headed for the perfect storm? OK, let’s move on to what I think Europe should do to get out of the crisis, which is basically to start the United States of Europe.
Consider this: it will cost Germany and all of Europe more if there is a wide default, and if Spain and Italy leave the Eurozone. So I think it’s time for Europe to unite and risk inflation as the USA did before.
If you had to summarize the reaction of the FED to the multi-trillion default of 2008, you’ll find that the FED risked inflation and won. That the FED stood there providing unlimited credit, and so did the Treasury. And that thanks to a gigantic state intervention, the US banking system, car industry and many other industries along with the economy as a whole were saved. And there was no inflation. Europe needs to do the same now, but for that, it needs to become the United States of Europe from a regulatory point of view. The other choice is the end of Europe, massive defaults and devaluations and possibly a tremendous shock to the global economy.
How does EU become the United States of Europe?
1) Europe starts the European Treasury. An agency that regulates how all tax revenue is distributed, and can give or withhold government expenditures from EU member nations depending on revenue. Short of that, I don’t see how the EU can prevent a country like Greece from meeting its deficit targets, for example. This European Treasury has to set 5 year objectives for all European nations to go into fiscal surplus to begin paying down European debt.
2) This European Treasury needs to consolidate all European debt into one debt pool regardless of nationality to eliminate risk spreads and with a credible deficit reduction package to bring down all euro interest rates to something slightly higher than Germany’s rates today.
3) The European Central Bank needs to become the regulator of all European banks and offer deposit guarantees for all European banks to stop the massive South to North capital flight that is taking place. All European banks would subject to the same rules, regulators and bank deposit guarantees.
As I see it, the future in Europe is United we Stand, Divided we Fall.
Do countries want to lose so much sovereignty? I think given the alternative, they should. As it is, Europe is a continent in which each country is married but it can mess around. That regime won’t work. It’s either Europe or divorce. Europe needs to unify a lot more as a result of this. One European traffic control, one European army, one European anything that is managed at the Federal level in USA. The USA has found a balance between cities, states and federal that Europe needs to emulate. Otherwise, the euro will not hold.
The enemy? Local powers. But if we were able to do away with tons of people who worked at European borders, European currency agencies we can do away with local patent offices, local traffic controllers, local air forces, local armies, local 100 other things, imagine how efficient we would be. How much better off. How much better prepared to compete globally.
PS: This is a first draft, will be modifying/improving this article as I do more research and get comments.
In the midst of the euro crisis I would like to share a contrarian view. As opposed to most I am actually optimistic on the euro, and while aware that the euro project may actually implode, I think the opposite will happen and the euro will come out strengthened as a result. Now what I am less optimistic about is how long it will take Southern European countries to reinvent themselves, and in this article I will focus particularly on Spain but many of my arguments apply to Italy, Portugal and Greece as well.
In the case of the Euro I believe there are two possibilities. The first is the abyss, a return to the old times with a fragmented Europe where each country has its own currency. The second, more optimistic scenario, is a new Europe that is more united and better organized, with clear rules. I believe the second scenario is more likely simply because these past days the yield on German 10-year bonds was higher than that of the UK for the first time since 2009. This was a wake-up call for the German government, which is finally realizing that the country is not immune to the crisis and that the market is no longer unconditionally willing to purchase their bonds. This is not happening because Germany is a bad debtor, but because German debt is issued in Euros, a currency with an uncertain future. And as soon as German politicians start paying more to finance their country’s debt and are forced to provide less social services, they will change their current course and help shore up the Euro. At the same time, and I see this as something positive, the Germans will insist that the new Europe become more German, with rigorous controls in place. They will also create a real European Central Bank, a lender of last resort that will provide liquidity as the Federal Reserve did in the USA, but within a system of rules that will control the level of public and private debt within the EU.
So while aware of the perils I am positive that we will not see the Euro collapse, and that Spain and Italy will again be paying around 3% for their debt in a matter of six months. This is why I believe that buying Spanish and Italian bonds at 7% may very well turn out to be a good investment. I also think it’s absurd that nowadays people would rather deposit money in banks and earn much less interest than what the government of Italy and Spain are paying to finance themselves. Especially considering that these governments are the ones that take on failing banks.
Once the financial problems of Europe are solved, Spain and Italy will have to deal with a much more complicated issue, namely their lack of competitiveness. In the case of Spain the challenge is the highest unemployment rate of the OECD now at 21% and on its way to 23%. And the main reason for this unemployment rate is how un-competitive most Spanish employees, politicians and businesspeople are, compared to those of other countries. Spain, while leading in a few industries related to construction and infrastructure, is mostly a laggard in every other sector. As the current rankings by the World Bank show, Spain and Italy are not very competitive in terms of the overall ease of doing business (Spain is 44th, Italy 87th). And it gets even worse when looking at the ease of starting a business, in which Spain occupies the 133rd spot on the list and Italy the 77th. As comparison, the UK is 7th and 19th in the two respective rankings.
I spend a third of the year in Spain, and the other two thirds in the rest of Europe, the USA Latin America and Asia. Building a global business allows me to realize that there are problems pertaining to Spain that are intrinsically Spanish. At the same time, there are a number of Spanish virtues that are intrinsically Spanish and will help the country get out of the crisis. For example, Spanish people are less likely to believe in utopias and know how to tighten their belt during tough times. They are also more realistic as voters and citizens. Zapatero was bad, Rajoy is mediocre, but at least Spain does not elect a crook like Berlusconi as president.
However, one of the biggest flaws of the Spanish culture is its difficulty to produce excellence, and excellence is the only thing that will lead to recovery of Southern Europe in the long term. I could give many examples of this, but the most obvious one are the Spanish universities that are incredibly bad on an international level, they don’t show up in any of the meaningful rankings. Spain has the 12th largest economy in the world, yet it has nothing to show for in the educational field except for some private universities like IE and IESE. In the last decades, we haven’t received any Nobel Prizes in scientific disciplines, and we haven’t made any important scientific discoveries compared to France, Italy and Germany. Neither does it have a high level of technology, nor is able to live off our own innovations. The lack of excellence is a cancer that afflicts the entire Hispanic culture. Imagine how the world would be if tomorrow it decided to live only with what has been invented in Spanish?
In Spain we have a population that is not well educated enough to compete in a globalized world. A huge portion of the population is only prepared for one of two industries: construction or tourism. One of the industries, construction, is already dead. The other industry, tourism, only creates seasonal and badly-paid employment. I believe that if someone were to examine unemployment in Spain, they would conclude that most of it is derived by the fact that an enormous part of the population was educated to do something related to construction, an industry that no longer exists and that will never be nearly as big as it used to be. And considering the importance of tourism, the low level of English spoken by the vast majority of Spaniards is a real shame – this is true when it comes to waiters and other staff, and even the Prime Minister-elect, Mariano Rajoy, whose inability to speak English inhibits him from fully understanding the world around him. In Spain it sometimes seems like people take pride in ignorance. It’s hard to explain this unless you live outside of Spain or know the North American, British, French, German, Scandinavian and Japanese cultures of excellence well. It’s as if wanting to be really good at something, wanting to stand out and to be better than the others turns you into a pariah in this country.
When looking closer at the origins of Spain’s problems, it becomes clear that only a small part of the local crisis is related to the international crisis. Let’s assume that about a third of unemployment was caused by the international crisis. The rest, which takes us to the sad figure of 21%, has to do with the lack of training of the average Spaniard, a proper training that could enable them to do something genuinely meaningful. There is also a lack of incentives for companies to make up for the government’s shortcomings in education and adequately train their employees, which would ultimately benefit the entire country. Another problem, and one that contributes to the extremely high youth unemployment in particular, is the forced severance pay system, which hinders young people from being admitted into the workforce. Young people also lack access to housing, as even with the crisis, prices for real estate and rents are still out of proportion and will probably remain at their high levels since so many people are trapped by their mortgages. Being young in Spain is sad. The few jobs this country has are held by older people who are not going to leave, even if this makes the overall situation even worse. That’s why the best are leaving the country.
The underlying problem in Spain, meaning the disconnect between what its labor force can do and what the global market needs, is a problem that will take at least a decade to solve. It’s also a problem that will be solved by companies, if anyone is to do it. But for companies to solve this problem, the government needs to get out of the way. Nowadays, many people in Spain are so-called “mileuristas” – people earning 1000 (mil, in Spanish) euros per month or less. But in reality, the term “mileurista” is a misrepresentation, since a person earning 1000€ per month in fact costs the company 2000€, twice as much as she actually receives. The other half is squeezed out by the government in form of social security contributions, income taxes, value-added taxes, etc. Of course these people also receive many services from the government in return, such as healthcare and education, but the government has already reached its limit as to what it can take away from employees in the form of taxes and how many jobs it can create. The budget deficit is huge, making it easier nowadays for companies to get loans than for the government, in which no one trusts any longer.
In this situation, it’s not that companies need help, but the government needs to stop forcing them to be job creators and agents of the welfare state at the same time. They shouldn’t have to pay enormous social charges for every job that they create, and they shouldn’t have to make high severance payments if things go wrong. What companies need is a government that doesn’t drown them in taxes and other covenants. A government that is laissez-faire in terms of business, at least when it comes to job creation. It’s terrible being an entrepreneur in Spain, I already wrote about the subject, you can be ruined for life as your liability is unlimited. The only thing that compares to this is having a mortgage in Spain, under the unbelievable pro-bank rules that exist here. A person cannot simply give up ownership of the home they used as collateral for the loan, as is possible in the USA, but remain slaves of the bank for their entire lives or until they somehow find a way to pay off their debt. Something has to be changed now to give back mobility to the Spanish so they can move to where the jobs are. In Spain, unemployment is regional – low in the north, and high in the south.
I know that in other countries companies are also required to be social agents, this is the case in the Scandinavian countries, but the difference is that there, companies have a more educated and ethical population at their disposition thanks to the successful measures of their governments. Also the entrepreneurs from those countries are much more educated and ethical than the Spanish. In Spain, the problem of poor education and lack of ethics is fairly widespread: businessmen, politicians and workers are all affected. That’s why this country needs to reinvent itself and change, which could finally happen because of this crisis. Spain lived through decades of artificial growth, partly because the same system used to measure GDP growth falls into the fallacy of considering debt as growth, but this is over and due to the crisis, people are rethinking the system and want to improve.
What Spain needs is a government that doesn’t penalize job creation, so that companies can hire more and take more risks. It’s not so much Spanish companies that are involved in a huge mess right now, but rather the government itself. And only way for the government to fix its problems is with the help of companies, who nowadays pay less for their debt than the Spanish state, a state that nowadays lives on charity from the European Central Bank. If it weren’t for this institution buying Spanish debt, Spain would have no credit since its citizens have lost trust in their government and will not invest their savings in it.
What I hope is that the political party now in power, the People’s Party (PP), will manage to unleash the forces that will pull the country from ruin. Creative forces, forces that help build a new country. The past party, the PSOE, could have done this, but now it represents the status quo; those who are part of the problem, not the solution. It represents big business, big banks, state officials, unions. The PSOE should represent those who are unemployed but want to work, but instead it represents those who have jobs and housing and want to maintain their privileges while blocking out the others. It represents those who do not want to lower housing prices or increase productivity and make us more competitive so that more people could have jobs and housing. It represents state officials who can’t be fired, no matter what they do, and incompetent workers who hide under the concept of “unfair dismissal” that always blames the employer. In Spain, a salesperson who does not close any contract in a month, but works in a team that closes 10 a month can’t be fired for being useless. This happened to me at Jazztel. Even in such a clear-cut case where an employee is unable to carry out his job, the employer gets blamed when he fires that person. This is simply unacceptable. There has to be a way of suspending people, just like there was in school. There has to be a way of promoting the good guys and moving the bad out of the way. There has to be a way of cultivating excellence, of competing on a global level and winning. In Spain there are incredibly good employees. I see this at Fon, which from this country has created the largest WiFi network in the world with a great team. This country has its clusters of excellence, as the case of Fon, Inditex and other companies shows, especially in the sector of alternative energies where Spain is among the leaders of the field. But so far, these are still small islands in a sea of mediocrity. And it’s about time to change this. Building a business in Spain is still a struggle against a society and a government that does not understand the entrepreneur – this is not how it should be.
Now my case
I have 5 children ranging from a few months to the age of 21 years. My oldest daughter, who studies at Columbia University and is graduating in few months, already has several job offers in the United States. But she’s thinking of starting her own business instead. But not for a moment has she considered starting that business in Spain. And why would she, when countries like the US or the UK are welcoming entrepreneurs with open arms. Everything is easier there, and the appreciation for the work of entrepreneurs is also much higher. And herein lies the challenge for Spain’s government. The most educated part of its workforce is drawn to other countries where their skills are highly sought after, and at this point in time there are not many incentives for them to stay in this country. The government needs to prevent a brain-drain by making it much more attractive to work in this country and innovate, both from the perspective of entrepreneurs as well as that of employees.
I came to Spain and started Jazztel, Ya.com and Fon here, but it seems like my days in Spain are also numbered. The governments in Ireland and the UK have been trying to attract me and convince me to move to their countries, and they are succeeding. They know that the new arms race is not won by those with the most atomic bombs, but by those who have the most “atomic entrepreneurs,” entrepreneurs with ideas that create jobs. That everything depends on a dynamic, creative and strong economy. But here, in this country that I love so much and where I raised my older children and now bring up my young, I get insulted for being successful, I get too many people calling me “rich bastard” to feel comfortable, and the government is not putting any effort into keeping me here, grow Fon and start new companies.
In Ireland and in the UK, the Prime Ministers gladly receive visits from and listen to entrepreneurs. Both David Cameron and the Irish authorities invited me over. Here, Zapatero completely ignored all entrepreneurs. But this was not so much his fault. Zapatero saw that the average Spaniard didn’t understand the role of entrepreneurs and businessmen. They don’t see them as what they are, job creators, but as rich thieves. As a result, Amancio Ortega, a national hero, now lives like a “fugitive” in his own country. He doesn’t show up anywhere because being the richest man in Spain isn’t an honor, but a shame, despite the fact that Inditex is the source of tens of thousands of jobs. If he were English, Amancio Ortega would be knighted, Sir Amancio Ortega, and he would receive the same kind of appreciation and recognition as other English or North American entrepreneurs. What Zapatero does by mistreating those who create wealth is to respond to a public that does not realize that unemployment and minimum wage jobs would decline if Spain had many entrepreneurs competing among each other for employees’ skills. As a society, if we keep biting the hand that feeds us, we will go hungry. While we remain a society where future Amancio Ortegas live in hiding or leave the country, we will continue being the champions of unemployment. I hope that the PP realizes this and will do its best to change it. The PSOE didn’t see it, which left us in our current situation. But as most entrepreneurs, I am an optimist and I believe that there is nothing that is so wrong in Spain that it can’t be changed with what’s right with the country. The Spanish people want and deserve something better. I will continue having Spain as a reference for building companies, and depending on how the situation evolves, I will be more or less around this part of the world that I love so much. I hope that Spain will finally realize its problems and, by standing united, will manage to reinvent itself.
Failure has to be accepted, but not encouraged
Published by MartinVarsavsky.net in Entrepreneurship with No Comments
Tonight in Paris, at dinner with @loic @geraldine and @ninavarsavsky, we spoke about attitudes towards failure in USA and Europe. In Europe it’s still terrible to fail and that is bad because failure is an essential part of success (think of all the sperm that fail to make a child). But in Silicon Valley, failure is becoming too much of the opposite: too accepted, people are not trying hard enough, too many start ups are getting funded as if VC’s knew there were bound to fail but went ahead anyway. In Europe now we are more like in Silicon Valley in 2006 when Fon got funded. Back then it was not that easy to get started. And that may not be all that bad. Failure has to be accepted, but not encouraged!
When I left the USA in 1995 and moved to Europe, the start-up scene on the Continent was pretty dead. But a lot has changed since then, and events like TechTour 09 are further proof that there is great talent, capital and great ideas in Europe too. And in a crisis, surprisingly, these three elements are more likely to ignite into a successful start-up.
Last night I spoke at the TechTour dinner thanks to a kind invitation by fomer Fon European, MD Robert Lang, now at Result (disclosure: I am an investor in Result). Nina and I left Madrid around 4pm and arrived in Lausanne at 7pm, stayed until 10pm and then flew back to Madrid. It was a short stay but in those 3 hours we had enough time both to speak and to learn from some of the 150 entrepreneurs and VCs gathered at the event.
My speech was about how the crisis is negative for most but a boom for entrepreneurs. More concretely, it was about how the unique European system of high severance pay and welfare payments (in Europe stock options are not common but extremely large severance pay packages are) constitute a source of capital that can allow a former executive to become an entrepreneur. Many unemployed European executives find themselves unemployed with enough money to devote, say, a year of their lives to a start up without additional compensation. Also in Europe, some very talented people get laid off because it is cheaper to fire them than less talented but older colleagues. And those people are exactly the ones who may be needed in a start up. Lastly, the crisis reduces the difference between large companies, as providers of stable employment and start ups. As people realize that there’s risk anywhere, being the master of their own destinies becomes more attractive.
After my speech I was able to speak with some VCs and entrepreneurs that make the European start up ecosystem very lively. There were many VCs of small funds, funds of say less than 100 million euros, generally funded by Family Offices or holding companies of wealthy European families. What distinguishes Europe from America is that institutional funds are less into start-ups, but fortunately wealthy families whose fortunes came from start ups are more active investors in the area. I end with Poken, a Lausanne based start-up that deserves special mention. Poken is a little device that “shakes hands” with other like devices and in so doing exchanges information about their respective owners. Pokens are great for conferences and events as they are time savers for people exchanging information.
Here are some pictures of the event.
US entrepreneurs in Europe beware!
Published by MartinVarsavsky.net in Entrepreneurship with No Comments
While not all Americans love Europe, many, mostly from the Blue States, do. People in San Francisco or New York City dream of spending part of their life in Italy, France, UK or Spain, and some do make it over. Not many go to the extreme of moving over here and giving up their US nationalities as I did. But after 9 years of being a tech entrepreneur in Europe and being forced to choose between Spanish or US citizenship, I chose Spanish and stayed in Madrid. As a tech entrepreneur, I found Europe, in general, and Spain, in particular, to be a fertile ground for me. The European market is huge, bigger actually than the US market. And over here, I built Viatel in the UK, Jazztel and Ya.com in Spain, Einsteinet in Germany (the only company that I sold at a big loss) and now Fon.
Europe is great for an American tech entrepreneur because wealth here is better distributed, people are more educated and there are less competitors. Since being an entrepreneur is not very well regarded over here, US entrepreneurs find more open niches; but on the negative side, the market in Europe is much less homogeneous than in USA, local cultures make it hard to launch pan European products and there are all sorts of taxes, market distorsions and restrictions that surprise a US entrepreneur.
So let´s go over the caveats. The first one that I would like to focus on, one that is particularly brutal, is the issue of unlimited personal liability of the entrepreneur. On the rest of the article I will refer to laws in Spain, but I do believe that what I am about to tell you about Spain applies to most of the rest of Continental Europe as well.
USA has a lenient view of failure. Failure in America is not seen as a lifelong chronic disease but as a test of character. VCs in the States look for people who have had a combination of successes and failures, as they are more prepared to deal with the tough realities of business life. In Europe, however, failure is seen as just that, failure, a stigma that stays with you for the rest of your life. So far, I have never managed a business that had to liquidate. In all cases, even during the crash of 2002, I was able to refinance, renegotiate and keep companies going. Even at Einsteinet we were able to preserve most of the jobs. We sold the company at a loss, but the loss was limited to the capital invested by myself and my partners mostly at Goldman Sachs. Recently, thanks to the crisis, I have been hearing horror stories of what happens to entrepreneurs who fail in this Continent vis a vis personal liability. It is not nice.
The basic problem for start up entrepreneurs in Spain (and probably most Continental European countries) is that there is no such thing as “bankruptcy”, in the legal sense of the word. This is a huge problem for start ups because, as we know, most of them fail. So, for example, if you start a company in Europe, try hard for five years to make it, but run out of money in the end, the company is not perceived as a bankrupt company in the American sense of the word. In Europe going bankrupt is the same as firing all the employees and you as the founder, PERSONALLY owe the money that has to be paid to the employees for letting them go, even if the business has done nothing wrong. I know, it sounds crazy, but this is the case. So Spain, for example, had a construction boom for the last 5 years that ended in a bust, and now entrepreneurs are having to close down businesses. But when they do, they have to sell their home or do whatever to pay the severance pay of the employees. Because in this case not only the employees can sue you (through the Seguridad Social) and force you to sell your home, car, and deprive your own family of whatever they need, but if you don’t have money to pay now, they can hunt you down for the rest of your life. You never recover, you can never declare bankruptcy. You can never start anew. If you start a new business and begin to do well, whatever you make then goes to pay for your past losses in your past business. Spanish law ties your future endeavors to your past endeavors. You never get a clean slate. If you had say 1000 employees, which is what I have had in my other companies, you could owe tens of millions of euros for the rest of your life to them. Even though you did not do anything wrong other than failing to generate a profit, you are held personally liable for poor market conditions. This is an enormous risk for a start up entrepreneur. A risk that grows larger, the longer you are in business, as severance liabilities are not related in any way to employee performance and only related to their duration with the company.
And even if you are lucky enough not to go bankrupt in Europe there are other conditions that dissuade an entrepreneur from starting a business. One of the reasons of the higher unemploymentin Europe than in America is the extremely high social charges. These are 50% higher than in the States. In Spain, a starting level employee who takes home 1000 euros after taxes costs the entrepreneur almost twice as much. In Europe the government takes so much money in between the entrepreneur and the employee that, while take home pay is many times absurdly low, employee cost is generally high. And not only are social charges very high, but salaries are deceiving because, by law, in Spain and in general in Europe you are forced to pay employees 13 or sometimes 14 months for 11 months of work (a year minus a month of mandatory vacation plus an extra month or sometimes two of a mandatory state bonus regardless of performance). So if you are an American entrepreneur and you come to Europe and find out that there are no stock options and bonuses and want to pay them as I have done, you should realize that, even though it appears that there isn´t additional compensation, in reality there are hidden forms of compensation such as extra months and accumulated liabilities through mandatory severance and these are secured by none other than your own children´s college funds, your home and your car. And this is not all.
In Europe for example, medical doctors play a hard to explain role in business. If, in America, the ghosts for entrepreneurs are injury lawyers, in Spain, France and Italy they are medical doctors. How? If a person does not feel like working, they go to a friendly doctor who declares them “depressed” and they can stop working and still get full paid for up to 18 months. At Sybilla, a company that I invested in, we now have many of such employees, all declared depressed by their friendly doctor, and company productivity is seriously suffering. Interestingly the same law does not apply to entrepreneurs. As an entrepreneur you are not allowed to be depressed. This is illegal. If you are nobody pays you. And even when your business fails, you, the entrepreneur (or admistrador in Spain), are not allowed to collect unemployment insurance even if you contributed to the Seguridad Social. In Spain and some other countries entrepreneurs are presumed guilty by default and, in case of failure, everything is seen as their fault even if they truly had a case of mental illness. Mental illness or depression cannot get an entrepreneur away from his obligations to pay, but very commonly gets employees away from their obligation to work.
So while some European countries do have great advantages to start businesses among them, no capital gains tax on businesses owned and sold in over 5 years, starting a business in Europe is riddled with danger. Having built businesses in the States as well, I know that USA has its negative aspects. One would be the “legal tax” of doing business. Legal expenditures for the average business in Europe are in my experience 70% less than in USA. Moreover in Europe you don´t need to worry about frivolous lawsuits nor insure yourself against them. But in Europe we have all sorts of entrepreneur obstacles such as net worth taxes, which are as high as 2% of your global net worth per year, we have a medical system in cahoots with employees, we have social charges that are twice as high, and lifetime liability for business failure.
So what do European entrepreneurs do? Many times they find loopholes but these loopholes even though they are sometimes legal, because we live in the black and white world of Napoleonic laws, they are pathetic to say the least. For example in some case entrepreneurs in Spain are not the legal administrators of their business but find instead people with no net worth to take the job so if things go wrong they are off the hook. And I heard worse things. In some instances, entrepreneurs in the construction industry ask all new employees to sign blank pieces of paper when they join so the entrepreneurs can force them to resign without severance should they need to do so. I know that it sounds insane to an American used to courts that interpret the intent of the law that a simple trick like that would work, but in Spain it works. Another common trick that is illegal but almost normal is that when employees want to resign for their own reasons they ask the entrepreneur to fire them so they can collect unemployment insurance. Another one is that employees who are collecting unemployment insurance offer to work for cash pay but not on the books so there´s no proof that they are working and collecting unemployment and entrepreneurs go along because they save social charges. And this is but a small list of tricks, illegal maneuvers and loopholes that the system of rigid laws, high social charges, and forced severance has created. So when you see unemployment statistics in Europe they tend to be inflated in the sense that there are a lot of people in Europe who are both working and collecting unemployment insurance. The problem is that the employment statistics are also inflated in the sense that there are a lot of fake sick people in Europe who are supposedly employed but who are not working.
Now here is an extreme example. The ultimate American start up, the Hewlett Packard, the company that started in a garage would be illegal in Europe. In Europe everything is regulated. People cannot legally work in a garage. In Germany for example there is legislation that defines what a workplace is. I know that it´s hard to believe but there are even laws that do not allow employees to work further than a few meters away from a window so unless this famous garage has a lot of windows already working in a garage can get your business close. Moreover there is almost a concept of bondage involved in the employee company relationship with a set of rights that creep in and build over time that go against the basic principle of the start up namely of trying new business concepts that may fail. Even eager start up employees who understand that a start up has risks and want to be part of the adventure are not allowed to waive any of these rights. If an employee wanted to sign a piece of paper that said “I declare that I know this is a start up and we don´t have money in this new company to get an office and I accept to work in this garage and I renounce my rights to a window” a government inspector could come and close the whole company anyway. In general I would say that in Europe the concept of trying things out just does not exist, if you try you are liable, if you try you have to behave as an established business. There´s no concept of an incubating business in temporary start up conditions. The moment you are in business you have to abide by the rules of business and this rules are against start ups.
Bottom line, if you are a US entrepreneur or a US company thinking of opening up a branch in Europe you have to learn that while the market here is huge that Europe is a whole new world when it gets to the rules of the game of starting a business. Think less of stock options which in any case are frequently illegal or taxable when they are given out even when they are out of the money, less of bonuses because bonuses are already part of employee compensation and instead interview very very well before you hire because firing is tough and lack of productivity is not reason. In Europe it is not illegal to ask personal questions in an interview, indeed interviewing is much easier in Europe than in America, what is harder is to lay people off. Even if you have a sales person who has been unable to close a single contract it is illegal in Europe to argue that you are laying off this person because he or she produced no sales. In Europe, a sales people are not supposed to sell, they are supposed to show up for work and if they fail to maek sales the fault always, invariably lies with the entrepreneur. When the entrepreneur fires this person it is always a wrongful dismissal that must be compensated for.
Now, to end on a positive note, I can say that in my 13 years of building businesses and managing people in Europe my personal experience has been good. While in one of my portfolio companies there is a high number of people who declared themselves depressed this has only happened with one of the managers who ever reported directly to me. Also, because I never had to close a business, I was not caught personally owing a lot of money to former employees. Employee morale at Fon for example is great and I have not seen any cases of people abusing the system. Moreover, in Spain, and in Europe in genera, there are fortunately very many highly ethical people who don´t abuse the system even if they could. As a result there are many successful entrepreneurs and successful businesses in Europe. But, overall I would say that European society is not business friendly and especially not start up entrepreneur friendly. If you come over, create jobs and do succeed don´t expect the recognition that you get in the States. In Europe, as an entrepreneur, you are much less likely to be seen as an engine of economic growth and more as a person who gained unfair advantage over average folk who are struggling to make ends meet. And, if you are American, even more so. So American entrepreneurs coming to Europe, beware!
John Markoff represents what is best about American journalism. He is fair, balanced and can explain technology to non geeks. So when John Markoff says “Move Over Silicon Valley Here Come European Start ups”, people listen. And by people I mean very important people like…my mother who is 67 and who normally does not believe in things until they appear….in the New York Times. After the article appeared on line (yes, I have an online Mom) she wrote to me all excited that she had read about my investing activities in the New York Times. For her this is the only source of truth in the news world (my blog of course is at the other end of the spectrum 😉 ).
Thanks John for giving this type of “kosher” certification to my investing activities in European start ups!
Corporate Fidelity, Europe vs America
Published by MartinVarsavsky.net in General with No Comments
Building companies and living on both sides of the Atlantic Ocean, I have learned that there are many things that distinguish Europe and America at all levels. Here´s a random list:
-America has more murders, Europe has more suicides.
-Americans mostly love guns, Europeans mostly hate and regulate guns.
-Americans are mostly religious, Europeans are mostly non religious.
-Americans believe in equal opportunity, Europeans believe in equal outcomes.
-Europeans believe in the rule of law, Americans believe in the rule of lawyers.
-Americans believe in the individual, Europeans believe in the collective.
My Own Freakonomics: Oil Prices in Europe and America
Published by MartinVarsavsky.net in General with No Comments
Here is my first contribution to Freakonomics. It relates to gasoline prices. I was recently in the States and read articles, one that emphasized that while in America consumers were very concerned about the rise in the price of gasoline, in Europe people were less worried. In the article there were many unusual theories as to why this may be the case.
American vs European style Aid
Published by MartinVarsavsky.net in International with No Comments
To many Europeans, American style philanthropy evokes a mix of admiration and contempt. Admiration because America has wealthy individuals who are willing to give a significant part of their income to improve the state of the world. Contempt because they believe that we cannot leave “improving the state of the world” in the hands of wealthy individuals. Personally, I think that the the problem here is one of degree. The American government is far too stingy in helping the world compared to European governments, but American individuals are remarkably generous. Bottom line is the American government should donate more. But the wealthy citizens in Europe should definitely be more charitable. Here at the Clinton Global Initiative we see American style philanthropy at work, and it´s amazing to see that at every session there´s an announcement of somebody coming up with an amazing donation.