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)