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.
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