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Dear all,
At the beginning, my firm The Family very much resembled a startup accelerator. We’ve now expanded beyond that, as our service-providing subsidiaries generate more cash flow and we’re able to opportunistically deploy capital in our best startups’ later rounds. But we’re often confronted with questions along the line of “Do you incubators and accelerators really add value at the earliest stage?”.
Our answer is that most people look at accelerators the wrong way. Because an accelerator focuses on the earliest stage, it is often seen as the first building block of a thriving entrepreneurial ecosystem.
We actually think it works the other way around. Before you can design support for startups at the earliest stage, you need an ecosystem that has grown healthy enough, with several generations of successful companies that made it from the garage to dominating their industry at a global stage. Then it’s possible to reverse-engineer what made those companies so successful and industrialize the process of starting new businesses and accelerating their growth in their first months of existence.
Absent those previous generations of successful companies, it’s still possible to operate incubators, accelerators, or full-service early-stage investment firms. But then you have to acknowledge that it’s not based on what has worked in the past. Rather it’s based on a strong investment thesis, a bet on the future that says: “This is how we think businesses should be started in this particular environment—and we’re willing to invest for five to ten years to prove that it actually works”.
When I was in Shanghai ten days ago, a Chinese private equity investor told me that Europe will have a very hard time existing in the global digital economy. Indeed, as of today, Europe is not really on the map, for it has mostly failed to grow large tech companies that are dominant at a global scale. Unlike the US, it didn’t keep investing in tech startups after the bubble burst in 2000. Unlike China, Europe doesn’t benefit from rapid economic development. And unlike the US and China, our continent doesn’t have a large domestic market unified by a common culture. For all those reasons, it’s now bound to play in the lesser leagues of the global digital economy.
Obviously we at The Family are aiming to reverse that trend. But what exactly is our investment thesis as regards Europe? I thought I would use this newsletter to discuss it in more specific terms.
One idea is that the European way of life is different from that of the Americans and the Chinese. Indeed, this has always been the case. Consider the US: even if it’s familiar thanks to Hollywood movies, the American way of life is very different from what we experience in Europe—think about cars, sports, firearms, schools, universities, and so on. To tell you the truth, nobody in Europe has ever understood what cheerleading, dating, or baseball are really about.
In the past global companies were willing to account for those cultural differences. Even McDonald’s, the ultimate multinational enterprise, had to customize its burgers for local tastes! But today’s US tech companies retain the illusion that they can operate globally, without caring much about customization to fit into local ways of life. It has all led those firms to most of their current problems, and now there’s a clear trend of scaling back or adapting to local customs at the expense of scalability.
Meanwhile, because entrepreneurship is the art of solving problems, we can count on European entrepreneurs to be the best at solving problems that are specifically European. For instance we in Europe live in large, dense cities and we use public transportation, whereas Americans live in suburbs and use their own car. With the more urban way of life come many specific challenges, and those will be best tackled by local entrepreneurs, ultimately giving rise to different businesses.
All in all, digital markets will be less and less global and more and more fragmented. This is the consequence of the transition now impacting more tangible industries (cars, energy, healthcare…) and more heavily regulated markets (business services, transportation, education…). This trend will only increase as governments get better at understanding what’s going on and enforcing domestic regulations on tech companies, however global their reach (you may have noticed that Facebook is now moving to a local selling model, with many implications in terms of taxes and beyond). Finally, it can be explained by the pressure of the users themselves: the digital economy remains so competitive that users demand ever more customization and reactivity, thus providing local players with an advantage. The current digital fragmentation is an opportunity that should be seized by European entrepreneurs.
Finally, Europe provides an institutional context that creates uniquely European opportunities for entrepreneurs. One example is the welfare state. Thanks to Donald Trump’s madness and the Republican Party’s ideological obsession with dismantling the American workers’ safety net, the US welfare state is shrinking at an accelerated pace. As for China, I was appalled by how hostile the people I met were to the very principle of covering individuals against critical risks. I understand China is a unique combination between Marxism (with Chinese characteristics) and ruthless capitalism. But as a result, it provides little political room to implement the kind of social insurance system that was historically brought about as a compromise by liberals and social democrats in the Western world.
This is clearly where Europe can make a difference. Most European countries have best-of-class public services and a wide and strong safety net. These can serve as platforms for entrepreneurs and give rise to European tech champions in sectors such as healthcare, insurance, housing, elderly care, child care, education, and others.
Of course it won’t happen overnight. European governments need to go through a radical redesign so that policymaking is turned into a platform for tech startups. What’s more, we need to work quite a lot on making it easier for government agencies to harness the power of entrepreneurship. But this is an opportunity that is uniquely European and doesn’t exist in the US or China.
Here are two related papers:
Warm regards (from London, UK),
Nicolas
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