10 ways successful early-stage startups might look different in Europe
More and more foreign VC funds are taking a closer look at startups in Europe, but judging them by the same standards and patterns as in the US might lead to overlooking great European companies whose businesses and traction might look different, even at a similar stage in their growth trajectory.
While there are generally more similarities than differences, here are a few ways that a breakout startup in Europe might look different from a breakout startup in the US.
1. Solving European problems
Just because you can’t relate to the problem, doesn’t mean it doesn’t exist.
Europe is a unique and fragmented place, differences in currencies, languages, laws and consumer behaviour all create uniquely European problems that startups look to solve. Transfers between currencies (TransferWise, Revolut), car pooling (BlaBlaCar), buying train tickets (Trainline, Omio); these ideas may not be very interesting in the US but certainly are in Europe and have spawned billion dollar businesses.
To complicate this further, a problem that exists across Europe may be more significant in one particular country than in others, leading to that country being the ideal place for that business to start. French payroll is more complex than that of other countries so PayFit started in France to automate payroll; Germans have lots of insurance contracts so WeFox started in DACH to manage insurance contracts. Similar businesses to these that launched in the UK had less success as UK payroll is relatively simple and UK millennial consumers have less insurance contracts to manage, so the problems are not as significant.
What should be important to a VC investor is that the problem is significant and the market for the solution large, regardless of whether they can relate to the problem or not.
2. First local, then European, then global
Just because they’re only in one country, doesn’t mean they’re destined to be a local business.
Given the differences between countries and the costs involved in supporting these differences, a startup may limit themselves to only one country when they start and focus on local customers while building the initial product and searching for product-market fit. Even a business that’s purely digital might stick to their home country at first as there are real costs involved with the localisation of the app, support in different languages etc.
Startups launching in large domestic markets (in particular Germany, UK or France) are often able to stay local for longer; building a solid company with only local customers before moving to neighbouring countries. For example, for a SaaS business; it’s possible to launch in one country, reach $100k MRR with only local customers, raise a Series A to expand only in-country before finally leaving the home country after raising a Series B.
However the trend is certainly moving to startups being “international first” and looking to be available in multiple cities/countries quickly, much sooner than in the past to the point that today it’s rare to see a Series B company that is only active in one market.
What should be important to a VC investor is that it is the founders’ ambition to build a large global business while understanding that the journey to get there may involve local steps first.
3. Local reference customers
Just because you haven’t heard of any of their customers, doesn’t mean they aren’t significant.
It makes sense for startups to sell locally and through their network to start. A company in the US that has gone through Y Combinator might have a list of large customers such as Airbnb, Stripe or Dropbox that are fellow YC alums or leverage their connections and past employment at companies like Google or Facebook for an easier sell, collecting these logos as reference customers. In the same way, a European startup should be expected to leverage their connections at local companies; those they previously worked at and those from their local accelerators and investors’ portfolios for their first customers.
Often the logos chosen to display on a website are chosen to convince the type of local customer they are targeting, and will even change depending on which localised landing page you are on. PayFit for example has the logos of only French startups that are their customers on their French site, that then changes to UK startups on their UK site. All are relatively small startups and might be unknown to a foreign VC but will be known by their target customers.
What should be important to a VC investor is the value of the customers based on their potential contract size, dollar value and local prestige rather than looking for brand names they are aware of and dismissing those that are unknown as not significant.
4. Leveraging European strengths
Just because they’re leveraging different strengths, doesn’t mean it’s wrong.
The cliché is that US VCs are hunting for a few strong computer science graduates building a pure software company, a few PhDs building a deep tech company etc.; these type of companies certainly also exist in Europe but there are also great companies being built by founders with different skillsets. Strengths in “softer” areas like retail, fashion, brand building or just specific knowledge of a unique industry might be more pronounced. These need to be taken into account when evaluating a business as they give a unique advantage stemming from the history and experiences that Europe has.
This historical advantage also leads to the clustering of certain tech startups around the location of historic industries (that might go back hundreds of years) as a consequence of experience held locally and local availability of customers for a certain product, such as the larger number of startups related to the industrial and manufacturing sectors coming out of Germany. It’s surprisingly common to meet a young founder and hear “my parents / grandparents worked in this traditional industry, I’m now working on software to make it more efficient” giving them unique insight into that traditional industry.
From a more recent point of view, these geographic clusters also form quickly around a successful startup where the employees then leave to start their own companies in the same sector. For example, the success of gaming companies in Finland such as Supercell and Rovio has led to a new generation of Finnish gaming companies who are able to leverage the experience of these companies and the availability of talent coming from them. The success of these companies means European VCs will pay significantly more attention to a gaming company coming out of Finland than out of a country that doesn’t have the advantage of the same geographic network effects.
What should be important to a VC investor is the strengths of the founders and how these strengths are relevant to the specific business they are building, rather than trying to pattern match to a generic skillset they are hoping to see.
5. Hype ≠ success
Just because you haven’t heard of their investors or read about them on TechCrunch, doesn’t mean they aren’t doing well.
Success in the US is often public and loudly celebrated (also everyone wants to signal to the world that they saw the cool new thing first) while in Europe things can be more subdued. Both in terms of press and investors, the best companies are not necessarily going to be the ones that are getting the most public attention. Companies may intentionally avoid the limelight, being heads-down building their product and avoiding press or any formal announcements, especially in the case of experienced founders. A recent example is Checkout.com, having spent 9 years bootstrapped to then announce their first funding round of a $230m Series A (their first TechCrunch mention was also about that round).
Regarding funding rounds, even large ones from brand-name investors, it has become more common to not announce them (or wait months or years to combine the announcement with another product announcement). While in the US generally such news is quickly paraded by the startup and investors to help with hiring and start developing upstream investor interest.
Along with this, the European market certainly isn’t dominated by the “celebrity” VC investors as much as in the US. At the early stage, a great company might be funded only by local investors, small angels or an accelerator programme that is not very well known so if you want to see them early you need need to be close to the ground. If they haven’t raised funding from a top London fund, it’ll often be because they haven’t spoken with them, rather than because that fund passed so tracking the activity of the top funds is a less reliable proxy to track the best companies. Even when a round is announced and it’s from a large fund, the hype around it is often smaller with those VCs that do blog or tweet less actively promoting their portfolio companies than their Sand Hill Road counterparts.
What should be important to a VC investor is the fundamentals and growth of a business, regardless of how much press or attention they’re getting in public. They also can’t rely on hype as a strong signal of which companies might be most interesting, without missing out on some of Europe’s most interesting startups.
6. Not necessarily based in a tech hub
Just because they’re not in London or Berlin, doesn’t mean they’re not serious or interesting.
In the US, Sand Hill Road VCs are often able to wait for (and expect) founders to move to San Francisco to launch their businesses. In Europe it was also true in the past that startups from across the continent would often move to a larger hub city in order to build their business and raise funding, but that’s no longer the case as often. Dealroom data shows the number of European unicorns founded outside of the UK, Germany, Netherlands and Sweden quickly increasing and even smaller towns are seeing early-stage activity pick up. A startup can certainly not be dismissed as uninteresting based on their location outside of the main tech hubs.
For VCs looking to invest across Europe, this creates the challenge of needing to hunt for companies across disparate geographies. I wrote about approaches that VC funds can take previously here.
What should be important to a VC investor is that they’re set up to find the best companies, regardless of where they are founded or based. Looking only at the startups coming out of the hub cities is no longer a sufficient strategy for covering Europe.
7. Distributed teams as the norm
Just because their team isn’t all in one place, doesn’t mean they’re dysfunctional.
A consequence of needing to be active in multiple countries in order to build a significant business means having offices and team members on the ground in these different countries; this shouldn’t be seen as unusual or as a negative factor. Particularly from a local sales point-of-view, expanding to a new city or country might start with an employee at the head office but quickly moves to having a city/country launcher to land, and a local office to expand.
Along with this, when a startup is founded by immigrant founders who relocated to one of the hub cities to launch their business, it’s common to keep (or start) an engineering office in their home country due to lower costs and less competition for local tech talent than they would face in the larger hub city. Combining the ability to raise funding and close business deals in a hub city, with the ability to hire high quality tech talent in a less competitive talent market can be the best of both worlds to extend their runway and speed of execution. This “tech office” is different from outsourcing tech to a third-party and certainly shouldn’t be interpreted as a negative.
Being distributed and present in the countries they serve, also gives a stronger understanding of the needs of a local market and allows the business to take advantage of this knowledge to build a better product than they could have without being present.
What should be important to a VC investor is that a startup has a robust strategy to serve their customers across Europe and to take advantage of their unique geographic heritage rather than assuming that a distributed team will cause problems and is always a negative factor.
8. Lower importance of founder credentials
Just because they didn’t go to Harvard/Stanford or work at FAANG, doesn’t mean they’re not smart or ambitious.
While there are a few selective universities in Europe that are difficult to get into (Oxbridge in the UK, the grandes écoles in France etc.), every country has great universities, a lot of which have open non-selective enrolment, making the signal of having attended (or simply having been accepted to) a certain university significantly weaker than in the competitive US system. A talented high school graduate in Europe will often attend the university that they think is best for them in their country, close to home, without even thinking to apply anywhere else.
Clearly some universities are more innovative (from a patent point of view) and I previously looked at the most entrepreneurial universities in London (based on AngelList data from 2013) but I can’t find a similar university ranking across Europe. Pitchbook’s survey of the top universities producing VC-backed entrepreneurs globally lists no European universities in their top 50 undergrad & MBA ranking but does include three in the MBA rankings (INSEAD, LBS and Oxford). If anything, we might even expect more startups in Europe to come from “less prestigious” institutions that have more focus on practical skills than pure academics. In Belgium for example, I often see more founders with backgrounds from the more applied “university college” system, rather than from the more prestigious “academic university” system because these schools often focus more on technology skills (software development, design etc.) over academic theory, preparing students better to build a product and start a company than memorising textbooks would.
From an employment history point-of-view, having worked for one of the large tech companies (Google, Facebook etc.) is usually also less of a valuable signal in Europe as these companies don’t have as large product teams in Europe so someone who worked for those companies was more likely to be working on a less glamorous function, like selling ads to local SMEs, than someone who worked for one of these companies early in the US. Having worked for a fast growing startup is just as good a signal in Europe (and leaving said hot startup to start something new, doubly so). However, since the startup scene in general isn’t as large (and is still seen as a less acceptable career path for graduates) more often founders still come from the traditional corporate world than the startup world and a lot of founders are still former investment bankers and management consultants, as these are the industries that talented graduates are drawn to for their first role, over large tech companies or startups.
What should be important to a VC investor is the talent and ambition of the founders and how their unique background leads to the elusive “founder-product-market fit” with the startup they are building, rather than putting too much emphasis on the academic or employer badges they have collected.
9. Starting with revenue over growth
Just because they focussed on revenue early, doesn’t prevent them from focussing on growth in the future.
In the US, companies are often encouraged to focus on growing as quickly as possible, as early as possible (and burning funds to do so) because they know if they’re growing the metrics that matter, there will be more funding available to keep growing when they run out of funds. In Europe, the availability (and risk tolerance) of VC funding is lower with funds investing in smaller rounds and wanting to see more results from them. Despite having similar ambitions, the next round for a company might not be as available or come as easily which leads to founders making the conscious choice to spend more frugally and possibly focussing more on revenue (and a realistic path to profitability) to have the option to survive longer without VC cash injections if needed.
This is doubly true for companies in sectors that are out of favour with investors or are less understood by European VCs than those in the US such as companies with very high user/customer engagement but low absolute user/customer numbers; that a US VC might be interested in funding but a European VC might want to wait for them to grow their absolute numbers.
This more conservative approach shouldn’t be interpreted as having lower ambitions; it’s simply a reaction to the market conditions that they find themselves in, and a somewhat healthier understanding of the role of capital as fuel to be used to scale after finding product-market fit. In Europe it’s more common than in the US to see founders building a solid business over a few years at a more conservative pace that’s supported by revenue without raising significant external capital, who might then go out and raise a significant first funding round (at much more favourable terms) to then scale the business once they are ready.
What should be important to a VC investor is that the founders have figured out their business and are in a position to grow quickly with the capital they are now raising, rather than judging them if they have made the decision to be more pragmatic to start.
10. Copying as a starting point
Just because they started with an existing idea, doesn’t mean they’re unoriginal.
The famous European copycat Rocket Internet was very successful in cloning American startups and often had a large window of time before they would need to compete directly with the startup they were copying. Today we see US startups expanding more quickly to Europe, leaving a smaller window for the copycats to get traction (and to try to be acquired by the company they copied) but we do still see this behaviour. For example, when the recent wave of men’s health startups (Hims, Keeps, Roman etc.) saw success in the US, we suddenly saw a handful of very similar business launch in London with very similar products, marketing and branding and every VC was speaking with multiple “Hims clones”.
However, while the idea already working in the US gives some indication that there will be product-market fit in Europe too, this isn't all that’s needed for these European copies to be successful. Generally the US company is used as an initial blueprint but launching the exact same product won’t necessarily lead to certain success in Europe; the product will still need to be adapted to differences in consumer behaviour and preferences in each of the local markets they want to launch in and often founders find the playbook that worked in the US, just doesn’t work here.
Over time we often see these copycat products diverging even more from the direction of the company they originally copied as they discover more original directions to go in to that better suit the differences of the local market; ending up with a product that looks almost nothing like the one they cloned to start.
What should be important to a VC investor is the founders’ ability to build a great product that serves their local market, rather than put too much emphasis how they got the original idea or how they got started.
These are just a few of the differences I’ve seen, if there’s anything that you think I missed, please let me know by leaving a note in the comments.