The Italian Startup Dilemma
as Europe takes off will the BelPaese be able to follow?
Throughout history, Italy has been recognized as an excellence for creativity, style, and outstanding entrepreneurship. This creativity, however, didn’t translate to startups. Italy trails behind every other big European country with an abysmal share of the overall startup investment. Why is that? This article will try to present some analysis to find the roots of our Startup Dilemma.
Introduction
Before starting let me just say really briefly who I am and why I’m writing this article. In September I left my University for an increasingly common journey among students, a gap year: an almost existential quest to find one’s purpose. To remain consistent with my passions and previous experiences in entrepreneurship and startups I decided to spend a part of 2016 at Earlybird, one of the biggest and most active Venture Capital funds in Europe.
After landing the internship and spending three months furiously analyzing deals, I feel comfortable enough to publish some of my findings on the Italian Startup Ecosystem.
Inception
If you work in a VC fund you probably know how hard it is to find a good investment and in general how hard it is to set up a good deal flow. Although I never lacked incoming deals, I lacked good ones*.
That’s when Italy came into play.
I had been given a great chance and responsibility: find the best teams across Europe, evaluate them and hopefully (various due diligences and analysis afterward) fund them. With a bit of patriotism, I decided I would focus a fair bit of my time on Italy. I would look into the market, find the hidden champions and state my case in front of our investment committee to get them funded and help their success.
As always with startups, things didn’t go as smoothly as planned.
To date I’ve reviewed ~500 Italian startups, attended several Italian startup events and spoken with dozens of investors, angels, and startuppers. And yet, I’ve failed to find a startup that can make our cut.
This doesn’t mean that there are no successful startups in Italy. First, there is no principle of causation between a VC’s interest and a startup’s success, ie. you can be greatly successful without being a VC case. Second, it just means that it is not easy to find them. Italy is a particular environment where many successful businesses are built outside the grid by first timers and serial entrepreneurs alike, and finding them can be really, really tough. Add to that the fact that we at EB avoid hardware-centric investments (a relevant share of the Italian startup market) and you have the recipe for a masochistic journey.
But let’s not justify my inability to find a strong player in the market simply by my incompetence, we have to be clearly conscious that…
…there’s statistical evidence that Italy is lagging far behind other European countries in terms of business origination and fundraising.
What this means is that we basically suck compared to other countries for the quality of our startups. No fancy way of putting it. Then we can find tons of reasons for it, and we will, but that’s a fact we have to work on. We are trailing far behind other countries and it is time to shift gears.
But before diving into the woes of the Italian ecosystem let’s go through some data regarding financing in Italy and Europe to be more conscious about the overall market.
*Earlybird has a great incoming deal flow, but that is mainly managed by senior team members. Every member of a VC has a way to set their own deal flow, clearly for new junior members the initial quality of incoming deals is low. The pun is that you have to work / travel a lot to establish a good deal flow.
The Market
A few weeks ago, InfoCamere, the IT arm of the Italian Chambers of Commerce, published its trimestrial report on the Italian Startups (here you go). The report trumpets a 7% growth from July to September, from 5.943 to 6.363 units. And man, the number is big.
Was I mistaken about Italy’s Startup Ecosystem all the way? Opinions are opinions, but numbers leave no room to doubt.
To give you a comparison Berlin, the hottest hub in a post-Brexit Europe, estimates 620 startups in its ranks, and that would be great, as the InfoCamere study estimates almost 1.000 startups only in Milan!
Wait! Milan bigger than Berlin? Did we miss a new Silicon Valley rising in our backyard? Don’t think so.
The problem lies with the definition of startup, which varies from Country to Country, from study to study.
This becomes apparent if we look at the definition given by the German IFSE (Institute for Strategic Development) and by its Italian counterpart, the Mise (Ministry of Economic Development).
Here’s the definition given by the IFSE:
“To us, a startup is a company that is unthinkable without the internet, has a scalable business model and is less than five years old.”
This definition is a bit narrow, nonetheless, it is clear and leaves no room for traditional businesses, as the company has to work with the internet, be scalable, and be in its startup phase.
On the other hand, the definition given by the Mise tells us:
“Startups are companies whose main objective is to develop, produce and commercialise innovative-high-tech products and services.”
Up to this point, other than the wider focus, nothing strange. But things get strange when the Mise lists the various criteria making up an innovative high-tech product or service. Among them we can find:
“A company is considered innovative if at least 2/3 of the co-founders OR collaborators possess a master’s degree.”
and this is ludicrous…
To put it simply, most companies in the InfoCamere report are not, by international standards, startups.
To really understand what’s going on in the Italian market we will have to change perspective, we will have to look at something more reliable, something universally comparable. Money.
There’s just one metric that has the advantage of being public and “easily” available: Financing rounds.
With financing rounds we can understand what is the value that investors attribute to our startup ecosystem: a pretty good proxy for its real economic impact.
Let’s dig into it.
Financing rounds in Italy tell a different story. A story of a median financing ticket that is 1/3 of the average ticket among comparable countries. They tell a story of a country that raised just 1/3 of what Spain raised when Spain has a smaller population and a less significant entrepreneurial history.
According to PitchBook in 2016 from January to October, just 113M$ (1,5% of the total studied) have been committed to startups headquartered in Italy while in Spain the amount totals 357M$ (>3x). The UK leads the pack with 4.4B$ in raised capital (not going to calculate how many times here…), followed by Berlin and Paris.
Spain is growing fast and it is consolidating its position as the country to be in Southern Europe.
The lack of capital becomes even more conspicuous when we look at later stages: Round B onwards. This is the stage where Europe has to play the biggest catch-up, as Atomico reports the US produces 3x as many $B+ companies as Europe but raises 5x as much capital.
Later-Stage funds in Europe raise 14 times less than their American fellows, and this translates into a lack of funding opportunities for growing European Startups, who have to turn to American VCs when aiming at becoming global market leaders.
In this analysis, I defined later stages as rounds where more than 8M$ are raised. In a world where Europe plays the part of the sheep, Italy’s presence is non-existent receiving only 0,5% of this already small capital.
From my analysis of 2016, just three companies headquartered in Italy (Mosaicoon, InstaPartners, and Rigenerand) were able to raise more than 8M$, with none of them going over the 10M$ threshold. In Spain the 7 startups that raised more than 8M$ had a median ticket of 13M$.
Germany registers the largest median ticket thanks to a few financing over 100M$ (Heliatek, Sonnen etc.).
To cap it all:
- Italian startup #s are inflated
- we largely get an abysmal share of funding (1.5% of the total)
- and we get an even worse share in later stages (0.5% of the total)
But why is that? Why are investors avoiding Italy? Combining my experience at EB and the experience gathered interviewing Italian startups I came up with 8 points that partly explain this phenomenon.
A country who has forgotten where its money comes from.
I will start this section with the words of a man to whom I looked up to, Bernardo Caprotti, founder of Esselunga, Italy’s third largest supermarket chain, a man who built an empire with humility and a great love for his employees.
Quoting the last page of his will (link):
“I provided the company with a first-class management. Now it’s “attractive”. But risk lingers. It is too heavy to manage, and even heavier to “own”, this catholic Nation doesn’t tolerate success. If the terrible times in Italy come to pass, an international collocation will be needed [the company should be sold to an international player. t.n.]”
This catholic Nation doesn’t tolerate success.
We forgot where our nation’s money comes from. And it’s not just that we abandoned our Entrepreneurs, we are killing our ability to build companies in the first place.
Let me articulate on that. Italy has one of the most taxing fiscal systems in Europe, 64.8% of fiscal pressure against a European average of 40.8% (pwc report), only this fact would be enough to make all companies and startups (startups will become companies at some point) want to pack and go abroad, but most don’t.
They don’t despite the intrinsic hostility to success. A hostility originating from the perception of someone’s success as one’s failure. While one’s success should prompt a desire of emulation, in our ecosystem this desire rapidly dies. Too complex, too much bureaucracy, too much entrepreneurial ignorance. Contempt and apathy are easier.
“The problem of Europe is not a lack of talent. It is a cultural problem: you lack the culture of failure. Few try. Too afraid of making a mistake: in Europe the ones who fail are branded for life. But even more than that, you lack the culture of success: if you are successful and make a lot of money you are not celebrated, you are shrouded by suspicion: who is suffering because of you? Who did you hurt to make all that money? You think you deserve it? Should you not give this money to those who need it? A young entrepreneur who is successful has almost to hide it. It’s terrible.” Brian Cohen.
The temptation for us Italians is always there, we hear a story of success and we immediately start to think about luck, privileged upbringing and inaccessible family connections. Because let’s admit it, most of us don’t think it is possible to succeed in Italy. We have already given up and see our future as unavoidably doomed.
But, I don’t think this is true, I wouldn’t have spent my time at Earlybird looking for gems in a country if I thought that there would be none. The situation in Italy is tough, no beating around the bush, but as I have come to know plenty of successful entrepreneurs in the country, I know that with the right preparation everyone can make it, even in Italy.
This is also an appeal to our institutions. In complex times the role of governments is to educate and lead not to watch and wait.
But enough of rhetoric. Let’s look at some concrete findings regarding why we are so far behind in the startup race.
Reasons for fleeing, reasons for not investing.
Let’s start addressing what is not working in the market, the reasons why startups don’t get funded or even founded.
Startups flee because there’s:
1) Too much bureaucracy.
Whenever I speak with an Italian entrepreneur who has built their startup outside of Italy, I always hear the question about bureaucracy, and how it is impossible to build a successful startup inside of Italy.
The examples of successful Italian startups built outside of Italy are countless, from Opportunity Network to Money Farm, from Fluentify to Weave.ai.
I still remember how a famous italian ex-CEO turned-startupper laughed and wished me good luck when I told him that I was focusing my deal sourcing efforts on Italy.
And this isn’t without reason, in 2016 the Global Competitiveness Report from the World Economic Forum ranked Italy as the 44th country in the world for business-attractiveness. SMEs in Italy on average spend 52% more time than their European counterparts dealing with bureaucracy, this added complexity costs the state 7.5B$, 2.5% of our GDP (the new economy represents 3.5% of our GDP). And this is on top of our stellar taxation.
Such an economic environment clouds progress made on the startup side, from the 2012’s “Growth 2.0” Act to the state’s startup registration platform (which should allow startup listing in a few clicks). And rightly so. The country is one, there is no industrial Italy or Startup Italy, there is simply Italy. Startups can embody part of the needed change in our country but without an overall change in our economy and mentality, they will hardly make the jump we are all hoping for.
2) Lack of a startup culture:
“Have we really understood what it means to do startups? Many confuse small businesses for startups. The young man who decides to open a small fruit shop under his house, even if he is on every possible social network and you can check on Foursquare at the watermelon’s counter, is not a startupper but simply an entrepreneur who understands the ‘usefulness of social networks to promote his business and attract customers’.” Officine Informative.
As crazy as it might sound most Italians have no idea about the meaning of a startup.
To give you and example, many universities recently started offering courses focused on startups. Courses usually taught by a researcher with no work experience outside academia, and clearly no past in startups. With the average curriculum dealing with business plans and how to get financing (did we all miss the secret formula?).
We lack a startup culture and those trying to provide it have no idea what they are talking about.
The average investor doesn’t have time to go through 30 pages of Business plan, a simple Pitch Deck is more than enough (5–10 slides explaining what problem you solve, how, in which market etc.).
This might be slightly changing in the private sector with many Accelerators / Online Journals / Communities springing up and providing quality content. But we are still in the phase where everyone is teaching and few doing.
3) Lack of an Hub:
Usually considered a marginal problem, the lack of a hub is in my view a critical weakness of our ecosystem.
Creating a real hub, rich in events, infrastructure, and networking between team can make the difference for the Italian Startup Ecosystem.
Today the three biggest startup provinces, Milan (14,7%), Rome (8,5%) and Turin (4,7%) added together represent less than 30% of the total number of startups on the territory.
Silicon Valley, London, Berlin and many other examples show how geographical proximity is one of the key recipes for success. A serious national plan would arbitrarily decide a startup capital (ie. Milan) and then invest in its development: low-cost housing, help with services etc.
This way knowledge would be transmitted from startup to startup and good employees could move among startups in the event of a failure.
4) Complexity of work-relations:
A friend who started a successful startup in Switzerland candidly admitted that the reason why he chose to build his company in Chiasso (other than tax reasons) was that he could fire people when they didn’t perform.
10M€ a year and 50 employees later it looks as if he was right.
Startups need speed over anything else, speed of execution, speed in solving controversies and yes, speed in reshuffling the team when needed.
I strongly believe that easing lawful terminations (ie. eliminating the reinstatement) would strongly increase employment thanks to a stronger flexibility and vitality in the job market. Strong work protection against “exploiters” make no sense anymore, Entrepreneurs are the new Oliver Twist, the ones who need protection to create value for the population as a whole.
5) Strong risk avoidance:
Italians are one of the most risk-averse people (see how we fare compared to other countries). From 1 to 100, Italian express a 75 uncertainty avoidance index, compared to 35 for the Brits and 63 for Germans.
This isn’t bad per se, Israel registers an 81 in the same index, and its startups are faring much better than ours. This is not the main cause of our problems, and can be hardly solved, but is something to be aware of.
6) It’s hard to get funded:
Let’s not sugarcoat it, the previous points make it hard for an innovative idea to get funded in Italy, more so in the early stages.
The funding process in Italy is eternal and the results are quite bleak.
As a friend from Bologna recalled:
Startups in Italy chase angels and VCs for months to get 10.000€ of funding.
Simply not worth it.
My only consolation is that if things started to change this last point would automatically improve as it is not a cause, yet a consequence.
Having focused on the country level let’s touch the last point. And so why investors are currently avoiding investing in Italy.
Investors flee because:
7) It’s really hard to raise capital in Italy.
As startups face problems raising anything from seed rounds to later stages, Italian VC fund managers go through hell to raise a few million.
There are multiple reasons for that:
- It’s really hard to ensure a decent IRR to LPs investing in Italian startups. Apparently most accelerators/VC funds in Italy actually lose money, ie. they provide negative net IRRs to their LPs (VCs never lose money thanks to their management fees).
- In Italy, LPs are hard to come by and the tough economic situation makes investments in high-risk sectors unlikely. In fact, the few Italian companies who seriously invest in startups usually do so outside of Italy, as LPs in big European VC funds.
- Italian VCs are generally small and focus on the Italian market, a position that is not appealing to international investors. That’s why some of the biggest VC funds of Italy are participated by the State through Invitalia, without which they would lose a significant share of their capital.
The VC business in Italy is so hard that if it wasn’t for the management fees hardly anyone would do it.
8) It’s hard to find good investment cases in the country.
It’s a fact that the average level of the Italian startups is worse than the European average. If this wasn’t the case the investment size in our startups would be higher as most European VCs start to monitor all startups (also Italians) from the very early stages.
This originates from the lack of a strong ecosystem, the lack of a strong startup culture and community, but it has also other origins:
- Italian startups are usually focused on Italy, and this focus leads to less ambition and a narrower market awareness. It is rare to find an Italian startup that is doing something none else is doing around the world. I saw multiple cases, but they are really rare. What we have to remember is that there is not just Italy or the USA, there is Europe! Italian players should aim at building a significant leadership in the European market and from there aim for the World. Italy is too small and too resistant to change to be an appealing market on its own.
- We have little market awareness / competitiveness.
It happened to me over and over to interview an interesting startup just to find out they had no idea about their competitive landscape. If I, after a 5 minutes search on Google, know more about your competitors than you, it’s not good.
Entrepreneurs are always biased to understate the scale of competition, but that is the biggest mistake a startup can make. The fatal temptation is to describe your market extremely narrowly so that you dominate it by definition. Suppose you want to start a restaurant that serves British food in Palo Alto. “No one else is doing it,” you might reason. “We’ll own the entire market.” But that’s only true if the relevant market is the market for British food specifically. What if the actual market is the Palo Alto restaurant market in general? And what if all the restaurants in nearby towns are part of the relevant market as well?
These are hard questions, but the bigger problem is that you have an incentive not to ask them at all. When you hear that most new restaurants fail within one or two years, your instinct will be to come up with a story about how yours is different. You’ll spend time trying to convince people that you are exceptional instead of seriously considering whether that’s true. It would be better to pause and consider whether there are people in Palo Alto who would rather eat British food above all else. It’s very possible they don’t exist. (Peter Thiel)
Ask yourself the hard question and don’t be afraid to face the competition, if you are truly special you will find ways to overcome it. If you are not special, it is better to fail fast and refocus instead of spending an awful amount of your time and money on something no one cares about.
- We lack boldness!
The place where you started/founded your startup matters up to a point, open yourself to the global market and aim big: be bold! No one gets excited by a half-spirited vision. At least investors don’t. Dreaming big while keeping your feet on the ground (ie. have a clear, realistic idea on how to make your vision a reality) can be tough but is what successful teams do.
“Shoot for the moon. Even if you miss, you’ll land among the stars.” (My grandma copying some random author)
Concluding Lines:
This article wanted to be a quick overview of my findings on the Italian ecosystem but ended up being much more detailed than I had anticipated.
We cannot hide that there are systemic problems with Italy’s startup ecosystem and that these problems cannot be solved by a group of enlightened entrepreneurs alone. We need a cooperation between State and Private Sector.
Education must be boosted to make people aware of how the economy works. We have this false belief that economy is a choice, and that you can avoid interacting with it if you don’t want to. But we don’t live in a bubble anymore, it burst in 2008.
Our startups need to bundle together to get better. They need to be more bold, more aware of their potential and more aware of the competition. European Ventures are more than willing to invest in Italian startups, they just need the right incentives: quality, vision, and potential.
There is always hope. Little by little the amount of investment in Italian startups is increasing, as is the quality of the startups. Italian exits are on the rise and the Italian VC landscape is getting more and more populated and active and international investors are starting to show up.
It is hard to predict how things will go.
What we know is that if we will be able to make Italy a better place for innovation and for the future it will be thanks to the effort of every person who worked toward this goal. On the other hand, if we will fail, the whole country will have failed.
There are those who look at things the way they are, and ask why… I dream of things that never were, and ask why not? R. Kennedy
Thanks for reading! I’d really appreciate it if you recommend this post (by clicking the ❤ button) so other people can find it. And, feel free to reach me out at any time! Mat
