Homework For A European Startup Ecosystem

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After publishing this article, her former employer’s website collapsed with the traffic in Germany. By Jenny Jung (Global Partnership Director, blackbox.vc)

"How do you perceive German entrepreneurship in Silicon Valley?"

The host kicks off a panel discussion featuring US VC fund managers and business angels. Carol Sands, Managing Member of The Angels' Forum and The Halo Funds responds:

"The German community is not well represented within the angel investing world. I’d love to see that improve because my number one investment this year was in a group of four Germans that came over (…) evidently because they had been trying to get some connections to the German community and got none, which I found interesting because they had already done a successful startup which they had sold in Germany (…) The minute they knocked on my door I was like: come in, close the door, and I never let them out. (…) I guess I should thank you guys for ignoring them!"

Unfortunately, this is a true story which happened last December at the “Business Finance Climate” event at the German ambassy in San Francisco. I attended this event during a trip to Silicon Valley to which I had been invited by Fadi Bishara, one of our ADVANCE Conference partners. I was eager to find out what Europe can learn from the valley albeit the obvious differences in infrastructure and culture.

Eleven days later, I returned with my mind blown and my eyes and ears wide open. Silicon Valley really does flick a switch in your head if you let it. Everything seems to happen at a pace 10 times faster than back home in Germany. It is not unusual at all to meet 20-year olds who have just received major VC funding with their 4th company. Everyone knows everyone and everyone is affiliated with tech and digital media. There is free WiFi EVERYWHERE. Cab drivers use mobile payment service Square, sending the receipt directly to your inbox. Even street musicians have traded their guitars for iPads. My expectations were exceeded.

Many Europeans have made this experience long before I did. Visiting Silicon Valley leaves you with a certain feeling of "why-oh-why-can’t-I". It helped me in understanding, why some German startups would rather leave their home country and try their luck in the San Francisco Bay Area.

The rate of innovation, specifically in the digital media and tech realms are extremely high due to a complex set of factors and their dynamic interplay. While it would go far beyond the scope of this post, to analyze all of the factors, some should be named:

Science, research and industry work hand in hand

Source: Strategic Business Insights

Large enterprises, SMEs and startups, universities and research institutions of Silicon Valley have long understood that working together leads to more and faster value creation.

In fact, Stanford University has played a key role in shaping the innnovation cluster for almost half a century. You will find countless founders among their alumni and their current students. Their adjoining research institutions like SRI International work closely with existing startups and have an enormous output of spin-off startups themselves.

As the majority (about 70%) of tech founders who receive their degree in California found their business there, too, talent and network accumulate naturally. And Stanford is by far not the only university in the bay area with close bonds towards the industry and investors (see infographic). But that is just one aspect contributing to the entrepreneurial spirit that lingers behind every door in the area

Extremely dense professional networks and vast surrounding services

  The blackbox mansion

Round this circuit of self-accelerating innovation you will find service providers of all kinds, that live off of this system for one, but also add value and help making it even more efficient. And I’m not just talking about VCs and angels.

The Silicon Valley startup network includes law firms, recruiters, journalists, flexible workspace providers, event-people, consultants of all kinds and of course business incubators and acceleration programs. The network of all these players is extremely dense.

Philipp Berner, a German entrepreneur I met at my homebase for the time, the blackbox mansion, said:

"When I first came here, I didn’t know very many people. After one year, when I hovered over event attendees’ profile pictures on Facebook, it would show at least five common friends with anyone."

What may seem a very large network from the outside perspective is effectively a small bubble in which everyone is connected by third degree at the most. So a few good contacts can suffice to gain a foothold in the local scene. A major incentive to make introductions on the one, but also respond to them on the other hand is simple: It’s about staying connected and relevant within the scene. Incubators have learned to leverage this.

When I visited the offices of 500 Startups, Christine Tsai, one of the partners told me:

"One thing that actually works really well for us is the community that we’ve developed. There is something I call the "500 family" – it’s all of the founders that are in our network, all the mentors and advisors that are working with 500 Startups. They formed a very tight community, both within each group and then kind of overall. Primarily the way they communicate is through our mailing lists. That may sound trivial but it’s actually very active. You see a lot of discussions, people asking for introductions or feedback. There’s a lot of very valuable information going back and forth. A lot of the folks feel that they get a lot out of that network and this is the reason why many people come to us and say 'We really want 500 Startups on board. We want to be in your program because we’ve heard so much about all those connections."

A culture of reciprocity and openness

Parts of the "500 family"

More than just by business relations, Valley folks are bound by a common spirit. This goes beyond the feeling of togetherness, which you might as well find in European startup hubs like London or Berlin-Mitte. I am talking about a common mindset.

For one, this mindset is about sharing ideas and helping each other out. Unlike in Germany, people in the Valley believe that an idea is worth nothing if it doesn’t infuse the right network. People will start exchanging on their ideas at a way earlier stage because they have learned, that the possibility of someone adding value to your idea is much higher than the thread of someone "stealing" it.

"It’s a cultural phenomenon," says Christine, "Most people are happy to help."

A few days after meeting Christine, I talked with Alfredo Coppola, president of the US Market Access Center (US MAC).

He told me yet another reason why people share their thoughts and ideas more openly:

"Even if someone else were to execute on my idea, he would most likely do it very differently than I. It would never become the same product. (…) An idea is worth nothing"

Either you win or you learn something

Maybe this attitude also contributes to the second big difference between Silicon Valley’s and Germany’s mindset - People in Silicon Valley are not afraid to fail. In fact, having failed before is considered a great quality. If you haven’t failed, you’re either inexperienced or suspicious. Startups try, fail, try again, pivot, fail and try again.

And they fail just the way they do everything else - fast. One could attribute the pace to the dynamics of the ecosystem. But another factor, which I hadn’t thought of before my trip, occurred to me when Alfredo told me what the biggest challenges for many European startups in the San Francisco Bay Area is. It’s all about the mindset. And the Silicon Valley mindset is coined by Americans not being used to extensive governmental (social) support:

"In other countries there is a lot of governmental support but not here. So people learn at a very young age how to fly and that makes things really fast-paced in the Valley. Coming from another culture, it is hard for foreign companies to keep up with this."

Many of the European startups which come to the Silicon Valley to learn or expand don’t make it past the first couple of weeks. Germans in particular also struggle with the social component of the startup business in Silicon Valley (and maybe elsewhere, too). Their perfectionism and accuracy sometimes just runs counter to the international code of conduct.

Civic-mindedness

The feeling of connectedness and belonging among the tech scene in SV also sparks civic engagement and lobbying towards the government. Superstar-investor Ron Conway, the newly elected mayor of San Francisco, Ed Lee, and former TechCrunch CEO Heather recently joined forces and started the San Francisco Citizens Initiative for Technology & Innovation. Among the contributers you will find companies such as Zynga, Twitter, Dropbox, Eventbrite but also non-profit organisations like Code for America and micro networks such as the Silicon Valley Leadership Group.

On their website it says that this initiative was founded "to leverage the collective power of the tech sector into a force for civic action in San Francisco…(it) will bring together city government and San Francisco’s tech community with a collective mission to improve the city and the technology sector".

Another pioneering form of the industry’s non-profit engagement in the public sector is a recently launched civic startup accelerator. This public-private partnership between San Francisco City Hall, sfCITI and Code for America aims to help startups in building products and services for the civic space. "Disrupting the government", if you will. The wet dream of cluster institutions like the one I work for.

German issues

Sadly, neither 500 Startups nor the US MAC (based at Rocketspace), nor the Plug & Play Tech Center, Sunfire Offices or any other facility I visited hosts a German startup yet. This contradicts the common notion that Germany yields great engineers and developers and are excellent at structuring complexity.

"We are very much interested in working more with German companies," says Alfredo. "But we don’t go there and ask. Business usually comes to us."

Germany hasn’t been showing particular interest in helping German startup businesses (at least in digital media and tech) across the pond. Other European countries have long begun to help their startups expand to the US market. Initiatives like swissnex organize special programs for entrepreneurs in their home country. Moreover, they centrally organize the transfer of knowledge back Switzerland, giving swiss companies a heads-up in market developments and technological trends.

The launch of the German Silicon Valley accelerator (GSVA) at the Plug & Play Tech Center in Mountain View is the first German step in this direction, a small albeit important one.

"What people in Germany need to understand," says Oliver Hanisch, one of the GSVA founders, "is that if a company decides to open an office here, it will rather help creating jobs in Germany than sucking talent out of it."

In my humble opinion, Germany needs to help its startups in tapping the US (capital) market but also do its homework at home as there are still major obstacles to overcome. As of today it seems that investors aren’t the only ones ignoring the potential of German startup founders.

On the governmental and institutional side tasks ahead are:

  • Making entrepreneurship more attractive to young people (tax advantages, image campaigns…)
  • Attracting large international companies that can function as carthorses for technological innovation and sparrings partner for young companies
  • Providing market insights in a transparent manner and helping entrepreneurs to identify sectors of growth. For 2012, many of the investors I talked to during my trip showed the most interest in software for the education and health sector as well as the vast realm of productivity tools. If I can identify these trends in less than 2 weeks, governments and institutions should sure have their ways.
  • Helping public universities and research institutions to build closer bonds with the industry.

During the panel discussion at the embassy, Mark Plashton (BMW i-Ventures) twisted his knife in the wound: "The number of startups coming out of institutes like Fraunhofer or Max Planck is microscopic."

On the German community’s end this means challenging the prevailing mindset: Taking risks, sharing ideas, dropping the fear of failure and learning to leverage the knowledge and expertise at hand.

But in a globalized world (pardon the expression), it’s just not enough to think on a German scale. We should also approach the issues at hand on a European level.

Homework for Europe

The European startup system is characterized by its decentral structures. You will find multiple digital media and tech hubs like London, Barcelona, Paris, Berlin, Dublin and Stockholm, all of which are taking up speed and momentum. Some of these hubs are actively nurtured by their governments, some are not.

All of them do a great job at creating bubbles and buzz around themselves but they are not sufficiently networked with each other. This way much of the energy invested by these micro-scenes remains unnoticed from the outside perspective. Also, with each country investing in their own hubs, Europe lacks strike capability that it would need in order to play a more significant role next to Silicon Valley.

Even though we cannot just recreate an infrastructure that has grown there for more than 40 years and Europe cannot compete with the sheer volume of VC capital available in the US, we can learn from the structures and mindset of the Valley’s ecosystem.

Networked thinking – and acting

We need European initiatives from within the market. Governments and institutions can not substitute for this. Their role is to create the right circumstances that reward risk-taking so young people start pursuing their own ideas, allow for fluid exchange on all levels and create legal frameworks that help great European companies (like Spotify) to expand more rapidly withing Europe. Furthermore, the transfer of knowledge from Silicon Valley, but also from other leading global hubs to Europe could be organized centrally

"It seems like every day, there is someone else over here, trying to learn from Silicon Valley folks. Sometimes from a country, sometimes from a region or a company," says Fadi, who btw is an excellent host if you ever think about making a trip to the heart of Silicon Valley.

The importance of bridging organisations has been proven, so why split our efforts when we can join forces?

Europeans need to understand that we can create more value if we feed each other lines instead of solely focussing on our own ends. We need to widen our horizon and build networks infused by trust and reciprocity – beyond our own hubs. This will lead to a stronger sense of European community among the whole startup scene and eventually to investors forming syndicates.

Instead of thousands of small incubators (some of which don’t even deserve the name) within each hub we need more visionaries that function as turntables within the European network, helping the right people to connect with each other. Within these networks, founders can start sharing their ideas more openly and drop the fear of public failure – because everyone else does.

Only this way can Europe contribute to shaping technology and its usage in a meaningful way. The recent economical turmoils offer a great starting point for this.

And then, maybe, in a future not too far ahead, there will be a stronger German community in Silicon Valley, too. Or maybe, it won’t even be necessary any more.

This post was originally posted at MEDIAN.NRW.

About the guest blogger: Jenny E. Jung is Global Partnership Director at blackbox.vc. She is a German startup enthusiast, natural networker and opportunity creator. Before coming to Silicon Valley, Jenny was responsible for (NRW) region development and hosting of European startup events like ADVANCE Conference focusing on digital media and technology. She quit her job to join the team of Silicon Valley -based startup accelerator blackbox.vc. Follow her on Twitter at @jung.