"Yeah, but what IS a startup?" And other questions I answered for the European Commission

Feb 11, 2013
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Last week I was up in Brussels for a workshop called “How the European Commission can support Web Entrepreneurship in Europe.” During the workshop, I talked about different initiatives that the European Commission could provide grants for, related to accelerators, crowdfunding, company creation, taxation, hiring/firing costs & more, and I was surprised at some of the responses I got, most of which was support for anything that promised to help startups grow. During the talk, I ran into a few interesting questions, which to me seemed obvious, but required some long explaining in order to convince the members of the workshop. I thought it would be interesting to share their questions, which in my opinion, represent questions that an average person might have about startups:

“Yeah, but what exactly IS a startup?”

During the talk, I had to answer this question a few times – about once for each person attending the workshop. It came up whenever I said “startups need” or “do this for startups,” and it became clear that there was no distinction between “SMB,” “Startup,” and “company created recently,” and so I called upon Paul Graham and Eric Ries to answer this question for me. From Paul Graham’s recent post Startup = Growth, I told them that regardless of age, regardless of activity, what makes a startup a startup is, more or less, 5-10% growth each week. I like this, because it’s identifiable, and it’s entirely independent of the age of company or current number of employees. Apple, for example, could be considered a startup when it launched the iPhone or other new products, as I’m sure they were seeing this kind of growth. Rude Baguette, for example, saw 37% UV growth in January vs. December, which we have been seeing for the past 5 months or so – therefore, technically, we are a startup (yay!).

The other part of the definition is less important, but I enjoy Eric Ries classification of a startup as a group of people looking for the solution to a problem whose solution is unknown, and is high-risk. It touches on the difference between a restaurant and a startup, that a restaurant’s problem and solution are known, even though a very good or highly anticipated restaurant may see extreme growth.

What’s the difference between Web and other IT Industries?

This a question that, in the web startup ecosystem, seems relatively obvious, but I understood a little better where the EC was coming from this when I realized that, in the EC, there are two groups in charge of allocating funding (and other aide) to innovation – the Web Innovation group, and the Innovation group – one is focused on Web, one is general. The members of the Innovation group were at the meeting hoping to show that support for the web ecosystem could just as easily be generalized to the entire innovation ecosystem, and so this is how I addressed the issue:

The Web ecosystem has a very unique set of barriers that block startups from becoming global leaders. If we think of an ecosystem as a startup itself, and begin tracking the conversion funnel from idea to global leader, we quickly see that the pharmaceutical industry has different barriers than the web. While a website costs very little to start – hosting, domain registration, setting up payments online, etc. – web startups get blocked in things like fund-raising, hiring/firing, and international expansion, because these are (some of) the hardesti parts on the conversion funnel to success. Meanwhile, a pharmaceutical startup, while it may encounter troubles in these areas, would likely count patent registration, IP protection, and perhaps manufacturing costs among its main problems, above crowdfunding or need for accelerators.

In short, the web scales. One website, 1 Billion + users. That eliminates a lot of the problems that other IT sectors deal with, and it also means that with a relatively small injection of capital (from the public or private sector), global leaders can arise in a matter of years, not decades.

How do we choose startups (for grants etc.)?

This was a very interesting question for me – most of the workshop talked about how the European Commission could provide a variety of grants to bolster startup growth in Europe, but in the end, the European Commission sees this as yet another pile of applications to dig through: “how are we supposed to pick which startups to accept? Have them send in 2 page business plans?” – that’s when it hit me that the public sector isn’t taking advantage of the private sector’s natural selection process: investors, accelerators, and funds.

I told them to let the private sector do it: any startup with investment from a prominent VC fund is likely “a startup,” as goes for any startup going through Seedcamp or other accelerators. I could equally imagine startups who are finalists in the LeWeb startup competition, if they are pre-seed companies, receiving similar treatment.

The government will never be as quick as the private sector at assessing a startup’s potential vs. its risk, nor should they be. That’s the job of the private sector, and they could easily assess whether a given fund meets their guidelines as a ‘startup determiner’ or something like that.

How can we create a European startup ecosystem?

During the workshop, I was asked why I spoke as if there was no European Startup Ecosystem. I explained that, while there is a Paris ecosystem, London ecosystem ,Berlin ecosystem, Stockholm, Copenhagen, Brussels, Amsterdam, Dublin and other local ecosystems, their lack of cohesion – interaction between each other – prevents them from being considered a European ecosystem. It will be very easy to tell when there is a European startup ecosystem – it will be when companies launch pan-European in one move, not as a series of steps. Imagine the barriers to entry to that.

As a response, one attendee asked “well, then how can we create a European startup ecosystem, then” and my response was “You can’t.” It’s not the place, or in the power of the European Commission to ‘create’ a private sector ecosystem, they can only support what is already arriving, and perhaps hasten its arrival. Europe will either completely separate with the dissolution of the European Union, or it will inevitably tend towards one market, either through governmental changes, or through private sector work-arounds. For now, there is a lot of money to be made just in lowering one of the barriers that stops a European startup from launching across Europe, which is potentially the reason why they launch in the US as their second market instead of the countries all around them.

In a recent interview, French Junior Minister Fleur Pellerin evoked a similar idea: “how can we create a veritable startup scene in Paris?” In it, she evoked how there were already schools (public institutions) that were bolstering the ecosystem, but that a real hub was needed to create the ecosystem – As I’ve mentioned before, I disagree. But whatever – I’m not French, so I don’t really care how they spend their tax dollars. But what Pellerin and other journalists are missing is that there is no evidence or example of a public entity creating a startup ecosystem locally, there are only counter examples. Paris, and other cities, already have their naturally developed ecosystems, and anything that goes against the grain of what is happening naturally in the private sector will only disrupt the progress.