Despite the financial insecurity surrounding Brexit, the European startup scene has rarely been in ruder health. Europe broke records for Series A investments in 2015, up 12 percent from 2014, and in the first two months of 2016, A rounds were up 38% over the same period last year.
European startups looking to maintain rapid growth naturally look overseas, and despite competition from other burgeoning tech hubs, Silicon Valley is still the place to be. And with good reason.
Since 2014, Silicon Valley has accounted for almost 50% of all company exits (aka acquisitions or IPOs), and according to Fortune, in 2013 venture capitalists invested $33 billion in US companies – more than four times the amount invested in the entire European Union.
The temptation of Silicon Valley is great, but it can cloud an entrepreneur’s judgement about the move. There are numerous long-held myths about how to make it in Palo Alto and environs that simply aren’t true.
Myth #1: You need a $1 billion idea.
While images of unicorn after unicorn galloping around the streets of Palo Alto persist, there is a shift occurring in investments, making the marketplace more supportive of proven businesses rather than those “pounding their chests” but who are essentially inefficient, capital-wise.
This is happening because “unicorns” are known to blow through cash and have negative gross margins -- a.k.a the “subprime unicorns.” That, coupled with the emergence of zombie tech stocks - as Fortune explains, ‘once-highflying IPOs wandering aimlessly in the wasteland of the public equity markets...understandably unloved by investors’ - and you can see why investors are playing it safe(r).
While this has not stopped the flow of cash, and the culture of risk is still greater than that of Europe, it does represent a change in attitude. As VC Paul Kohn reports, about 66% of the capital invested in the first half of 2016 was invested in large rounds of $25 million or more. The capital is going to the larger, more mature companies.
The message? It is much more important to be a proven business at $1 million than it is to be granted unicorn status with a high possibility of failure. Of course, a VC is unlikely to turn down a billion dollar idea, but you don’t have to have one to win investment. Build a business model that works, offer ideas for growth and expansion, and the VCs will come.
As Andrea Zurek, founding partner of XG Ventures says: “Have some traction. There are some angels out there who will invest in the idea or the cocktail napkin diagram, but we actually like to see a little bit of progress. We like to see that it’s been tested in the market, that there’s a real need for their product or service, and that they know who their customer base is going to be.”
Myth #2: Go now, prepare later.
Rush-and-go growth mentalities are inherent in the startup community. Understandably, many European startups feel the pressure to jump the pond and dig their heels in as soon as possible. However, much like myth 1, the focus should be on solidifying the business model and becoming a disciplined entrepreneur who can scale. This is not only smart business, it’s also an agile principle: “nail the model before you start scaling the business.”
Myth #3: If you’re not tech, don’t bother.
This is a half-truth. The reality is that tech is hot in the Silicon Valley. In 2015, the software sector alone grabbed 41% of the market share in terms of capital investments in the US.
There’s a reason that Silicon Valley VCs are attracted to tech, and that’s intellectual property. If you can show that you’ve created IP and that you own it, they will sit up and listen. The issue with this is that we see European startups trying to position themselves as tech companies when really they’re not. Just because your company has an online interface doesn’t necessarily make you “tech.”
Again, business model and potential profitability are paramount. If one can make a good case for a non-tech idea business model, the right VCs will bite. A Silicon Valley VC will see through any bluff and bluster immediately.
Myth #4: Silicon Valley or bust.
There are two reasons why this is a fallacy:
First, it depends on the reason for expansion. If the goal of expansion is commercial rather than for funding, Silicon Valley may well be the wrong place - unless, of course, the business has customers there. Tech hubs exist all over the US, and other areas are flush with capital and opportunity for other types of companies. For example, New York and Chicago are bustling and growing VC cities, each with their individual nuances.
Second, a business needs to be able to consolidate its home market. Without recognising this fact, many businesses fail by prematurely putting the States in their sights and pulling the trigger. There are essential considerations to review before doing this:
- Is expansion feasible, or is the business already working at full capacity and therefore unable to cope with adding a big new geographic market?
- Are the right processes, workflows, resources and systems in place to carry on existing business while expanding overseas?
- Is this expansion going to disrupt existing performance and hurt customer experience or satisfaction?
Myth #5: It’s not that different.
Sure Silicon Roundabout and Silicon Allee may take their cues from it, but the reality and culture of Silicon Valley is unlike any European tech hub. And it’s an environment that not all European startups can adapt to.
Risk, innovation, a constant drive and desire for the new: all traits built into the fabric of Silicon Valley. It's a tight-knit network so it can take newcomers a while to fit in, and the competition for talent is intense - startups must compete against Google, Facebook and others for the best employees. Only the most promising companies will get the A-players.
Silicon Valley investors will take risks for the right business, and they will be loyal to their portfolio companies, but employees may not share this dedication. A recent report by the Wall Street Journal paints a picture of much more particular, switched on workforce.
As one designer explains: “I used to look at equity and think every company was going to be the next Facebook. Now when I see equity I’m like, ‘That’s nice but I want it in actual money.’” If the company trajectory is not sufficiently encouraging, the employees are the ones most likely to jump ship. This atmosphere can prove difficult for European companies to surmount.
Myth #6: Venture funds or die.
While certainly important, venture funds are just one piece of the puzzle. It’s important to look at the entire startup ecosystem in totality. In our experience, creating and solidifying a winning business model that meets the needs of a sustainable market makes the best primary focus.
The best time to raise VC funding is when a company already has this proven model and an upward trajectory. Then the founders have the upper hand and the VC is happy to get on board to help fuel growth. It's when companies feel unsure of their trajectory, or feel they need VC money to get traction, that they are more vulnerable. For European startups that fit that mould, Silicon Valley can still be the promised land it appears.