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Is now the time for European entrepreneurialism?

European entrepreneurial spirit has started showing some positive signs over recent years spurred mainly by the late nineties' boom. But now the party is over, has the region been left with a pool of talented and experienced entrepreneurs and an infrastructure in which they can thrive?

‘The essence of a nation's entrepreneurial spirit is exemplified by the willingness of its new generations to excel, to win, and to improve. These are human traits that have motivated us since the beginning of time and that drove us out of the caves all those thousands of years ago.' Such is the view of Max Burger-Calderon, general partner at Apax Partners and former-chairman of the European Private Equity and Venture Capital Association (EVCA).

The trouble is, some nations seem to have more of this spirit than others, and none seems more driven than the US. It has been deeply embedded in US consciousness and tradition since the days when the pioneers risked everything for the chance of a better life.

That entrepreneurialism took on an added sense of fervour in the 1990s. A handful of high profile success stories encouraged disillusioned would-be millionaires from the comparative safety of major corporations in their droves, to set up on their own. And the venture capital market expanded at an incredible pace in an attempt to sustain this escalating appetite for risk. But as we all know, the illusion of fast and easy dot com wealth could not be sustained forever. As the market reached truly stratospheric heights in early 2000, the ground gave way beneath its feet leaving many licking their wounds.

But what of Europe? Generally more risk-averse than their US counterparts when it comes to wealth-creation, Europeans' response to unfolding events in the late 1990s and early 2000 was typically less pronounced than in America. Europe undoubtedly experienced the highs and lows of a global high-tech boom and bust but the volatility was on a smaller scale.

The result is that while the US venture capital industry is busy fire-fighting its troubled portfolios, Europe now has a chance to close the historical gap between US and European entrepreneurialism.

Creating the right environment
The European venture bubble was considerably shorter and less pronounced that that experienced in the US, but its impact should not be underestimated.

Just as in the US, unprecedented numbers of individuals were attracted to entrepreneurialism and the availability of venture funding soared. We've all seen the statistics but they are worth repeating. In 1997 European venture firms invested just E7.1bn in seed-stage and start-up companies. In 2000 the amount invested leapt to E66.6bn, according to figures from the EVCA.

This high-profile rise of entrepreneurial spirit was impossible to ignore. Europe's governments, many of which had been slow to recognise the growth potential of entrepreneurial economies, started taking action.

The most visible form of this action were the measures agreed at the Lisbon Economic Summit, held at the peak of dot com euphoria. The Risk Capital Action Plan and Financial Services Action Plan lay at the heart of the European Union's ideological and legislative reform. The reforms were structured to stimulate the creation of new companies and included measures to ease access for entrepreneurs to funding, to create tax regimes conducive to entrepreneurial activity, to soften bankruptcy law and to provide positive education for the entrepreneurs of the future.

‘In essence what is at stake is the creation of a new entrepreneurial culture in Europe,' the Lisbon Economic Council declared. ‘The real political challenge is to provide the tools enabling technologies and financial instruments for a new generation of European entrepreneurs to start-up and succeed.'

Individual national governments also made enthusiastic strides to promote and support entrepreneurship within their individual member states.

The UK government, for example, instigated the Myners report into institutional investments with the aim of investigating why UK investors were less keen on private equity than their US counterparts. It also reduced capital gains tax on business assets and improved the tax regime on option payments.

The French government liberalised the operating environment for venture capitalists and introduced measures to speed up business creation. And the German government undertook one of the most radical overhauls of a European taxation system in recent history as it attempted to disentangle the regulatory and fiscal barriers to entrepreneurial activity.

Europe, it seemed was unstoppable. ‘The European bubble only lasted from mid-1999 to mid-2000 but there was so much venture capital circulating that everybody wanted a piece of the action,' says Jacques Lilli of the European Investment Fund. ‘There was a feeling that economically, socially, and with the Lisbon process, even politically, that Europe was finally catching up with the US.'

But the Lisbon Council's laudable aims of transforming ‘the European Union into the most dynamic and knowledge based economy in the world' were stopped short by the crash of 2000.

The legacy
The music may have stopped, but Europe's boom (and bust) could stand it in good stead for creating a more dynamic and entrepreneurial economy over the longer term. There can be little doubt that much of the key legislation brought into effect during the heady days of the venture boom has had a positive effect on European entrepreneurialism. But possibly more importantly, the experience of success and (in many cases) failure during this period could well form the starting block for a remoulding of Europe's attitudes towards entrepreneurialism.

As fair weather entrepreneurs proved happy to return to regular employment, Europe has been left with a dedicated, experienced and talented core of entrepreneurial talent.

‘In reality despite the political and media hype, Europe's year-long bubble didn't really change the face of European entrepreneurialism too much' admits Lilli. ‘But the crash certainly did have an impact. Europe has been left with a legacy of true entrepreneurs, more experienced and better able to succeed.' Benchmark Capital's George Coelho agrees: ‘People were galvanised by what happened in the late nineties and early 2000 despite the crash. In fact European entrepreneurs have become stronger because of the crash. They have been left better equipped and more experienced by what happened.'

Hermann Hauser of early-stage investors Amadeus Capital Partners is also keen to stress the more positive aspects of the boom and bust cycle we have just been through. He describes Europe as a ‘compost heap' of experience. ‘Companies have been built up and sometimes failed. What is left for entrepreneurs is a residue of experience.'

But that doesn't mean that Europe is awash with people desperate to set up their own businesses. In fact, Ward explains, the number of European would-be entrepreneurs coming out of major corporations to start-up businesses has reduced considerably since the bubble burst. But this is not necessarily a bad thing. ‘You need a special set of skills and aspirations to be a successful entrepreneur and big corporate players don't necessarily have them,' says Ward. ‘You have to have a belief in technology and an overwhelming desire to build a business.'

Instead, Europe's pool of entrepreneurial talent has been steadily swelling over the last three years as a result of the migration of European entrepreneurs returning from America. Many entrepreneurs were lured across the Atlantic in the nineties, enticed by extravagant funding, the sophisticated infrastructure supporting America's entrepreneurial clusters and the social and economic value placed on entrepreneurship.

‘Many European entrepreneurs went to Silicon Valley because it was easy to get funding and the technology curve was growing more quickly,' says Ward. ‘They learnt their trade, were successful in large part because of the time in which they were operating, and now they are returning home armed with their experiences.'

Homecoming
The reason for this migration back is two-fold. Europeans are being drawn home partly because the prospect for success is rather higher than it used to be in their own cultural environment. But it is also partly because they are being pushed out by the closing ranks of a troubled US venture market.

‘Many entrepreneurs are returning to Europe for personal reasons. They went out to America in their early twenties, without ties and full of ambition. They are now married with children and want to return to their cultural roots,' says Coelho. ‘But ultimately they are entrepreneurs and business men and they would not have come back if they hadn't thought they could start successful businesses and make money.'

In addition to personal and cultural issues, Coelho cites the improved quality of management teams and the impressive pool of low cost and unique talent in Europe as powerful forces behind the migratory movement. He believes that the venture boom and subsequent bust have allowed a viable European entrepreneurial infrastructure to begin to emerge. This formative infrastructure has enabled entrepreneurs to return to Europe, to create companies and - crucially - to make money.

Stan Boland, co-founder of Element 14 and Icera, one of Benchmark's portfolio companies, is one such returning entrepreneur. Boland went to America to raise funding for his first start-up in the late nineties because ‘that was where the money was at the time.' But when it came to attracting investment for his second endeavour in early 2001, he turned to the European venture industry.

‘This time around there was a lot more early-stage funding available in Europe than there previously had been,' Boland explains. ‘A lot was raised on the back of the boom and hadn't been spent so there was dry powder around. US investors were too busy managing their damaged portfolios and so funding became a lot harder to come by over there.'

Lilli takes this point further. He believes that not only is there now less capital available for early-stage investment in the US, but that Europeans are being actively excluded. ‘Now the US is experiencing hard times and there is less venture capital money around, the networks are closing in,' he says. ‘Americans are sticking together and the Europeans are being pushed out.'

Given the choice
Increased globalisation has allowed greater flexibility within the entrepreneurial process and has aided the return of many European entrepreneurs. Significantly, Boland does not believe that there is any real culture shock involved for entrepreneurs returning to Europe. ‘In fact, those who have returned have been amazed at how far Europe has come. It is unrecognisable from five years ago,' he says. ‘Everyone is talking the same language. Funding structures are the same, deals are prepared on an exact comparative basis, we are thinking globally. Now, an entrepreneur can enjoy a European lifestyle at the same time as the advantages of a globally minded entrepreneurial environment. We have been given the choice.'

Boland even believes that, if anything, the availability of funding is currently greater for entrepreneurs in Europe than in the US. ‘European investors, perhaps slightly naively, are more willing to provide funding than their US counterparts,' he says. ‘Entrepreneurs are, in fact, being given more encouragement in Europe. The US is suffering major lows because its highs were that much higher. Europe has come out of the crash in a significantly better state.'

Entrepreneurs returning from the US are armed with company building experience and an appreciative understanding of America's mature venture industry. They are returning, therefore, with advice and practical assistance for the next generation of European entrepreneurs. Anecdotal evidence suggests that they are increasingly providing angel investment and sitting on boards of young companies. And, importantly, they are providing the success stories essential to encouraging a truly entrepreneurial culture.

It seems, therefore, that the US has provided the perfect training ground for Europe's budding entrepreneurs. ‘This was never a brain drain,' says Lilli. ‘The move was only temporary. Now the entrepreneurs are returning, enriched by their experiences. It is a positive flow for Europe.'

Still lagging behind
Yet despite these positive aspects of the boom and bust in Europe, European entrepreneurialism is still lagging behind its US counterpart. Even with a growing pool of increasingly qualified and experienced entrepreneurs there is still a long way to go. ‘Despite all the improvement it is still not as easy to start a business in Europe as in the US,' Coelho admits. ‘The US still has most of the advantages.'

Among the most frequently cited advantages for entrepreneurs operating in the US is its comparatively well developed and professional entrepreneurial infrastructure. Take Boland's experience for example. He chose to register both his start-up companies in the US despite receiving European venture funding on the second occasion and despite basing his research and development and management teams in Europe. ‘There just aren't as many lawyers specialising in this area in Europe,' he explains. ‘In the same way there aren't as many debt providers or entrepreneurial networks. European infrastructure just isn't as sophisticated.'

Add to that a lack of well funded, commercially minded universities, and a lack of formal entrepreneurial education, says Coelho. He goes on to say that despite huge improvements, European tax regimes and option schemes, with the exception of the UK, are still not as conducive to entrepreneurial activity as those in the US.

The administrative procedures surrounding company creation also remain far more complex in Europe. Comparatively inflexible labour laws, particularly in France and Germany, and archaic legal requirements make business building a more protracted and costly pursuit. ‘In the states you can register a business in a day,' says Lilli. ‘Things are improving here all the time but you are still talking about a couple of weeks.'

The venture capital industry is also blamed, by some, for the gap that exists between European and US entrepreneurialism. Peter Spark, founder of Ecsponent, a start-up company focused on environmental information flow, believes that there is a profound lack of business competence in the European venture capital industry. In particular, both Spark and Lilli believe that it is essential that venture firms incorporate a greater density of entrepreneurial experience into their teams. ‘European venture capitalists tend to view their role as risk manager rather than business creator and this just doesn't work,' Spark says. ‘European venture capitalists are the wrong people in the wrong jobs. They are inappropriately skilled.'

Cultural differences
But perhaps the most insurmountable obstacle impeding the future development of European entrepreneurialism is cultural. Europeans generally see insolvency and bankruptcy as failure. Draconian bankruptcy laws that treat failed entrepreneurship as tantamount to crime don't help this perception. Many see the pursuit of wealth creation as something rather vulgar. The US has a totally different view.

In the US, a failed business is not necessarily considered cause for shame. It is viewed as a valuable step on the entrepreneurial learning curve. ‘Europe has a stigma of failure,' says Ward. ‘Entrepreneurs consider it as a bad reflection on themselves and to some extent European investors agree.' In the US, entrepreneurialism is highly valued and entrepreneurs are rewarded with social respect and economic returns. As a result, a culture has developed in which entrepreneurs return again and again to start up new businesses. Ultimately they become angel investors, imparting capital and knowledge to the next generation, constantly driven by the prospect of financial reward.

The future
So will Europe ever be able to catch up? And does it even want to? Governments clearly want it to, as evidenced by the aims stated at the Lisbon Summit. Indeed, Europe has made significant steps towards removing the structural and legislative barriers to entrepreneurial development over the last decade. And there is no shortage of talent in the region to help it catch up. ‘There is no doubt that Europe has the organic material for success,' says Ward. ‘Europe has smart people and smart technology. The challenge is to get them on a path to growth and development so that eventually there will be as many big successful companies here as in the US.'

But these developments will always be limited and this talent stunted while cultural barriers to progress continue to exist. In fact the 2002 Global Entrepreneurship Monitor, an annual assessment of regional entrepreneurial activity, concludes that in Europe, ‘entrepreneurship appears to happen despite our culture rather than because of it'. If European entrepreneurialism is ever to catch up with America, these underlying cultural issues must be addressed. ‘It is fundamentally a cultural issue,' Spark says. ‘It will take decades for Europe to catch up with America, if it ever can.'

Future policy effort needs to be directed at Europe's underlying fear of failure, at encouraging serial entrepreneurialism, and educating our next generation of entrepreneurs. These are not changes that will happen overnight. Progress will inevitably be slow. But primary emphasis needs to be placed on fostering a stable entrepreneurial culture in the European Union if its entrepreneurialism is ever to catch up with its US counterpart.

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