What Do Success and Failure Mean for a European Startup Without a High Valuation? | Maybe Europe Has the Answer ⑦

European startups have long gone their own way, growing up under a different model of survival.

Entrepreneurs gather here too, but the street where the Amsterdam accelerator Rockstart sits has none of the bustle of "Startup Street" in Beijing's Zhongguancun.

Apart from the black wooden plaque on the door reading Rockstart, and the young people who stand outside chatting now and then, this is an ordinary old building on an Amsterdam canal. It may hold one of the densest concentrations of entrepreneurs in the old town, yet tourists walking past barely notice it — the surrounding streets are full of select shops and boutiques, one of the sights every visitor to the city center ends up browsing.

The discreet building fits the fact that Europe's startup market does not catch the eye.

According to a CB Insights report, 338 European startups raised $3.5 billion between them in the first quarter of this year — fewer than a third as many companies as in North America, and a fifth of North America's total funding.

"Entrepreneurship isn't really a Dutch tradition." Five years ago, when Don Ritzen was putting Rockstart together in Amsterdam, the Dutch startup scene was loose and scattered. "Back then a few people had started investing in friends, backing them in their ventures, but nobody was organizing any of it."

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The other fact is that European startups grow on their own terms.

Rockstart's building holds plenty of small companies. A few have raised Series B rounds of several million dollars and rent an office to themselves; the great majority are teams that have graduated from the accelerator or are still in it, sharing a few hundred square meters with several other teams.

One day in late May, 30 investors arrived at Rockstart's banquet hall for an investor dinner. It is the most lavish room in the building and the only one left as it was; every other room has been turned into startup offices and shared desks.

Most of the guests knew the place well. Several times a year they push open a black wooden door on Herengracht, walk past the people working and arguing over laptops in the ground-floor hall, take the spiral staircase to the second floor and arrive in this centuries-old banquet hall — by now a well-known venue for startup events in the city.

Most of these investors made their money in the 1990s or the early 2000s. Five years ago, though, Dutch entrepreneurs had no idea where to find people who had experience, capital and a willingness to spend their own time and money on the next generation of companies. Rockstart has since built a database of 400 investors, most of them local; some come from large institutions, more invest as individuals.

Like investors anywhere, these old-school businessmen quickly learned to talk about current operating numbers, the fine print of international expansion plans, and models of order volume and profitability. Along with governments and big corporations, they changed the mood of European entrepreneurship over the past five years.

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Some traditions have held, all the same. Small European companies still struggle to win high valuations, and that shapes how European startups think about success and failure.

The data analytics company Spoke Intelligence and the business site VentureBeat once produced a report on "unicorns", covering 229 startups worldwide valued above $1 billion. By the time they reached that valuation, these companies had raised $95 million on average, and it had taken them six years from founding. Nearly half of those 200-plus unicorns sit in California; Europe has 13.

Smaller cheques mean, to some degree, slower growth. In the first half of this year, a report from the Belgian nonprofit Siris showed that more than 1,100 European startups raised over $1 million in 2016.

It takes these companies an average of four years from founding to a Series A. The startups that closed Series B rounds this year were founded earlier still — most in 2010 or before.

A conservative mood is mostly responsible. Compared with Silicon Valley in particular, European founders and investors alike are afraid of failure, and that fear may cost them opportunities in a global startup boom.

"Why is Germany no dreamland for startups? Because in America people are more willing to take risks. To them failure counts for nothing — you simply start the next company," Ralph Wiegmann, CEO of the iF Design Award, told QDaily. "Here, if your startup fails, you're finished. Nobody will believe in you again."

Starting a company means taking risks, and neither European society nor European investors tolerate risk especially well. The shame attached to failure is far heavier in Europe than in the United States. Vaclav Muchna, founder of the Czech enterprise software company Y Soft, wrote in an essay on why Europe has produced no Silicon Valley: "In many European countries failure is still a disgrace. If your company collapses, you may not even be allowed to serve as a company's legal representative for years."

European bankruptcy law is far more punitive too. In America, bankruptcy is just one stage many successful entrepreneurs pass through on their way up.

Things go more easily only if you are lucky enough to start out in Europe with some capital already behind you. Daan Weddepohl, founder of the borrowing community Peerby, had sold two software companies before he began, and used that money to think about what to build next. Honeypot, the programmer recruitment platform we have written about before, was all but incubated inside AppLift, the previous company of its founder, Kaye Taner.

That gives them a different growth path: from the first day, a European startup has to think about cutting costs, making money, breaking even. The 3D-printing platform 3D Hubs graduated from Rockstart's accelerator three years ago and recently closed a $7 million Series B, two years after its Series A. "After every round I tell the team to treat it as the company's last," says founder Brian Garret.

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The young founders who met this room of self-made older investors at the seven o'clock dinner kept all of that in mind.

You could tell founders from investors without reading the badges on their chests. The investors wore suits and were older; the founders mostly wore T-shirts or open shirts and went looking for investors to talk to and pitch. Many of the founders came from Brazil and India, while most of the guests were Dutch.

Earlier, ten teams had each taken five or six minutes to present a product or a business model.

"Demo Day is 42 days away, and these teams are at the stage of practicing how to acquire users," Don Ritzen, Rockstart's co-founder, said in a short opening speech. The teams all belong to Rockstart's "mobile internet" program; picked out of more than 300 applicants, they came to Amsterdam for 150 days of "acceleration."

As at other well-known accelerators, every team that gets in receives a full training program — sharpening the business model, planning international expansion — plus a grant of 20,000 euros; in exchange, Rockstart takes 8% of the equity. Over five months at Rockstart, the teams attend several dinners like this one, mainly to build ties with potential customers or investors.

That is what European startups most need to work on, in a market where money is scarce and cautious to begin with.

"Founders have to go through this. An investor rarely decides to back you after one meeting; what matters before that is the relationship." One purpose of Rockstart's program is to help teams build a direct, mentor-like relationship with investors, instead of turning up with a slide deck only when they need money. Ritzen believes accelerators like Rockstart matter especially in Europe.

Outside the banquet hall, half of this five-story building houses three accelerator programs; the other half is a co-working space rented to companies that have graduated. A day at Rockstart starts at breakfast: some people drop into a seat in the ground-floor canteen and talk over where their project stands; others take a sandwich in one hand and a coffee in the other and hurry to a screen. The common areas stay busy past eight in the evening, and on weekends, when most Europeans do not work, a few people are still in the offices here.

Photographs from past Rockstart events hang on the walls of the hall. Many of the teams in them have left the building for offices in Amsterdam's newer districts and a new stage of growth. Founder Oscar Kneppers originally reckoned that if 20% of the projects succeeded, the goal would be met. By Ritzen's account, 85% of Rockstart's companies survive.

Zazzy, a 3D jewelry design platform, graduated from the accelerator last year and rented a small room on the third floor: three desks, and a table against the wall packed tight with 3D printers and the goods they had printed.

A little after six, founder Gret Jan Spriensma was preparing to ship a batch of precious-metal printing material to suppliers on the platform, and with that to end his day. It is also the liveliest hour in Rockstart's ground-floor hall: formally dressed guests arriving one after another and crossing the hall toward the banquet room; teams at the round tables holding who knows which meeting of the day; a few people working alone off to one side, headphones on, facing a screen.

Like Spriensma, founders in the building tend to put the last meeting of the day in the hall — less formal, less tense. They are ready to show the confident side of themselves, and perhaps things really are going well. At the end of the interview he pointed at the photographs on the wall: "Look, these people were in the same place we are. They made it, so can we."

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"Success" has no single definition among European startups.

As with startups everywhere, scale is one measure. More precisely: for most companies starting from the European market, going international is not optional. They tend to plan for foreign markets from the day they are founded.

Peerby graduated from Rockstart four years ago and drew plenty of Dutch press the moment it launched — even though it was then testing its "borrow from your neighbors" model in a single community of about 3,000 people in a town near Amsterdam.

Belgium was the first foreign market Peerby entered: it shares a border, and part of its population speaks Dutch. But for Weddepohl the market that matters most is still the United States. Like most European founders, he believes Europe is fragmented while America is one large unified market, where a single shared language alone makes expansion far easier. "Everything in America is five to ten times bigger than here, and it is easier to tell a success story there," as Ritzen puts it.

Peerby's biggest goal this year is to land in its first American city. The example in front of them is the music streaming platform Spotify. Jonathan Forster, one of Spotify's early employees, told the Financial Times: "Sweden is a small country, the industry here is smaller in scale, and you can often get something done faster." Today the company's subscribers come from 60 countries. At the end of 2015 Spotify had 89 million active users and a valuation of $8.5 billion, and its biggest market was the United States, not Europe.

When it picks companies to take in, Rockstart favors those that can go international, because the Netherlands has only a few million people — plainly too small a market for a successful internet company.

"After a year or two they start doing international business," Ritzen says. What they are looking for is the next Booking.com. Founded in 1996, Booking.com is one of the Netherlands' most successful startups and one of the world's most-used booking sites, serving customers in 41 languages.

Another way into the global supply chain is to sell enterprise services to the most global corporations. Enterprise services — yes, this is the new opening for European tech startups.

Siris' report shows that, unlike Silicon Valley with its consumer-facing ventures, more than half of European startups, 55%, work in enterprise services. Adyen, for instance, supplies payment solutions to Booking.com, Netflix and KLM Royal Dutch Airlines.

In late May, Amsterdam hosted Startup Fest Europe. CEOs of tech giants including Apple, Google and LinkedIn, well-known Silicon Valley investment firms and the tech press all came to the city, for more than 70 events in a week.

Besides the roadshows and panel sessions, the most consequential thing for startups may have been the week's 53 Launchpad sessions. StartupAmsterdam runs them to introduce startups to large Dutch companies — "and to make the big companies see that these startups don't have to be their competitors; the big company is their customer, not their rival." This was the third Launchpad, and the largest yet.

Growing on the back of large corporations, these startups may in the end sell themselves for a good price.

In 2014, Google paid $400 million for the artificial intelligence company DeepMind, now Google's largest research center in Europe. Two months ago, Amazon's cloud computing platform announced it was buying the Dutch startup Cloud9, which provides integrated development environments to users of cloud platforms; Salesforce and Soundcloud are both customers.

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People no longer believe that an IPO is the best proof a startup has succeeded. Going public settles nothing for good: plenty of companies have ridden venture money to valuations in the tens of billions of dollars and still failed to build a sizable, stable source of revenue. And of the American tech companies that listed in the past few years, almost all now trade below their offering price.

In Europe the view is stronger still.

Over the past five years, not many European tech startups have gone public. King, Criteo and Zendesk listed in the United States; JustEat, Scout24, Zalando, Rocket Internet and Zoopla listed in Europe itself.

Hi-Tec, a Dutch outdoor brand founded in 1974, listed in London in 1988; 12 years later, founder Frank van Wezel took the whole company private again. Ed van Wezel, Hi-Tec's current CEO, told QDaily that staying private was a way to keep open the possibility of investing in the company for the long term.

Meanwhile, more startups are choosing to sell.

Beyond avoiding the swings of a public valuation, the money from an acquisition can be substantial: Microsoft paid $8.5 billion for Skype and $2.5 billion for Mojang, and Tencent paid $8.6 billion for the mobile game company Supercell.

After a sale, some founders join the acquiring team while others start again — Peerby's Daan Weddepohl and Zazzy's Gret Jan Spriensma both used the proceeds of their previous company as the seed money for the one they run now.

In Peerby's four years, Daan Weddepohl has moved the team's office more than ten times and come through the unsettled early phase. Now Peerby is heading into an American market friendlier to startups, with more users and more capital available — and also with higher demands for scaling fast, and the need to keep growing users against a crowd of competitors.

Weddepohl knows how hard that will be for a European company used to steady, slow growth. "It really means founding a whole new startup," he says of the American market ahead. "We have to create a middle ground between two different markets, connecting the two companies and the two markets."

Cover image from VisualHunt