I recently had the opportunity to join 500 Startups’ Geeks on a Plane tour of Eastern Europe. Over the course of 12 days we hit four cities, met a few heavy hitters and countless up-and-comers on the entrepreneurial scene, had outstanding food, and met a sitting President. This was easily the best business trip I’ve ever taken, and it was a great personal adventure as well. I spoke with someone a few days ago who asked me what the most valuable lessons were that I learned on the trip. This is my response to him:
1. Attitude Silicon Valley entrepreneurs are known for their optimism. Even if they’re not happy, or are having a difficult time, they maintain the attitude that they can find a way to overcome the immediate hardships and make something truly great. We find ways over, under, or around problems. If we fail, that’s ok. We usually end up trying again, either working for someone else’s startup, or starting a new one of our own. This attitude was not as prevalent in Eastern Europe. Admittedly, I think it’s more difficult to do a startup in Europe than it is in Silicon Valley, but that just makes it more important to have the right attitude. Several people I met seemed quite happy to tell me how hard everything was. Every time I suggested a way around a problem I was told it wouldn’t work because “the problem here is…”
2. CommunityIn Silicon Valley we have the benefit of having a vast and active community of entrepreneurs. I think this goes a long way toward contributing to the attitude I mentioned. We feel like we can do it because we’ve seen others do it and we get to talk to them on a regular basis, bump into them at the coffee shop, or see them speak at regular events. We have a support group of other crazy people to enable us in our dangerous habit. There are nascent startup communities in Eastern Europe and there are some success stories too, but I think that higher density of both startups and networking events would be really helpful in making people see entrepreneurship as a viable career option and develop the understanding that failure is necessary and not necessarily sad.
3. Government Several governments in Europe are actively promoting entrepreneurship (most notably Croatia), and many are investing directly in companies through their own seed funds. Small businesses drive job growth, and reinforce the desirability of higher education. Educated workforces bring higher margin returns. Startups not only hire well educated people, but they give those people valuable experience that will make them more effective as they progress in their careers. Governments love that. Good laws can also help the money flow, and even money that goes into failed ventures creates jobs, education (experience), and tax revenue. What’s not to like about that?
4. Funding From what I saw, the state of Angel and Venture funding in Europe lags considerably behind the US. Factors include undervaluing the founder’s stake in the company, a lack of local success stories (holding valuations down), laws regarding certain financial instruments (debt financing via convertible note is almost unheard of, and this is the primary mode of angel funding in the US), inexperience on the part of investors, and lack of an exit path (no Merger/Acquisition culture, difficult to IPO, etc). These factors all work together to make it difficult to raise appropriate amounts of capital at a reasonable cost to the founders. I heard many stories of founders giving away as much as 40% of their company for $100,000 or less in their angel round. This speaks to the inexperience of investors and founders alike. If you give away such a significant portion of your company to an angel, it leaves you in a terrible position to go and raise a Series A. In addition to that, using equity financing in an Angel round sets a valuation for your company at a time when it’s simply too early to determine any potential valuation. That’s why we use convertible debt in the US. It allows the valuation to be set by the first equity financed round (which will happen at a much later date). The Angel investors get a reasonable return for their money without hamstringing the founders.
I also learned that I still don’t like going out and getting hammered, not all hotel breakfast buffets are equal, and I love going for walks alone in foreign cities. In 12 days I saw places I had never thought I’d see. I toured the Kremlin, met furniture designers in Estonia, rode in a million dollar electric car prototype, met the President of Croatia, and talked to cloners in Berlin who could put the Kaminoans to shame. I will never forget it and I can’t wait to go again.