The 2015 edition of the pan-European startup contest Idea Challenge sees an increase in variety and internationality. The series of events re…
Bill Reichert is cofounder of Silicon Valley based of Garage Technology Ventures
Is the CEE startup scene well known in Silicon Valley?
Those in Silicon Valley who know something about the central European scene know mainly about Berlin. Britain, Ireland and the Nordic countries have extremely aggressive initiatives in the Valley to promote their ventures, but not much is known there about the rest of Europe. Moscow and Ukraine, both incredible stories, are treated separately from Europe in the Valley mentality. But I would say that central European countries have not done a great job of celebrating their innovation ecosystems in the Valley.
Should these countries set up a physical presence in the Valley to promote local innovators?
The number one way a region gets visibility in the Valley is by turning out successful companies. Finland originally became known because of Nokia and, later on, Rovio [Angry Birds]; Sweden because of Ericsson, Ikea, MySQL and now Spotify; Estonia by Skype. It's the companies that cause a region to become well known, but it's true that corporate or government led initiatives have certainly helped the Nordics, British and Irish.
Are there any specific CEE entrepreneurs who are well known in Silicon Valley?
I don't know any founders by name but I recognise some companies by name. Last night, someone mentioned a few regional companies that were familiar names to me, but I had no idea that they originated here!
What are American investors looking for in a European startup or founder?
Silicon Valley tends to paint Europe with a broad brush, in a negative sense. There is a huge bias against the European infrastructure, in terms of taxes, employment and bankruptcy laws– these issues that we don't know so much about, but we generally hear only bad things about [laughs]. To this day, we're uncomfortable investing outside of the USA, even in the UK, because the various legal structures require so much effort to learn. Our current fund allows us to invest only in US corporations.
The US investor meeting the Austrian startup scene in Vienna; Photo credit: Bill Reichert
So why are you here in Europe?
Garage is looking to partner with European investors who will help us identify early-stage companies that are already planning to come to the US. Silicon Valley has become the world's master at sucking the talent from all corners of the globe. We want the brilliant entrepreneurs to come over and use Silicon Valley as a launchpad for going global. Sure, it's OK to keep your development team back home (as long as it's stable and cheap!).
That's just the “arrogant American” perspective – we're fortunate to have the luxury of having the easiest large market to go after. And Silicon Valley already has all the infrastructure you need to land and become a global success.
So you're not looking for direct investment opportunities on your trip here?
Unlike venture capital funds like ours, there are private equity investors in the US, with more resources, who do invest directly in later-stage European entities. There may be some companies here that have the potential for good investments even without going to the US. Maybe they can't be competitive there – perhaps they're the European version of an existing US product. That's perfectly fine, but most other companies want to start locally, get validation here and then figure out how to go global.
There are two ways to hit the ground running in the US. [...] Either you've been able to attract local investors to help you go global, or if you've been able to generate a decent revenue stream.
Can European startups increase their chances of getting venture capital by establishing a subsidiary in the US?
Technically, the parent company has to be established in the US and the subsidiary must be in Europe. In order to get investment, the US entity has to own the corporate assets, including the intellectual property. There's a whole legal practice that's been set up to do this called “flipping”. This term is also used when a startup exits to Google, for example. But in terms of corporate structures, flipping means setting up a foreign company with their headquarters in the US.
Would a company that has already been validated in Europe have to start from scratch when it moves over to the US?
There are two ways to hit the ground running in the US. If you've got validation here in Europe, either you've been able to attract local investors to help you go global, or if you've been able to generate a decent revenue stream. So you wouldn't necessarily be starting from scratch, because you already have operations, revenues and some core investment capital. This gives you a lot more credibility when you hit the ground in Silicon Valley than just a couple of guys coming over with their big idea.
But what about having to build an entirely new network in the US?
That's true. You don't have your local university connections, your local support network. It's also really expensive to live in the Valley – back home you can at least crash with your parents! We encourage a lot of foreign entrepreneurs to stay back home until they get the validation, without which you are definitely starting from scratch in the Valley. With enough momentum, it's easy to plug into the Valley's infrastructure.
Bill Reichelt enjoying his trip through Europe. Photo credit: Bill Reichelt
What are the main reasons a European startup should consider “flipping?”
Most people think of the Valley as the source of all capital, but that's generally not the best first reason to come. The other two things you get there are talent and customers. This is the dirty little secret about Silicon Valley: it's perhaps the best place on the planet to test out almost any technology company. The highest value there is that almost every potential customer – certainly in an enterprise sense but to some extent in a consumer sense – is already there. There's a tremendous early-adopter community in almost every sector. Pretty much every significant technology company in the world has an office there. If you want to talk to Samsung, Sony, Panasonic, Mitsubishi, Foxconn, Ericsson, Alcatel, or Nokia (actually, no one wants to talk with them anymore), it's easier to do so in the Valley than back in their home countries. In one evening, you can go to three different events where you can meet almost everybody you would ever need to meet.
Then there's the abundance of talent. For most European entrepreneurs, there aren't that many local people who've had previous experience with building teams, going through crises, getting product to market, going global. There are so many people in the Valley who have done this, in so many different industries.
I would argue that from a business perspective, the Valley is the most cosmopolitan place on the planet, if one defines “cosmopolitan” as people being comfortable at an international level. Wall Street may be the world's financial hub, but in terms of business operations, product development and marketing, it's hard to imagine a more cosmopolitan place than the Valley to do business. People in London may beg to differ, though.
The cautionary tale is that it doesn't matter how well you've been doing so far – the Valley is the most competitive place on earth.
For many central European tech entrepreneurs, going to Silicon Valley is like a wet dream. Are they naïve to think that it's a sure thing?
The cautionary tale is that it doesn't matter how well you've been doing so far – the Valley is the most competitive place on earth. For everyone who thinks they've got a brand new breakthrough idea, there are ten other people who've already pitched it.
What are the most annoying things about your job as an investor?
While it's certainly not unique to foreign entrepreneurs, anyone who can't tell me clearly what is compelling about what they are doing – they just drive me nuts! I mean, these people are trying to build a career out of their dream, yet they can't articulate what they're doing to anyone other than themselves or their buddy. To us investors, you may be the most brilliant scientist, engineer or creative individual, but if you can't convince others that what you have is brilliant, you don't have a business. Then there's that team that has come up with the 101st social mobile app to help users find a local bar...
Or who are making yet another coupon app!
Right! There are a hundred others with basically the same product, but these entrepreneurs are convinced that theirs is unique because it's blue instead of green. But to be fair, even we investors are guilty of this to some extent. Once we take a company in our portfolio, we can become blind to its weaknesses. We were the first investors in Pandora, which was an 11-year-long “overnight” success. For the longest time, people asked us why we invested in a music startup – as if the world needed another one. When we present our companies, we're like parents sharing photos of their children. We ask people “Isn't she the most beautiful baby in the whole world?” but most people will see just another average infant.
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