You are here

Europe's startups find US tough to crack in quest for cash

Monday, January 19, 2015 - 22:51

[LONDON] After startups from France's Vente-Privee.com SA to the UK's Hailo Network Ltd retreated from the US last year, European entrepreneurs are learning just how hard crossing the Atlantic can be.

US presence gives startups access to a dramatically larger pool of investors compared with Europe, so the risk is worth it even if it means facing tougher competition, said Didier Rappaport, the French founder of mobile-dating app Happn.

"There's a rule in our industry: You either make it in two or three years, or you'll never make it," said Mr Rappaport, whose company expanded to New York, Chicago and Los Angeles last year. "Investors are coming to me because the app is in New York and it works there."

Success in the US can make or break a startup's future as venture funding in America soars and Europe's economy sputters. Startups in the US raised seven times more money than their European counterparts in 2013, and the gap may have widened last year as venture financing in America jumped 61 per cent to US$48.3 billion - the biggest surge of funds since the dot-com bubble.

The challenge for a European startup in the US is that rivals are often more established and better-funded. Luxury flash-sale website Vente-Privee and ride-hailing service Hailo exited amid competition from the likes of Amazon.com Inc and Uber Technologies Inc. Mr Rappaport's Happn will face Tinder, OKCupid, Grindr, Match.com, How About We, and Plenty of Fish.

Europe's had trouble replicating the Silicon Valley ecosystem - the mashup of technology-oriented universities, big businesses, venture investors and experienced entrepreneurs that's made it a factory for promising new companies.

As startups in the US received US$30 billion in funding in 2013, young European companies got about US$4 billion. That was up 5 per cent from the year before and went to fund more than 3,000 companies, according to the latest numbers available from the European Venture Capital Association.

Compare that to the more than US$2 billion that San Francisco-based Uber raised by itself last year.

The US "is a more mature market," said Ben McDonald, a partner at KPMG in London who helps oversee the company's services for startups. "There's probably more experience of failure and learning from mistakes and being better prepared the second time around."

Europe can't be blamed for lack of trying. Governments all over the continent have tried to boost innovation and attract technology companies and talent. Berlin has the Silicon Allee, London the Silicon Roundabout, and Paris the Silicon Sentier.

On Sunday, UK's Ed Vaizey and France's Axelle Lemaire, ministers in charge of the countries' digital industries, spoke at the annual Digital Life Design event in Munich to convince entrepreneurs why Europe is the best place to start a company. Technology executives and investors were also among attendees discussing ways to support the region's startups.

"Once failed, always failed - that's the mentality here in Europe," Deutsche Telekom AG Chief Executive Officer Timotheus Hoettges said at the event. "We need investors to be more like those in the Valley. You can fail and get back on your feet."

Not all startups attempt to conquer the US, said Philippe Botteri, a London-based partner at venture-capital firm Accel Partners. Paris-based BlaBlaCar, a ride-sharing application that Accel invested in, found that Asia was a better fit for international expansion, he said. Distribution platforms such as app stores help companies sell globally despite their physical location, he said.

"Connectivity means geography matters less," Mr Botteri said on Monday in an interview at DLD. "If in the past innovation was coming from Silicon Valley, now it's everywhere."

Still, the networks that California provides mean that not only are US companies more likely to attract investment, there are similarly more initial public offerings and takeovers for startup founders looking for an exit.

It's no surprise, then, that competition in US is fierce. London-based Hailo said in October that it planned to discontinue its operations in North America because costs to market its service were "astronomical" and made "profitability for any one player almost impossible."

Tom Barr has since resigned as Hailo's chief, ceding the role to Andrew Pinnington, and marking the third CEO change since October. Hailo representatives didn't respond to a request for comment on Monday.

Vente-Privee said in October that the US market demanded "an exponential amount of time, resources and financial investment" to achieve "sufficient growth." The company said it's looking for a new business model in the US and would focus on its European business in the mean time. A Vente-Privee representative declined to comment beyond the statement.

"Making it isn't something you do at a country or region level," said Mr Rappaport, who is also co-founder of video site DailyMotion SA. "You have to go worldwide."

BLOOMBERG

Powered by GET.comGetCom