Why Italy, Spain, France, and other European countries can’t create global digital products.
And usually, no global digital products = no unicorn startups.
Why are European countries like Italy, Spain, and France facing hard times creating unicorns (a startup valued at least $1b within ten years from the founded date) and global digital products?
Everyone is blaming taxes, bureaucracy, ease of doing business, and people’s mindset.
Despite these can be some of the factors, I don’t think that these are the main ones.
We need to dig a little deeper into the reasons, which are probably more “structural” and not easy to identify and solve.
I don’t expect that the v1.0 of this article will be the absolute truth, the bible. Here are just a few of my reflections I developed during the years.
If you have some experience and observation to share, I’d happy to improve this content and make it more accurate.
The first market: why it’s so crucial
Let’s take the classic example of an Italian startup. The most natural thing to do is developing, launching, and optimizing the product in the Italian market.
That seems obvious. And often, it seems to work pretty well for years. The first hundreds, thousands of clients buy, they’re happy, there’s few or zero competition, operations costs are low, etc.
But, at some point, the company reaches the systemic limits of the market.
This usually happens at $2–10m of annual revenue in a classic startup with a specific solution to a particular problem.
Ok… now? Well, this is the time to expand internationally.
But this is so hard to do if the company started in countries like Italy, Spain, France with a strong local culture and language.
Product and marketing
Once you have a product developed in a market like the Italian one, it’s tough to expand it in other nations (unless being Italian is an added value for the company, but usually, this is true for organizations operating in fashion, food, or design. Not tech).
It would require not just a language adaptation, but most importantly, a cultural one.
Marketing: same problem. Lead generation, brand awareness, word of mouth. Everything should be created again from scratch, and it’s almost like starting a new company.
All this is not just hard. It exponentially increases the complexity of the company while it’s still a small one.
Here’s where things become even more problematic.
Once you have an Italian company, in Italy, with Italian consumers… the problem is that you’ll also have a 100% local team.
The company is Italian, managed in the “Italian way” with an “Italian style” culture. Which is not “bad,” but it’s definite and territorial, and so definitely very hard to scale globally.
(Replace Italian with Spanish, French, etc. it’s the same).
I had the opportunity to see some Italian companies trying to expand in the Spanish or other European markets. With half of the company Spanish and the other half Italian… trust me, it’s far from an “ideal” organization.
High complexity and low economy of scale
As I described above, the typical situation is a small company that must structure itself as a multinational business when it does not have the right dimension yet.
Again: far from an ideal situation.
It probably would require much money to work in this scenario. But…
Valuation and raising
The European venture capital market is less developed than the American one; we all know that.
But I think that there’s much more to say about it.
The valuation of a company is calculated using an infinite amount of factors.
But to make it simple: its present value necessarily reflects the expected future value.
Because of this…
The more the expansion plan is “certain,” the higher the company’s present value will be. And vice versa.
Let’s suppose that we have two identical startups, one in California and the other one in France.
The same number of clients, same talented employees, same revenue, same everything.
The Californian startup will likely worth 2–10 times than the French one.
Not because California is “a bubble.”
Because it’s hugely more likely that a digital product that already works in California will also work in New York. And also in Florida. And Washington, etc.
BUT it is everything but sure that a French product will also work in Germany, Spain, and Italy.
So… since the future value that the Californian company will generate is much more credible… the Californian startup will be evaluated TODAY much more than the french one. Even if TODAY, they’re exactly the same.
And valuation is the parameter that defines if a company is or is not a unicorn.
The power of the US market
Once a company tries to expand abroad from one of these European countries, they often realize that the product doesn’t make sense in other countries because there is another strong territorial competitor or substantial cultural differences.
So why a big part of top Tech companies in the world target the US as the first market?
Since the US market is wealthy and homogeneous, it’s also, in general, the most competitive.
And since it’s the most competitive, if something works there, there’s a good chance that it will also be relevant globally.
Talking with a friend who works in Film distribution in NYC, she said that the same thing happens with movies. And she saw this happens thousands of times.
A Film that works in the US is likely to work also all around the world. But the opposite rarely happens.
The power of focus
When you have a big market, you have a lot of competition.
So how do you win?
Typically by focus.
Focus all your resources to create a very specific product, which is the solution to a particular problem.
This strategy allows you to keep the general complexity of the business low (1 product, 1 problem, 1 solution, 1 source of revenue) for a long time, continue to grow fast, and make the product the best in the market.
And if it’s the best in the most competitive market in the world, it’s likely to be the best in the whole globe as well.
If you start instead with a small or mid-size market, you just can’t do that.
You face the systemic limits of the market too soon. In this case, the company starts to add more products, services, etc. to solve more existing clients’ problems.
(If you struggle to acquire many more clients, you grow by providing more value to the clients you already have, by creating more products that solve more of their problems).
The business’ complexity rise; keeping a world-class quality on different products becomes harder (loss of focus).
The company will remain bogged down in that market forever, and it becomes almost impossible to expand the business globally.
The best startup countries in Europe
It’s not surprising that almost every startup-related stats in Europe looks like this.
London is by far the best startup ecosystem in Europe and among the best in the world.
Global European successes are usually created in ecosystems where:
- The culture is extremely open with a global mindset.
- There’s a great ethic of work. (Ethical businesses are the only ones sustainable on a big scale and long term).
- English can easily be the primary language of the company. (This is the elephant in the room that nobody is talking about, but it’s crucial.)
- High qualified immigration.
- Another elephant in the room: there’re a lot of other successful startups (= more know-how, talents, investments, ecosystem, etc.)
- Spotify (Stockholm, Sweden)
- Transferwise (London, UK)
- Revolut (London, UK)
- Farfetch (London, UK)
- Klarna (Stockholm, Sweden)
The myth of “New European Silicon Valley”
It is funny to see news every year all with the same headline: “CityX, the New European Silicon Valley.”
If you search on google, you can find at least one article like that for every main European city.
But unfortunately, it doesn’t work like that.
The Bay Area has a solid competitive advantage. And probably the strongest one: the network effect. With 100+ years of iterations.
So this lack of 100+ years of iterations and focus in a specific direction brings a lot of other obstacles:
- Less know-how
- Talent attraction
- Serendipity and “density” effect
- Founder mindset
- Investors mindset
- Employees mindset
- Ease of raising capital
- Less M&A culture
Conclusions: how to create global products in Europe
Let’s try to figure out some useful and practical pieces of advice.
- English should be the first language of the company
- Take into consideration to set the HQ in cities like London, Stockholm, etc. According to Paul Graham, the wrong location is one of the common mistakes that kills a startup.
- Start from a competitive and big market (usually the US one). Check this amazingly useful tool made by the Index Ventures team.
As I said at the beginning of this post, I don’t pretend this is the absolute truth. Here are just a few thoughts based on my personal experience.
I would like to have some feedback from you to improve the quality of this post.