After startups from France's Vente-Privee.com SA to the U.K.'s Hailo Network Ltd. retreated from the U.S. last year, European entrepreneurs are learning just how hard crossing the Atlantic can be.
U.S. 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, says Didier Rappaport, the French founder of mobile-dating app Happn.
"There's a rule in our industry: You either make it in 2 or 3 years, or you'll never make it," said 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 U.S. can make or break a startup's future as venture funding in America soars and Europe's economy sputters. Startups in the U.S. 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 $48.3-billion – the biggest surge of funds since the dot-com bubble.
The challenge for a European startup in the U.S. 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. 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 U.S. received $30-billion in funding in 2013, European young companies got about $4-billion in such backing. 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 $2-billion that San Francisco-based Uber raised by itself last year.
The U.S. "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.
Yesterday, U.K.'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."
The networks that California provides means that not only are U.S. 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 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.
Vente-Privee said in October that the U.S. 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 U.S. and would focus on its European business in the mean time.
"Making it isn't something you do at a country or region level," said Rappaport, who is also co-founder of video site DailyMotion SA. "You have to go worldwide."