crazy European rich

Here’s a fun read about how rich Europeans “should” invest in tech instead of hotels in order to have Europe catch up with the US and China in building the world’s biggest consumer internet companies.

It’s fun because it seems written under a false and perhaps misunderstood perception about how rich Europeans think and behave.

Let’s try to deconstruct a little:

Rich people invest to get more rich.

When they think about what to do with their money, wealthy individuals don’t care about Europe vs US vs China.

They also don’t really care about the next wave of deeptech companies, the world’s biggest internet companies or who the greatest entrepreneurs are.

Or, if they do, they do it opportunistically in terms of getting a piece of it or a shortcut that can help replicate a successful pattern to get rich quick - that is basically Rocket Internet’s story.

But, in general, rich people don’t really care about changing the world, or making it a better place, or about the climate change, for example, or about what people like Greta Thunberg say (they usually make fun of her in closed circles).

They won’t get involved in this kind of stuff unless they have a specific interest or for public perception, a collateral skin in the game such as friends/peer pressure or a Gone with the wind’s Rhett Butler redemption moment (that’s how the Klarna guy did Norrsken VC in Sweden, for example).

They first and foremost care to multiply their money with sizable returns and hard assets like real estate, hospitality or boring manufacturing are easier to comprehend than bold visions of innovative stuff.

Getting rich by investing in innovative stuff is very hard. And risky!

The easiest and most straightforward way to get rich is to buy something cheap and sell it more expensive, as fast as possible and as often as possible.

However, investing in innovation or new tech means a different behavior and way of thinking, as it hasn’t been done before, therefore there’s a lot of unknowns and risks and no clear path to return. The probability of good multipliers, if any, is very low and that is why the good VC business is terribly hard in spite of an apparent glam and being seemingly easy accessible. And fact of the matter is that European wealthy people have little experience with this kind of deals.

Historically throughout the past hundreds of years, the European rich have mostly made money from information asymmetry i.e. buying cheap and selling high or other ways that may or may not have involved conquering countries and doing other crazy stuff that’s in the history books but that’s the topic for another discussion - when you have done this for a long time, it is hard to change your modus operandi and mindset.

That is why now they may be reluctant to take risks investing in things that have never been made before, their behavior is intuitively influenced by a different pattern that involves familiarity.

And yeah, tech is cool and aspirational, founders are awesome, and we have dedicated media hyping up the VC industry and fancy presentations claiming that the continent is the most entrepreneurial ever but facts and data shows that i) the risk appetence for tech startups of most of the HNWI from Europe is low and ii) the quality of the Euro startup output is still quite far from what can be achieved.

Rich people usually are investing in their comfort zone.

That means in things they can understand and they can explain over the dinner table to their family.

They are usually risk averse and feel threatened by disruptions, preferring the status quo.

Unless they are professional investors or working with ones they listen to, it is hard to find rich people willing to take risks outside their cogent scope, with sometimes the exception of some sort of blind faith in people they trust or they love.

And btw, being rich doesn’t necessarily mean that you know how to be a good investor or that you understand how the world works. Au contraire.

(Most of the) Rich people in Europe come from wealthy families already.

Euro rich people didn’t become wealthy over night or in a few years - they are usually part of family businesses which are decades or centuries old, sometimes with nobility titles associated to their status.

It is a different world, where rich kids inherit wealth as opposed to create it via innovation.

They are usually taking over the family businesses, which is part of a long-tenured and closed establishment, very traditional and which doesn’t usually have room for outsiders.

Besides the wealth, they inherit their parents’ Porsche, relationships and rolodex, and this involves very little risk taking and thinking outside a certain paradigm, no matter how expensive their business school was.

Europe’s story doesn’t include too many 30 years old entrepreneurs that just took their company to the stock exchange or sold it to Google.

Most of the European successful entrepreneurs are in their 40s or 50s, a few generations later than the digital natives, and with a lower risk appetite to challenge the establishment.

Compare this to the US where old companies like HP, IBM or Oracle, are being constantly challenged, or being replaced by the FAANG, which are also now being replaced by kids in their 20s building a new tech startup in the their parents bedroom.

Related - in Europe, the newcomers, as many as they are, are usually eating the lunch of the rich people family businesses - if they decide that it is worth keeping their startup company in Europe and not flying over to the better US environment.

Lunch protection is also why there is a strong push against the American tech companies under the form of regulation, see the following point.

Europe is all about control.

Because of the generational old family businesses controlling the rules of the game, the market is mainly focused on keeping things the way they were as opposed to disruptions. Families are usually making business with each other and it it difficult for outsiders to get a sit at the table, because they simply don’t belong.

That is why Europe has businesses or industries with zero sum games or with incremental upside yoy as opposed to the American obsessive growth focus, also in part an explanation for the lower European M&A liquidity.

It is an inherent dichotomy between investors focus of backing the building of new biz changing the existing state of order and the current common economic European interest of people resisting this via non-free market means such as the excessive regulation.

All the regulations (and what is coming now with the DSA is part of it) are just a reflection of those influent money dealers looking to tightly control the market. It’s mostly a power and money play, don’t be misled about the PR spiels.

-

So yeah, when you have over for dinner your rich uncle owning half of the hotels from the Riviera, and tells you about Elon Musk, he likely knows about him because he drives one of Elon’s cars not because Elon changed a few industries upside down. Or, just as well, they might have had a drink or two the other night. :-)

tax (and startup) friendly countries in Europe

This week there’s been a piece of research circulating through media revealing the worst kept secret in the Euro startup (and freelancing) world: the Baltics are the most friendly startup countries in the EU.

This is actually a very interesting aspect of doing business in the EU - if you run a tech business that sells digital goods, you can benefit from and use the fiscal rules (taxes) asymmetries within the EU countries.

Terms and conditions apply for each case, of course, but a half a day of proper research on the topic can produce a lot of $ savings especially very early in the life of a company.

And it is not only the stock options friendliness that make the Baltics attractive, but also the absolute tax numbers that can vary from country to country, a particular case for all Eastern Europe countries, or even tax heavens that countries like Malta, Cyprus, Andorra or Luxembourg can provide.

In Romania, for example, the corporate tax is 16% of profits and instead of a profit tax a startup can opt to pay as little as 3% from their revenues if they make less than 1 million euro per year in turnover. And the dividend tax is 5%. Those numbers are among the lower in the EU, where they can get as high as 35-40%+.

when your LP wants to be a VC

The EU started to operate the EIC Fund, an initiative announced last summer and which is a fund that wants to invest equity alongside venture companies from Europe. They call it a breakthrough initiative but it is unclear why, probably because it is a first of its kind within the EU.

From what I gather, it is an equity vehicle part of a grant accelerator that has been functional already for some time.

It is notable, of course, any fresh money in the market is a good thing - after all, more money in the market is better than less money, right?

The EU is already the largest spender on the continent as a fund of funds administrator - if you are an Euro VC and don’t have EU money in your fund you are at a competitive disadvantage. They’re not only an LP but also involved in many projects as customers, including media and research initiatives aimed to contribute to the private investment ecosystem (this is made with the EU’s money, for example). And, as always, when you spend a lot of money, you have a lot of friends who say nice things to you and about you.

However. While the intentions may be wonderful on the paper, the EIC fund is a head scratcher, for many good reasons, such as the fucked-up cap table example.

I will just mention one: this transforms a passive money distributor whose job is macro and policy into an active money manager having to micromanage in order to maximize ROI.

Make no mistake, they are two very different jobs. And, btw, it’s not a secret that politicians and state employees are not exactly the best (micro)managers in the world.

Oh wait, I hear you say, there is a catch - the EU fonctionnaires from the board have hired some VCs on their investment committee in order to get their valuable advice on how to handle this.

Yes, of course, you pay those guys for advice but the question is how accountable are they, since they are not employees but consultants. This is just a nice, hopefully well-paid, side gig, while their main job is their own fund, catering to their own interests of their own LPs and portfolio companies. Turning the tables a bit, if you were an investor, would you back a company whose core competence is outsourced to consultants?

Another instance - if a portfolio company of the investment committee members raises money from the said EIC fund, is that a conflict of interest? Or, the opposite, if those portfolio cos are not allowed to raise from the EIC Fund because of presumably conflicts of interest, is that a fair decision aligned to the EU’s mission to support all Euro startups?

There’s many scenarios that can go wrong in the VC business, it’s the job. And in the VC business shit hits the fan more often than you see happy times. When all is good everybody is happy and friendly but when shit hits the fan how are things going to play out? Here’s another example of a working scenario.

As an entrepreneur you will need to evaluate this, as dealing with the EU institutions is difficult at best and a mess in general, that is a fact. It is bureaucratic and slow, they have bad comms, bad PR, contradictory info and so on.

All of this red tape has been compensated until now by the fact that the money you get in exchange was quasi-free - you go through the bureaucracy hell to get it but it is equity free and don’t have to fight with those guys in your board until you buy them out.

Now you do.

Execution follows strategy, they say, and if you sit on top of a pile of money, as the EU does, decide that supporting startups is strategic for your job and then decide that one the solutions is to become a VC - it is telling about what problems the EU thinks the local ecosystem has.

And let’s be honest with each other, Europe’s problem is not the lack of VCs. Oh, sure, it badly needs good ones, but is the EIC Fund going to be a good VC just because it’s also the largest Euro LP?

Digg is back - is that a good thing?

Kevin Rose wants to buy back Digg for $1 million.

On one hand, I kinda miss the old online products from 10-15 years ago which were just working and were not cluttered by algos and “stories” and a lot of BS aimed to engage the mainstream passive audience.

On the other, Digg’s failure and implicitly KR’s as founder back in the day was exactly his business inability to make it a product available for the mainstream audience. Dude has become a VC since then, fwiw, so not holding my hopes high.

crazy pizza unpacking

EU revealed more details about their plan to regulate Big Tech. If companies refuse to obey, they could be forced to hand over up to 10% of their European turnover.

It’s long due as the last scheme was made 20 years ago.

While the EU will never admit it publicly, this one looks like it’s particularly made as a groundwork for controlling more what Americans are doing in Europe.

The politics and regulators are far behind in understanding and controlling what businesses do with technology these days, and this is a catch up, reactive move.

There are some good points in there, there’s no doubt, but, in general, regulation is one of the main deterrents of innovation. And Europe badly needs incentives to be innovative and come up with strong stuff.

This ain’t one, as this aims to prevent the other guys from doing stuff. And it is inevitable that this is the kind of regulation that will, sooner or later, also affect equally European tech, should we ever have an Euro FAANG.

Here’s an example of a rule that will prevent competition and innovation:

companies will be obliged to not use data gathered via their main service to launch a product that will compete with other established businesses

This is exactly one of Spotify’s complains against Apple. Word by word.

While I agree with Spotify’s position that Apple is being unfair and aggressively using its Store power to promote their competing inferior service, they are not right in this case.

And moreover, making an unsubstantiated complaint a general rule with the power of law doesn’t make sense to me and think it is unjustified.

Let’s unpack it a bit.

Let’s say I have an Italian restaurant and my customers are crazy about pizza. I know that because I have a loyal clientele, I know everything about them and I make a good business out of it. That’s data.

However, I notice that there’s another restaurant, pizza only, which has a good dish that sells like crazy. A dish that I don’t have in my restaurant. That’s an established business.

Should I add a similar one in my menu? Yes, if I am business savvy, my customers will probably like it and my shareholders would say that I am a proactive manager.

However, the above rule would restrict me to sell a similar dish for my loyal clientele. That would be a new product competing with an established business.

And this, in layman’s terms, prevents competition. And that’s not right.

Other examples: banks complaining that Klarna is using its users data for launching banking services. Or Spotify complaining that a radio station is using its customers data to launch a digital music database service.

You get the idea. That is to say that the data gathered in a lawful way about your users behaviour and preferences is proprietary IP and is a competitive advantage. In a free economy, you should be able to use your competitive advantages against other players.

I understand where it comes from and I feel for Spotify as Apple is a rich loser abusing it in many ways but this ain’t one.

This kind of stuff prevents a market to work properly. Really hope there’s a larger context and clearer boundaries defined beyond that. Would be curious to hear other opinions.