Articles Dragos Novac

Europeans are jealous on the American tech builders

We touched a bit last year about the big disconnect between politicians and tech people, and their need to regulate because the politicians are simply too far behind in terms of knowledge and ultimately control of what the tech companies do.

Here’s a little something from what I wrote last summer:

The tech ecosystem has developed tremendously in the past 15 years, in spite of the shitty politics from across both ponds.

That is the very reason for which governments want to regulate Google and Facebook. The gap is so big between the two worlds that the politics is out of control.

More regulation and protectionism will not narrow it down, au contraire, it will force tech to be more creative, they invent things for a living after all. And yes, US is a very different beast than Europe but smart people adapt.

Apart from the money and power plays, it is unclear if the European protectionism is not also about jealousy.

You know, that sort of provincial feeling of being an European decision taker capable of making things happen when seeing that all the interesting tech companies are still coming from the US.

After all, internet regulations from the EU, instead of being focused on the market needs, seem to be dealing in a good part with how American companies are doing business. And it is not really a secret that legislation is made because the Americans are too powerful on the local turf not because, well, there has to be some proper economic incentives so that the market would work efficiently and the consumer would benefit from buying locally more often than not.

And so, I was not too surprised when I read the following:

Clubhouse violates European rules and the requirements of the General Data Protection Regulation (GDPR) are not being met. The entire data protection architecture of the Clubhouse app shows that the service has evidently grown too quickly and does not meet the requirements of the GDPR.

If you don’t know yet, Clubhouse is an audio-based social network launched last April and which raised money pre-everything at $100M valuation a few of months later. Because this is how they do business in the US.

Long story short, Clubhouse exploded in Germany in the past couple of weeks when it also reached the #1 spot in App Store. And it looks like not only VCs are learning from it but also the local authorities are quick to scrutinize them, as per the above quote taken from a data protection officer from Germany and employed by the EU.

The service has evidently grown too quickly - did you get that?

Maybe my German is poor and there’s something lost in translation (zu schnell gewachsen) but uhm, isn’t grow quickly what a startup should do? How quickly is too quickly, is there some sort of EU guidance about it?

Jokes aside, what this guy is seemingly bothered about - Clubhouse is using one of the oldest growth hacking tools in the book: it forces users to share their address book if they want to invite other people into the app. If not, a user can still use the app as he or she pleases.

The service has evidently grown too quickly - did you get that?

Maybe my German is poor and there’s something lost in translation (zu schnell gewachsen) but uhm, isn’t grow quickly what a startup should do? How quickly is too quickly, is there some sort of EU guidance about it?

Jokes aside, what this guy is seemingly bothered about - Clubhouse is using one of the oldest growth hacking tools in the book: it forces users to share their address book if they want to invite other people into the app. If not, a user can still use the app as he or she pleases.

And if you used Clubhouse, you’re quick to see that the permission ask is quite explicit and straightforward, and works like any banal mail marketing tool does before uploading your address book for sending them emails. (i.e. Mailchimp)

I mean, let’s be clear, I don’t like this technique as a user either, but if I don’t, it is my choice not to use the service or its feature anymore, it’s as simple as that. And if I am an idiot and I am spamming all my address book with Clubhouse invites (an edge case but for the sake of the argument) and those recipients deem my invite unuseful and hemce spam, and then reporting me so, then maybe Clubhouse is liable to take action due to people complaining, and if it doesn't, maybe then we have a case of an outside dude to have a look into it and evaluate the situation.

This is how a normal market works, doesn’t it?

The whole thing is still declarative, in the media, and it is also true that maybe this guy has never ever done growth marketing either. [Narrator: he has not].

Not done with the jealousy argument just yet.

Speaking of the EU business understanding the times we live in and the startup/VC business in particular, here’s another quote, from Michael (btw, if you’re into Euro VC and don’t follow Michael yet, you should):

Recently an investment director of a European govt LP told me he thinks GP upside should be capped and that it’s not good for GPs to be too financially successful as it “upsets the balance of things”, and that some US VCs are too successful and powerful.

Too successful and powerful.

Would you be comfortable in your company to work for decisions makers with this type of attitudes? Discuss.

PS. They want to be VCs too.

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.

Google gets EU's blessing for the Fitbit acquisition

Google says that the Fitbit deal is about the hardware rather than getting access to its health data. The EU got some sort of assurances and greenlit the deal.

Google is a media company good at tech advertising, and has no idea and capabilities for building good hardware. They have tried and failed many times.

The Fitbit deal is very strategic as G wants to compete with Apple Watch, which is already a platform and which has a huge upside potential. They sold more than 100 million units already and grow double digits yoy.

It’s harder to get it and grasp the size of it because you don’t see it now in Europe since Europeans are cheap and prefer Android devices. Therein lies the opportunity.

On the other hand, if you want to see good corporate strategy rollover, study Apple watch’s evolution from launch till today.

And Apple is beatable, there’s a strategy playbook for it.

Macron and the dentists

The below observation was triggered by a boring interview about European entrepreneurs given by France’s president Macron, where, among other things, he says:

We need European financing, European solutions, European talent. We have GAFA in the U.S., BATX in China and GDPR in Europe.

No, we don’t. *Macron* does, for a nationalistic rhetoric made by a politician.

That is just another way of saying that Europe needs heavy protectionism, which any undergrad will learn in school that it hinders competitiveness, not encourage it.

The top down approach is not going to work for creating a thriving environment. From a macro perspective, we need a functional economy, access to capital and as little bureaucracy as possible. That is Macron’s job. Other than that it is a market’s problem and usually free markets are efficient in self organizing.

The capital part is there already but we all can see that throwing money at a problem, like Macron did in France in the past years, will not make for more and better entrepreneurs.

The continent is full of money already and the entrepreneurship level backed by investors in Europe is mediocre at best.

Maybe we’re not hungry enough and certainly we could use better incentives and models but the European paradigm of building tech startups seems to converge towards copying things from the Silicon Valley sorts and, if they stick, selling it to media as a success story.

There is more money than projects, the good ones are not too many and Europe lacks entrepreneurs, ideas and a proper overall environment for matching the good ones with the right kind of money.

Sure, it’s not black and white and that is the half empty part of the glass. You can argue that it has some of those elements (hey, we only saw tech unicorns on TV 10 years ago and now we have a good hundred) - but is it enough when your best value creators simply go to US in droves?

And that is also investors fault, as their industry from Europe as a category is pretty old school and narrow-minded, and that is probably top reason for the brain drain - you will go work with people who get it, and Europe doesn't have too many of those in excess too.

And btw, if you don’t go to America, America comes to you. Competition is probably even a better incentive than what Macron can do for the venture investors in Europe.

And listen, Macron and the likes may have good intentions as long their agenda allows them to but will have a hard time to understand that because the job of being a politician has nothing to do with entrepreneurship. It’s the same with him or with my dentist - they may have a cogent opinion when asked, but in particular have little knowledge about specifics.

the small sample

If you’re an investor or intend to become one, you need to be familiar with Atomico’s report released this week - it’s by far the best and most comprehensive research piece covering the venture business in Europe.

It’s free.

However, turning the tables around, if you’re a startup founder - not that helpful.

Why is that - the research represents a very small subset of people making a living as entrepreneurs. Atomico’s research covers only venture money - i.e. startups that already raised money from professional investors.

Do you know how many entrepreneurs *do not* use risk capital in Europe? Here, I looked it up for you.

EU countries had 23.5 million small companies as per 2015 - EU’s nomenclature considers a SME an org with less than 250 employees.

Assuming 10-15k venture deals in Europe a year and a 30% margin of not covering all the deals - let’s say we have 20k companies per year that we can infer data about from what various vendors track. Let’s assume for the sake of simplicity that in 10 years we have 200k companies having at least once used a risk capital product - this number is pretty much a standard proposition of data venture whole-sellers.

200k in a 23.5M universe. So Atomico’s research is representative for a sample lower than 1% from the European “startups”.

Point is - most of startups don’t or won’t work with professional investors. If you go outside that bubble you will discover that most entrepreneurs don’t build stuff to become filthy rich, or to change the world or because they want to become unicorns in 3 years. That’s the investors narrative because that is their business model.

Most entrepreneurs are usually simple people with a pragmatic mindset, trying to figure out how to make a buck by solving problems and having an independent lifestyle. That's more fulfilling than having 100 million instead of 10 million or even 1 in the bank. And they also built economic mechanisms using tech (which is pervasive in 2021), employing people, paying taxes and planning to grow their business. Just like the startup guys working with professional investors.

For every 1 founder that raised risk money, there’s 10 that didn’t make the cut (conventional wisdom) and 90 that most likely didn’t even consider this.

This is a lot of entrepreneurial value creation not accounted for by Atomico’s research. A research report as comprehensive about those guys would be really cool, wouldn’t it? 😊

The clones race has become a war.

Quick reminder, if you’re new to the saga - a hot thing in Germany this fall was investing in aggregators of Amazon-based, small retailers. All of them are copying the model of an American company named Thrasio, which is market leader and also which was valued at $1 billion earlier this year.

And so there’s been companies launched and money raised - I known of at least 8-9 wannabes only in Germany, and of one notable from the UK (notable in the sense that they raised $65 million for it).

However. Compared to a decade ago when the Americans mainly ignored the Rocket Internet people blatantly copying their businesses, things escalated a bit this week.

Specifically Thrasio, the business which is being imitated, just acquired one of their clones from Germany, Thristii, and made it their European office. It says that they now have two offices in Germany, in Berlin and Dusseldorf, operating a $50 million local business.

Not only that, but they also published a press release saying that they put aside $225 million to complete acquisitions of German companies and explicitly stating their differentiators.

What distinguishes Thrasio from other purported acquirers is that we are committed to closing every term sheet we sign, have the ability to close quickly, and can operate a company in the Amazon ecosystem well enough to generate real earn-outs for German sellers. Thrasio's expanded market presence gives German entrepreneurs a much better option: working with the company that is the gold standard in the space (with nearly 100 deals closed), a company with a real track record, and industry-leading data and performance.

Quote of the president dude of Thrasio, no less.

They also do something very smart namely creating the rules of the war:

Thrasio purchases these category-leading brands for a typical purchase price of $1+ million, giving small business owners their hard-won payout.

“You get an offer lower than 1 mil? Come talk to us!”

Read the whole thing. The Yankees got pissed and Boston people are the feisty sort.

A somewhat virgin market has become all of a sudden a zero sum game, and not a friendly environment either. Kinda wondering how much this risk was accounted for.

I guess at least we really get to see if the formula “copy others + consultants + money” makes for successful entrepreneurs in Europe.

PS. The winner of the whole thing? Amazon.