This guest post was written by Roman Stanek, the founder and CEO of Good Data, a cloud-based business intelligence startup headquartered in San Francisco. Roman has been a tech entrepreneur for almost 20 years. He was founder and CEO of NetBeans (acquired by Sun Microsystems) and Systinet (acquired by Mercury Interactive and later Hewlett Packard). Read Roman’s blog here.
When I met Michael Arrington back in April, I told him he was crazy to dismiss the possibility of a first-class technology startup coming out of Europe. I was born and raised in the Czech Republic, I’ve spent the last 15 years working towards building a global hi-tech company. So naturally I took it a bit personally. But I’ve been thinking about this quite a bit since then.
The story usually goes that Europeans just don’t have the drive and commitment to spend enough hours necessary to get a fledgling company to an escape velocity and grow it from there. Our love of the two-hour lunch and Augusts in Provence is the evidence most often cited to prove this theory. But I believe that there are some very driven people in Europe who are willing to put enough time into it.
My problem with the European startup ecosystem is somewhere else. I actually believe that it bears some signs of a Cargo Cult. Here is the definition from Wikipedia:
A cargo cult is a type of religious practice that may appear in traditional tribal societies in the wake of interaction with technologically advanced, non-native cultures. The cults are focused on obtaining the material wealth of the advanced culture through magical thinking, religious rituals and practices, believing that the wealth was intended for them by their deities and ancestors.
The best known examples of Cargo Cults come from some Pacific islands during World War II. The American airfields and their personnel brought relative prosperity and modernity to the island people, but once the war was over the Americans took their planes and equipment and left. The local people wanted to bring the prosperity back but they did not understand the substance of why the Americans came there. They only saw the form. And so the locals crafted wooden headphones, lit fires to light up runways and tried to attract back the planes with canned food and other useful goods by emulating airfield traffic.
Something similar happens in the startup community in Europe these days. People start companies, write business plans, meet with investors, talk about term sheets and exits. But in reality most Europeans don’t actually understand the substance of the system—the business plans are wooden headphones and term sheets are fabricated control towers. Repeating the form of US-based startups without a real understanding of how much the deep and complex ecosystem of Silicon Valley contributes to the success of VC-funded US startups won’t bring prosperity to companies coming from Europe.
In order to overcome the limitations of not being in the Valley and to avoid the the cargo cult mentality, I had to adjust the typical model. I’m on my third attempt to get the trans-Atlantic startup model right.
I started my first “global” startup in Prague in the summer of 1997. I was so impressed by Marc Andreessen and Netscape that I wanted to build something similar. And so I started NetBeans and sent the business plan to Esther Dyson. Esther introduced me to her friends in Silicon Valley. And that’s when I first realized that I had no idea how the system works.
And so NetBeans was marketed in the US, we raised money here but the engineering team was always based in Prague. We were ultimately able to build the company on a shoestring. Eighteen months later we got a call from Sun Microsystems and we agreed to sell our baby. I did not know until the last day if my transaction was going to happen. I had spent all my money (and more) on lawyers and advisors and there was no break-up fee in the term sheet. Startups are absolutely not for the faint of heart.
I thought Systinet would be very similar, but it turned out quite different. We started working on the code in Prague in 2000. By the time I got here after the Summer of 2001, the situation did not look so rosy. Fortunately we managed to get the attention of the VC community; by Christmas time we received a $21M term sheet from Warburg Pincus. In November 2005 we signed a term sheet with Mercury Interactive for $105M. What we did not know is that during the due diligence, Mercury would be investigated by the SEC for stock option backdating and the company was delisted from Nasdaq. Not a pleasant experience for a small startup going through a very disruptive (and expensive) process of being acquired. Mercury was eventuaally acquired by HP.
I am now working on my third startup: Good Data.
I am a huge fan of the Customer Development Model by Steve Blank, but it assumes that the company can continue spending money on engineering and market/product fit tests until the target market is actually validated. And as much as I like the startup ecosystem here it seems to me that the people cost of software development forces startups to launch half-baked products. Very few companies can make the “Four Steps to the Epiphany” work financially – this is one reason having engineering located in a cheaper country from day one is a major plus.
Good Data is still early but we managed to raise money from Marc Andreessen (among others)—the same person who inspired me to start NetBeans. Since Good Data was born in the cloud, we own no hardware (except notebooks), we have no PR agency, we do no outbound marketing, there are no software downloads, but we’re able to release a new version of our service to our customers twice a month. Startups are cheaper to operate these days, and technology helps us be much more agile than ten years ago—agile throughout our business. And being here in the Valley lets us be part of new trends—we can move even faster.
My advice is always the same to European entrepreneurs: emulating and competing with Silicon Valley startups in Europe looks easy but the substance is quite a bit more complicated. You just cannot compete with Silicon Valley completely from the outside. Europeans—and all entrepreneurs—should consider that bootstrapping and focus on local markets is usually a better way to obtain the material wealth of the advanced culture rather than through magical thinking, religious rituals and practices.
Ok and this article is about ???
I know several other young entrepreneurs from eastern Europe which are in the same position as you were years ago, Roman, and I always advise them to have a presence in US somehow, but keep the development team in their country.
Another problem is getting the visa to come here…some eastern European countries (like Czech Republic) got a break from the Department of State (no visa required for traveling in US) while some other eastern European countries are still in the waiting line (Romania). Not being able to travel here when required it’s a big disadvantage for the entrepreneurs (even if you are coming here for business related stuff getting a visa is not guaranteed at all).
The bottom line is that a lot of talent is wasted because it’s not in the right place (even if the time is right)…
I am stupid. help me understand:
1. What is the point of this article?
2. Does Roman means overseas start-ups must based their marketing and business units in the valley, and base development elsewhere?
3. Customer development is expensive if you are based in the U.S. It is impossible if you are not (assuming the U.S. is your target market).
Great article, though it would have been valuable to hear a more articulate description of how the Cargo Cult syndrome works.
We are seeing very similar patterns with the startups we come across from Western Europe, South America and Australia, a fundamental lack of understanding of how the SV ecosystem operates. I would add that, fundamentally, entrepreneurs in Europe tend to look at the US market size as the driver to enter the market, but also grossly underestimate a) the resources, financial and otherwise, required to make a dent in the market and b) the intensity of the competition.
I, rather, would like to hear the precise inner workings of Silicon Valley that is not understood by the cargo cults of Eastern Europe. I didn’t quite get what they don’t understand or what they’re missing???
Roman, thanks for bringing up the point about European startups.
On my opinion European startupers are too much obsessed about silicon valley and it’s ecosystem. The “Silicon Valley way” is not the only way for startup to become successful. Yes, it’s easier for startups in valley to get going…but, definitely not the only way. Often for european startup moving to silicon valley is too expensive and not the best way to use their cash. I like that you mentioned Customer Development model. European startups can become successful by focusing on customers. Making sure customers are happy could be as strong driver as being part of silicon valley ecosystem.
So to resume my point: instead of pitching VCs in Palo Alto, European enterpreneurs should focus on their customers and making them happy wherever they are, in Europe, Silicon Valley, India or any other place in the world…
Wow, I never knew that Michael Arrington dismissed that a successful start-up could come out of Europe.
Let’s put a list together.
How about these 4 for starters..
Skype
MySQL
Navision (now Microsoft Dynamics)
Autonomy
Is it just Good Data PR? A lot of words but no sense. Deep and complex ecosystem of Silicon Valley = PR+PR+PR? => more money from VCs?
europe and startups….who wouda thunk??
A great blog post. Added the guy’s blog to my blogroll.
Great discussion!
When I began practicing venture capital in Brazil seven years ago we faced many of the same issues.
Surprisingly, however, things have recently begun to change.
The quality of the companies that we have seen in the last 16 months or so has improved dramatically.
So, whereas seven years ago, the typical “startup” that walked through our door was a professor with an idea, nowadays we are being approached by full teams with existing products/services, revenue, etc.
If you would have asked me seven years ago whether we would ever see companies of the quality we are seeing today, I would never have believed it.
Ironically, I believe that the efforts of Michael Arrington, Matt Marshall, Dan Primack, etc. have played a pivotal role by democratizing information and demystifying what makes Silicon Valley tick.
Of course, we still face lots of hurdles, ex. How do you convince startup employees to value stock options when they have never seen someone in their country make money from them before?, etc., but things are headed in the right direction.
In terms of the importance of having a physical presence in Silicon Valley/the US, my impression is that this is also changing.
One of the greatest things about Web 2.0 is that it has reduced the importance of physical presence.
So, for example, a good team can build a Web-based product or service and roll it out worldwide without having to actually be in Silicon Valley or the US.
Unquestionably, Silicon Valley/the US still have the best startup ecosystem, but the rest of the world is slowly catching up.
It seems a physical presence is expected in the Valley by the VCs, even if you are quite succesful at home. At some point you will need investments and most european countries lack the VC or/and angel infrastructure so, naturally, the entrepreneurs there look elsewhere (Silicon Valley or other areas like that).
Not to mention that if you would sell the company then it will have a better value if SV investors would invest and the company is based in SV rather than Europe (that’s even more obvious if the company would be based in Eastern Europe).
Roman,
So what are you saying here specifically? That European startups shouldn’t play by the valley rules and try and swing for the fences?
Best,
A European Startup Founder Who’s Building A Big Company
A Big Company: http://siteanal....com+zynga.com/
Zynga is unrelated to my company, and I’m clearly not claiming to have either made it yet with this business or that I’m bigger than Zynga who are doing phenomenally well…
Some interesting insight but the point is somewhat missing.
I know a lot of Eastern european programmers
You know I think the Cargo Cult analogy plays out to pretty much everywhere outside of silicon valley, not just Europe… Its actually even more accurate for other places in the US outside of the Valley ecosystem.
As soon as I read that I identified on a personal level as someone who’s interacted and been brought magical wealth from SV but never quite been ingrained in the culture. My last startup attempt, when I look back on it completely was like wooden headphones.
I think you hit on something big here
Great article,
I see that some people did not understand this article. I think that the people who don’t understand this post are from SV.
I am from the Czech Republic too and I have a startup. I have my independent business since 2004.
We (people from EU) often look at SV and how you people do it there and what you do. I have been in 2007 for 2 month in SV to see it there for myself and this year I have been in NY for the first time. NY and Prague are 2 completely different worlds.
I discovered this:
In EU, we have a problem that we sometimes blindly copy what you do in SV, but we absolutely don’t know why you do it that way there.
We are blindly copying web layouts, graphics, features, marketing sentences, we think they works, maybe they are ok, but we don’t know why they work or don’t work.
I believe its similar to Cargo Cult (a new term to me)
So again, I think this article is great and I fully understand the message. I would not be able to understand it 2 years ago, but moro I try to learn about Customer development and Business development (= don’t do programming in the beginning), I think I am a little bit closer how your ecosystem works.
But still, I am miles away.
tomas
Interesting post but I don’t really get your point. If the point is your last paragraph that Europeans should consider bootstrapping and focus on local markets.
On the first point, all startups, European and US, should consider bootstrapping. If you can bootstrap to what you want to achieve then go for it. However some ideas just don’t bootstrap.
On the second, I don’t see your experience or the logic in your post backs that up. Would you have achieved the successes you’ve achieved by focusing on the Czech market? No, then why recommend other European entrepreneurs should do that?
Basically you are saying it is hard for European startups to compete in the US. Yeah it is but that didn’t hold back startups like MySQL, Skype or Last.fm. Or are they suffering from the cargo cult as well? From where I’m sitting those look like real dollars, not wooden ones!
Thanks for the post Roman. When I was in Austria visiting companies one CEO told us that in a socialist country such as Austria, people did not get very rich, however neither did they get very poor. While not all startups are focused on going big and selling, many VC-backed companies are, or so I was told in business school.
Do you think that the political environment has anything to do with it?
Since when is Austria a “socialist country”, dude? Mistake or just plain ignorance?
Robin, socialist doesn’t mean soviet.
Here, it means “social democratic”.
For more info please read http://en.wikip...arty_of_Austria.
More articles like this please.
Interesting thoughts but unclear conclusions…
At least here in Finland this is very much the case; all the VCs, business incubators, even governmental agencies expect and encourage the startups to be growth companies the Silicon Valley way, and are pointing west all the time. Only that we’re not Silicon Valley.
I don’t think it is reasonable to start a company in Europe only to start flying to SV to speak to VCs. Then you have to move to US anyway and if you are ready to do that, why not found the company in the US in the first place?
There are great startup opportunities in Europe as well, but the founders should understand that if you’re building a new Facebook or other global web business, then you should probably be in the SV to begin with – not that you couldn’t build it elsewhere, but in that kind of businesses you need explosive go to market because of the competition.
If you are building whatever else, then create a profitable business just in your home country first. If you think that is too slow, then move wherever you need to be to begin with.
Well said!
Agree.
“I am a huge fan of the Customer Development Model by Steve Blank, but it assumes that the company can continue spending money on engineering and market/product fit tests until the target market is actually validated.”
The Customer Development Model is designed to minimize the risk of launching a product for a market that does not exist. It encourages a startup to invest in customer discovery and validation in parallel with product development prior to product launch.
Lowering/increasing the cost of engineering personnel doesn’t affect this model (although the trend over the last two decades has been to dramatically lower the cost of developing a software product: open source libraries, Moore’s Law, Internet distribution/SaaS are three big drivers).
Why would you stop spending effort or money on validating product/market fit and focus on finishing the product if you didn’t have evidence of demand?
I reckon that Netbeans is the best Java IDE out there. I had used Eclipse before, but now Netbeans is my only tool that I work with. Awesome tool.
Let me ponder that last sentence:
“Europeans—and all entrepreneurs—should consider that bootstrapping and focus on local markets is usually a better way to obtain the material wealth of the advanced culture rather than through magical thinking, religious rituals and practices.”
…
I am with the bemused readers. It is mostly a great article except it feels like one of the old fashioned cliffhangers, cutting to the next chapter just as the evil doctor is about to disclose who Luke’s father really was. Enlighten us great Yoda ! How do we give up our wooden icons ? What does it all mean ? Is life but an endless path to an elusive enligthenment ? Is the Reading incubator really doomed ? Am I not worthy ?
This article is good but as said Fred Destin, it’s not good enough.
I mean: Yes it’s true, something is wrong about entrepreneurship in EU. BUT to my mind, it’s not about wooden figures or stuff like that.
First of all, you might consider the market :
In US you are about 300 millions speaking the same language and having the same money for a very long time.
Here (I’m from France) it’s quiet different, we don’t speak the same language and we do have the same currency but not for so much time, meaning, we don’t have any global logistic (for example I founded a flower company and if I sell flowers outside from France, it will cost me five time the price of a bunch…) And as far as I know, even our banking system is not global…
Then, US has a real entrepreneurship “way of life”, here we don’t. For example in France only one guy is a billionaire from IT. His name is Xavier Neil, he founded Iliad http://iliad.fr/.
As you are famous for your elevator pitch, we are good for the old fashion way to do business: discret meeting in the lounge. The three mains telco in France have been condemned for agreement on the price. And they are all doing what they can to stop iliad to have a 3G licence because they know iliad will cut the price.
Finaly, in France, there are a lot of taxes (at least more than in US) so investors are not really willing to come in France. So less investments means less chance for a worldwide success…
As a conclusion, I am not saying we suck at entrepreneurship or at creating good business, I’m saying for some points, here it’s just harder.
Interesting post, but I definitely feel that the comment by Simon Olson is synched to an increasing trend. Although it helps inmensely, it’s becoming less of requirement to have a presence in the Valley. I used to live in Silicon Valley and understand the amazing ecosystem there for start-ups, but, as Simon mentions, certain dynamics have been kicking in which make it more possible to “make it” even without a Valley presence.
That said, Ramon, your accomplishments are truly impressive!