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! 'Startups in Europe: Hurdles'

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I’ve been a tourist in startup world for a little while: I attempted to co-found one, and subsequently sold my services as an IT freelancer to spin-offs and innovative ventures. This doesn’t make me an expert, but it certainly gives me a perspective on the topic of this post: why are there proportionally fewer startups in Europe, as opposed to the constant creative supernova that is Silicon Valley?

Tax

Allow me first to debunk the popular liberal myth that higher tax rates are holding us back. The proponents of this theory argue that tax makes business in Europe anticompetitive compared to the States or other lower-taxed countries. I come from a country, Belgium, that has exceptionnally high tax rates, and I’ve been known to complain about it, but I don’t believe it holds us back from innovating. On the contrary: all this tax goes to health care, cheap education, decent infrastructure, a social net. Sure, there are cases of mismanagement, but the end result is this: a huge decrease in risk for the average citizen. Even if your startup doesn’t make it, you’ll still have a minimum to live on, your child will be able to go to school, your family will receive health care where needed. Compare this to the US system where without medical insurance, you’re screwed, where good education is prohibitively expensive. It could make people hesitate to let go of a stable job.

Secondly, a small part of that tax money is going to grants for innovative businesses – if you’re on the ball, you might be able to get a good boost from the government, and it will be a better deal than what you get from the average seed/venture capitalist.

Tax is not necessarily anticompetitive for startups, if the government makes good use of it.

Administration

Depending on which country you’re in, starting a business might have prohibitive costs and take a lot of paperwork. In Belgium, for instance, it takes about a month to get all the paperwork going, costs you a hefty fee for a sollicitor, and you have to have a capital of 12000eur in the bank. All these rules obviously date from an age when you needed Infrastructure (capital I) to start a business. For an internet business, where all you need is a personal computer, an internet connection and living costs, it’s ridiculous and frustrating.

In the UK the situation is somewhat better, starting a limited company is done online and in one week, and in theory, you’re in business. The tax papers are somewhat more complicated but at least you can go ahead and start trading.

I want to give you money

But if you want an online payment set up, this is where the problems starts. There are several formulas available:

  • the merchant account: if you’re selling a good volume of products, and you’re expecting to do so for a while, this is the best option: a higher overhead cost usually, but lower transaction costs. However, all people I’ve spoken to have told me this is a nightmare to obtain. To get a merchant account you have to demonstrate six months to a year’s trading figures to a bank. This is impossible if you’re a budding startup, so another solution is needed. Even if you have a solid financial background, I’m told banks are still reticent.
  • payment service providers (PSP): higher transaction costs, lower overhead, so ideal if you’re starting up. Paypal is the well-known one, but it has awful customer service and seriously bad PR at the moment. A lot of them still require a merchant account (see above), some of them don’t, but might require an account with a certain bank. They’re still notoriously skittish to accept new business.

The aspect that makes no sense in this is that all you’re asking the bank is to accept money, you’re not asking them to grant you a loan or an overdraft. Of course, you still have the risk of fraud or money-laundering schemes – keeping an eye on the ball for odd transactions can mitigate that risk. The risk is usually put at the seller’s door anyway. What is holding the banks back? And how are internet based startups supposed to make money? It’s not uncommon to get a partner in the States (like Travis are doing), just to cover that aspect.

Failure is the end

In the US, most successful entrepreneurs are serial entrepreneurs. They have a string of more or less successful ventures behind them, some less than more – and that’s considered normal. Failed ventures constitute an apprenticeship. Not so in Europe. In Europe, bankruptcy affects your credit rating aversely. Once your credit rating is bad, the game is up: you’re limited on bank accounts, credit cards, and say bye bye to mortgages or reasonable loans. It’s a long and difficult process to reverse an adverse credit rating. 6 years until this mark is erased according to the website.

In short, you have one attempt, and one attempt only: you better make sure your idea has legs.

Solutions

The administration issue is something that has to be solved via legal routes: talk to your representatives, get things moving. Starting a business should be the easy part of starting a venture. Governments are usually aware of this issue, and are generally making positive changes, but a prod can definitely help.

For online payments we need innovative solutions, like Stripe in the states. Personal and small business banking is due an overhaul, and definitely competition. Several startups have picked up on this, like GoCardless, and we hope to see more solutions in the future. I’m convinced that any solutions that removes this pain will be insanely successful.

The last part is the hardest: the whole credit rating system. I understand that in some cases it makes sense for people to have a generally bad rating – however it definitely feels like the banks are erring on the side of caution, to their own advantage and to the public’s loss. The system should allow for failed ventures. When there was no gross mismanagement and the founders acted with common sense, but the plan just didn’t work out, they should be able to appeal to reverse and bad marks. Otherwise we cannot come to a system where an experienced founder is allowed to start again. I have no clear idea of how to change this, but maybe the legal route is in order here as well.

What do you think?

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