In May 2007 at GetJar’s former headquarters in Lithuania, I received the most important call of my life.
It was from Rich Wong, a partner from Accel Partners, a Palo Alto, Calif.-based venture firm that has backed the likes of Facebook, BitTorrent and Etsy. Wong was calling to discuss potentially backing GetJar, a mobile app store I founded in 2004. There was only one problem. I had no idea what “venture capital” meant. I have a master’s degree in economics from Vilnius University in Lithuania and have started several successful tech companies, in addition to GetJar. But my oblivion to the VC world proves in itself that VC operations have a shaky foothold in Europe.
Unfortunately, I can’t say that my carefully considered decision in November 2007 to accept the backing of Accel and move GetJar’s headquarters from Lithuania to Silicon Valley spoke well of European VC either.
I had become certain that the VC model—the economic paradigm I had learned was far and away best for IT companies—could not be implemented effectively in Europe thanks to two factors: Europe’s heavily government-controlled business environment and lack of VC experience.
I’ll explain. First off, the long work hours required to jump start a new tech company under the VC model are not permitted by European laws, which usually only allow employees to work 40 hours per week. Those already scarce hours are often consumed by another aspect of the strictly controlled European work environment: report filing, certification courses and tax inspections—all of which are conducted with much more rigor than in the U.S.
During the startup phase, a European company is subjected to a stringent level of control. In addition to endless paperwork, a full-time accountant must be hired immediately. If, for example, form 140B-3.6 isn’t filled out by a certain time on a certain day, a company owner can be fined or even jailed.
To say the least, these rules are not VC-model friendly. They take attention away from a startup’s main objectives, add a level of stress not conducive to creative thinking and actually discourage the formation of IT startups.
Europe’s controlled business environment prohibits the level of experimentation necessary for VC-backed enterprises, particularly in regards to hiring and firing. While American employees who don’t work well in furthering the company’s goals may be terminated without warning, European employees, once hired, can rest safely in their jobs for an extended period.
While it’s a benefit to the employee, the inability of employers to view a newly hired employee as participating in an audition of sorts hinders the creative freedom of the company and can lead to long-term stagnation, both consequences that operate in direct opposition to the VC model.
In addition to the issues stemming from a strictly controlled workplace, Europe’s efforts in VC suffer from an extreme naiveté. As the birthplace of the VC model, the U.S. has considerably more experience in VC enterprises, and, as such, operates with a more mature view. In the most intimate way, American VCs have seen the rise of Google, Twitter and Facebook. They know the ins and outs of their formation, they are familiar with the risks they took and they know the intricacies of their success.
Also, thanks to their experience, VCs in the U.S. understand that the parameters of the classic business model do not apply to the businesses they back. While European boards are focused on profits and revenue from the get-go, their U.S. counterparts realize that money often takes its time coming. In fact, I have noted time and time again that European valuations of IT companies are two to three times lower than those in the U.S.
In 2007, at the time of Rich’s first call, the success of Twitter and Facebook were in a universe separate from mine. Today, however, I see GetJar as well within reach of Twitter-type success. It took a move from Lithuania to Silicon Valley to make my collision of universes possible.
In the years to come, expect Europe and the rest of the world to become more VC compatible, like their U.S. counterparts They’ll have to if a share of the new IT world is something they want.
Ilja Laurs is CEO and founder of GetJar. He can be reached at email@example.com.