One common practice in the European tech world is trying to imitate Silicon Valley. We build technology parks that we think match the design of Stanford. We do pitch competitions inspired by TechCrunch Disrupt. We offer employee stock options, but usually via traditional, local, highly imperfect schemes. And we make an effort at celebrating failure, because that is supposedly what makes Silicon Valley a thriving ecosystem. Failure is good, we say—a necessary part of the entrepreneurial journey.
Yet even as top European entrepreneurs focus on their markets and are seeing the fruits of their labor beginning to ripen, too many people still get the causal relationship between the Silicon Valley ecosystem and its characteristics wrong.
Celebrating failure is a good illustration. Failure and/or its celebration doesn’t in itself contribute to an entrepreneurial ecosystem that works. Rather, it’s because Silicon Valley is an entrepreneurial ecosystem that works that people there enjoy the luxury of celebrating failure. The local startup community acts as a safety net against the negative consequences of failure. To borrow Nassim Taleb’s word, Silicon Valley makes individuals antifragile.
A key factor in that antifragility is liquidity on the talent market. For many Silicon Valley-based ventures, turnover is so high and growth is so fast that entrepreneurs are on a constant hiring spree. For those who lose their jobs because one startup fails, Silicon Valley makes it easy to rebound and find a new job in an instant. Thus failure is good news from an employee’s perspective: it means you don’t need to stick with a company that’s struggling, instead heading off to swiftly join one that is thriving.
That situation doesn’t exist in Europe. Many startups are hiring, of course, but growth rates are not as high and funding is much less lavish. And importantly, the European startup world is not as dense as Silicon Valley. Sure, there are many jobs for you, somewhere in Europe, if your startup has just gone bust.
But joining that rising star in, say, London comes with a high price: You need to move there, have your plus-one find a new job, find a new school for your kids in a country where they don’t speak the language, and explain your foreign credit history to a suspicious landlord. (Plus, just wait for Brexit, when you’ll also get to deal with those endless immigration forms.)
Cashing out culture
For entrepreneurs themselves, Silicon Valley has another way of providing safety for those who fail. It has become common practice for founders to cash out a portion of their stock when they raise a Series B round and beyond. It wasn’t always so common, though. Back in 2011, there was a public clash between Chamath Palihapitiya, an early Facebook employee turned venture capitalist, and the founders of Airbnb. Palihapitiya thought it was unfair to investors and bad for the company that the founders intended to partially cash out as part of Airbnb’s $112M Series B and as a result, passed on investing – something that, in hindsight, he probably regrets
This debate will sound familiar to entrepreneurs across Europe. Many venture capitalists do not want capital they deploy be used to provide cash for founders, instead preferring it to go towards company growth.
But those feeble investors miss the point of founders cashing out. Most entrepreneurs tie up every resource they have in their companies, under the form of common stock. As a result, every time they need to take a bold risk on the business front, they (rightfully) have the impression that they’re gambling with their entire life. And since most of them are not that crazy, they sometimes decide not to take the risk. They’ve made promises to their spouse, or to their colleagues, or to their friends, and they don’t want to lose it all (reputation, marriage, and wealth) in one go.
Risk or die
The issue is that tech companies must take more risks. Unlike 20th-century companies, they enjoy what economists call increasing returns to scale. From a competitive standpoint, this means that on every market, one startup is destined to race ahead and seize a dominant position, while all the others are bound to go bust or be acquired. Getting to the point where you beat all competitors at a large scale and reap those infinite rewards requires a lot of crazy risk-taking. And entrepreneurs are not ready for such risk-taking if they’re going to lose literally everything should their startup fail.
This is why partially cashing out is such a good practice. On one side (Europe), failing as an entrepreneur means losing everything and disappointing everyone around you—up to and including your life partner who has been so patient during the gruelling, thankless early years of your company. On the other side (Silicon Valley), cashing out is a common practice once the wild competitive ride begins (usually when you reach Series B, when a lot of value has already been created since many customers are already benefiting from the product). That way, even if a startup fails, its founders still retain the opportunity of owning a nice home, doing a bit of angel investing, and having some money set aside. Partially cashing out brings peace into their household, alleviates some of the anxiety that comes with entrepreneurship, and makes them comfortable with taking even more critical risks as their business grows.
Europe needs a safety net
Overall, Silicon Valley acts as a safety net for everyone involved: employees who can switch jobs in an instant, founders who can make some money even if their startup fails, and investors who can deploy capital across a thriving startup community. It’s the density and good practices, such as partially cashing out in Series B, that create this unique context in which it’s OK to fail because failure never means losing everything. And so instead of simply celebrating failure in a futile attempt to imitate Silicon Valley, more Europeans should push to build the kind of safety net that lifts all startups up and enables some of them to turn into great tech companies.