Europeans Need the Luxury to Risk

“Americans Build, Europeans Regulate”

It has become a cliché that Americans build and Europeans regulate, implying a cultural difference that permanently undermines Europe’s ability to compete. Regulation is a cultural touchstone in Europe, leading to its (unfortunate) desire to be a global regulator, but the real dichotomy between America and Europe is risk acceptance and aversion, and the structures that are incentivized by them.

The reality is: Americans Can Risk…

In the U.S., founders are given the freedom to test bold and unproven ideas, fostering breakthroughs in emerging fields. The stereotype of Americans is that they "move fast and break things" – speed and scale outweighing concerns about potential legal and regulatory issues. This has worked because (a) the legal and regulatory framework in the United States is fragmented between multiple jurisdictions, (b) governments tend to be more innovation-friendly, (c) the cost of waiting is greater than the cost of potential fines, and (d) VCs threw unlimited money at companies that could potentially scale so fast that they could monopolize a market.

US companies such as Uber, AirBnB and OpenAI benefitted from this combination of factors and are dominant in their markets. But the real advantage of the US system is that founders rarely are personally faced with the consequences of failure. Bankruptcy laws are far more personally forgiving in the US, and far more personally punitive in Europe, particularly if you have accepted public money, which many, if not most, startups have. Furthermore, corporate violations of law or regulations do not lead to personal criminal charges, rather companies pay disproportionately small fines and move on.

…And Europeans Don’t Have the Luxury

I’ve been involved with a company that had a cash flow crisis at the end of last year. A security issue delayed payment from a key customer, and as a result the company needed to temporarily slash costs, in a very short timeframe. In the US, this would have resulted in everyone missing partial paychecks, suppliers being held off for a month or two, and the company would have resolved the issue and moved on.

In Germany, where this occurred, the moment the founders knew they would be technically insolvent, they had to declare bankruptcy. Otherwise, they would have been personally liable for the debts of the company and could face criminal charges. Complicating matters, they had accepted a government grant to hire additional employees in anticipation of growth. When informed of the cash shortfall, the government agency turned the grant into a loan, and informed them that if they laid anyone off the loan would come immediately due. Ironically, the only major creditor is the government agency, which forced them into bankruptcy, getting everyone fired instead of just a portion of the team.

Obviously savvy founders are able to maneuver crises and succeed, that’s the job. And European founders are aware of the environment they exist in. However, an environment that generates unnecessary obstacles increases founder risk, and diminishes the number of potential entrepreneurs and serial entrepreneurs, including making it even less likely women and underrepresented groups will take the risk. But criminal prosecution and personal bankruptcy, while the most dramatic downsides, are less onerous than the day-to-day petty and unnecessary burdens added by local, national and EU governments.

One key example is the bureaucracy surrounding government registration of businesses. In the US, one incorporates with the state, pays a small fee, and all governance is conducted internally via board and shareholder resolutions. Only the initial Articles of Incorporation need be filed with the government. In Europe, governments maintain a registry of corporations, and even small, non-public corporations must register internal corporate governance events with the registry, via notaries which are equivalent to super-lawyers, often requiring signature in person and certifications, with consequent delays and costs. It can be mind-boggling how much more bureaucratic the system is here as opposed to the US.

Public Capital is Smothering, but What Can a European Do?

One key difference between the US and Europe is the role of public money. In the US, early stage money (after friends and family) is private equity: VCs, microfunds, accelerators, incubators, angel groups and syndicates, etc. These all exist here, but in far fewer numbers and with much greater risk aversion. And so government funding plays a significant role in Europe, often being tapped by founders to address market gaps.

But these have significant downsides. Banks like BPIFrance, a French public investment bank, provide significant funding to startups, but with strict conditions, conditions that require reporting and time-sucking compliance that take time away from private fundraising and building the business and, in fact might literally limit the use of funds to government approved purposes. Another downside is local government investment, which is often done by regions, requires companies to hire locally, ending up having part of your company in one city and the rest in another to optimize grant funding. Terms, like these, create inefficiency and can prevent the flexibility startups need to pivot and survive crises.

Compare this to the U.S. Companies like **OpenAI,** Palantir and Databricks thrive because from the early-stage through growth-stage funding they have had access to private capital ****that encouraged risk-taking. The reality in Europe is that there is no vast pool of VC money that enables the kind of market monopolizing spending that was and generally is available in the US, particularly at the early stages.

When private investors are willing to fund the risk, companies have far more runway to experiment, pivot and test. In Europe, VCs hesitate to lead at the early stages, and use metrics to avoid early stage investments that do not meet, what, in my opinion, are artificially high revenue and growth targets. Without private funding, European founders gamble they can escape the government vise before it squeezes, and devote time and energy unproductively in managing the government regulations and reporting required by the public investment.

Conclusion

I have described the reality of the startup ecosystems in the US and Europe. Understanding the reality points us to a deeper truth: risk aversion and acceptance reflect deeper societal values. While Americans can and do prioritize flexibility and experimentation, Europeans emphasize responsibility and sustainability. Americans can afford this because institutional investors are willing to take on some of the risk for the enormous potential rewards. However, European culture is not going to change, so understanding what European founders need to do to compete effectively means leaning into their strengths – rewriting the playbook inherited from Silicon Valley and capturing value through responsibility and sustainability. This will be addressed in subsequent articles in the series.