Is the EU too big as a startup ecosystem?

The other day I attended an event in Rome where Greg Horowitt discussed how the Rainforest model for fostering a healthy startup ecosystem could apply to Italy. It was a fairly interesting presentation and discussion, but I was a little disappointed by the lack of any reference to the bigger European context (and market).

Curious to know if this was just because the organizers were only interested in the Italian specific case – the conference title was “The Italian Rainforest” – or for other, more profound reasons, I asked Horowitt what he thought about a possible “EU-wide rainforest”.

His answer was that, above a certain size, the transaction costs become too big for an ecosystem to work, and that the EU was, in his opinion, above that size. I then asked about Italy’s size: the Italian population is 1.5 times that of California, and around 20 times that of Silicon Valley+San Francisco. During the conference Horowitt had said that the very different Italian regions should work to create their own ecosystems to leverage their different strengths, but his answer was that in Italy’s case it would make sense to work for an Italian rainforest.

This made me think. The 27-states European Union is home to 500 million people. Obviously, the EU could never be the “Next Silicon Valley” – just like the whole USA couldn’t be a “Silicon Valley”. But would the transaction costs really be too high? Are the problems that startups in the different EU states have to face so much different? Wouldn’t it help if we started thinking in terms of a EU startup ecosystem, thus creating a cross-pollination of experiences, solutions, talents – and, why not, some EU level lobbying?

I don’t have a definitive answer yet. But, from the many discussions I follow about EU startups, I see a lot of common problems, and the transaction costs are getting lower every day: At least among innovative startups throughout Europe, English is already the lingua franca; we have very cheap and frequent flights connecting most of the EU; Internet communication options are getting better and better every day; regulations are converging more and more.

And, most important of all, only at the EU level our startups could have a home market able to rival in size the one US startups have privileged access to, with all the advantages in terms of economies of scale and publicity this brings. No matter how well we develop our national ecosystems, no single EU nation could create one that could compare in size not just to the US, but also to China, Japan, and soon India, Russia and Brasil.

So, no matter how difficult it could be, and even if there are no guarantees that a EU rainforest could work, EU startups should start thinking at a EU level, and at least try to find ways to turn the EU single market, and the EU common institutions, to their advantage. The only alternatives are to settle for also-ran ecosystems, or move to the US.

I thank Horowitt very much for the insights he shared with us and for taking the time to answer me, but I hope EU startups will prove him wrong.

US patents and European startups: More threat or more opportunity?

Martin Bryant on The Next Web gives his take about the mess with US patents and European startup and tech sector in general, about which I wrote in a recent post.

From his article it looks almost as if the patent threat was worse for European businesses than it is for US ones, because it is easier (or less risky) for US business to come to Europe than the opposite. But US startups have to face that threat in their home market, and the situation there isn’t any better for them than it is for their foreign competitors. So they could never get the chance to come to Europe, if they don’t even get the opportunity to start.

I still think that the threat is bigger for US startups than for EU ones. Maybe that’s not true for big businesses, but I’m not convinced of even that. We’ll see 🙂

European startups and US software patents: Threat or Opportunity?

For a long time the intellectual property of computer software could only be protected by the means of copyright laws. This meant that a developer who had an idea and wanted to make it a reality could do so without any fear: As long as he didn’t actually copy from someone else’s code, there was nothing to worry about.

Business sharkThis changed when patents started to be granted for software. With a software patent you are barred from reinventing something that someone else already invented and patented, even if you do it starting from scratch and without knowing anything about that patent. This means that you may be forced to pay to use your own idea, if someone else had it before you and already patented it – that is, if the patent holder even wants to license it to you.

To make a long story short, since 1996, when the patentability of software was officially regulated by the US Patent Office, the trickle of software patents issued in the US has become a deluge – over 16,000 just last year, for an accumulated number well over 100,000. And most of the “inventions” that those patents cover are far from revolutionary or from being something requiring years of research; on the contrary, most of them are very simple if not absolutely obvious. Something that most average programmers could reproduce by chance when solving a problem on their own.

So, if you have an idea and implement it in software today, it is quite possible that you will break at least one of those patents, without knowing it. This has been true for some time, but now there are more and more companies that are trying to profit from their patents by threatening to sue other companies, and even individual programmers, who might be infringing their portfolio – even if there is no competition whatsoever with the infringer.

This is bad news for developers, bad news for entrepreneurs, and bad news for consumers. The only good news is that the situation isn’t as bad everywhere – for example, here in Europe, at least for now, software patents are much more difficult to obtain. They are usually only granted when related to some industrial process, and the patentability of software “as such” is explicitly prohibited.

This means that European startups don’t have to worry so much about software patents in Europe itself, but if they want to get to the US market they fall under the same threat as their American counterparts; and to become a global player in software, success in Europe is not enough: You need to be validated in the US.

As a matter of fact, Europe has been the birthplace of many successful software startups, some of which have become global hits: Rovio and Spotify (which incidentally got sued the moment it landed in the US) just to cite a couple of the most recent ones, Skype and Mysql to talk about the most famous. But that’s nowhere near the number and the level seen in the US.

There are many theories about this difference, and as far as I know they never include a lack of talent as an explanation. The problem lies somewhere else. In my opinion, one of the biggest disadvantages European software startups have to face if compared to US – and especially Silicon Valley – new ventures is one related to visibility and credibility.

Success begets success. The attention of the tech world is focused on the US and even more on Silicon Valley. The simple fact that a startup is based there brings a higher visibility and bigger credibility, easier publicity, more funding. It’s not for nothing if so many foreign startups and entrepreneurs move to the Valley to seek their success.

As the pernicious effects of software patents start weighing in more and more, though, this could change. I’ve got nothing against the Silicon Valley or the US – I even have relatives living there – but this self-inflicted problem could create a big opportunity for European developers and entrepreneurs.

Europe is already the richest market for software in general, but its linguistic fragmentation, more conservative consumers and a tradition of US innovation make it less prominent than the US one. If the European Parliament resists the pressures to relax the European rules on software patents, though, and if the USA doesn’t change the track it put itself on, Europe could become the reference market for innovative software, especially for new web and mobile apps that would be riskier and riskier be bring to the market in the USA because of the threat of patent litigation.

An American market practically closed to innovators that don’t have very deep pockets and/or thousands of protective software patents to answer the threat from lawsuits would mean a poorer global market for everybody. But in that poorer global market European startups would be comparatively much better positioned than today.

And if lots of cool new things will start to happen in Europe,  startups based in Europe could gain the upper hand when it comes to visibility and credibility. There would still be problems of fragmentation and consumer attitude, but if the tipping point is reached that could be superseded by other effects. Even some American entrepreneurs, scared by patent litigation at home, may decide to move here, inverting the traditional trend of European startuppers who move to the US, and this influx of talent would create an even better environment and contribute to the change.

If not Europe, who could bear the baton of software startup innovation if the US were forced to pass it up? China or India could be two candidates, but for now Europe looks much better positioned to me, if anything else because the best software talent in those two giant countries is already soaked up by other booming industries.

In the end, I wish that the US will be able to sort out its growing mess with software patents soon, not just out of disinterested generosity but also because that would be better for the global economy. But if they stay on their current course – and it looks VERY difficult to me that that course will be changed substantially, considering the staggering amount of money that has already been invested in software patents – then we in Europe should try to be as ready as possible to receive the baton.

This should include lobbying to get even stricter rules for software patents, creating stronger ties between innovators and other such systemic measures. But, in my opinion, it could and should start first of all creating an awareness of the chance that European developers and entrepreneurs have in front of themselves.

The baton may be there for grab in a short time – a couple of years. What are we waiting for then? We should already be warming up.