Euro tech start-ups hanker for U.S. success
Except for a handful of companies, crossing the Atlantic has often meant entering "a territory of failure."
"The U.S. has been such a territory of failure," lamented Bernard Liautaud, CEO and founder of Business Objects, one of the most successful venture-backed European start-ups ever to make the leap across the Atlantic.
"They go to the U.S. and everything goes down the tube," he said of most of his corporate compatriots who have relocated to the States. "The tendency is to say that we are a unique case, but I don't think so. Any software company in Europe should be able to do what we did. I think European VCs are still wondering what the right model is."
Indeed they are, though replicating the success of Liautaud's Business Objects would be tough. Liautaud, a former Oracle sales head in Paris and Stanford University-educated engineer, set out 15 years ago to build his software start-up in the American mold after Oracle passed on his suggestions to set up a business-intelligence software unit within the company. He also staked a claim in the U.S. very early in his company's development.
"We were only seven people in Paris when we started our U.S. operation," recalled Liautaud, who capitalized on the timing of the move with key strategic decisions. The software market at the time was centered almost exclusively in the U.S., so even though the company was based in Paris he made its official language English. He sought venture funding from Boston-based Atlas Venture, which boasted a network in the tech industry that he could lean on alongside his two French venture backers, Paribas Technologies and France Telecom's Innovacom unit. Liautaud also instituted an incentive-based, American-style sales framework.
"When you are in the U.S., you have the toughest competition," Liautaud said. "It forces you to improve your products. If you beat the competition in the States, you beat it everywhere."
But in the technology industry, where for so many sectors the U.S. is the main market and thus key to a company's long-term success, European venture capital-backed start-ups that take the plunge most often fail miserably. European VCs reel off myriad reasons for the failure of their portfolio companies to translate technological savvy into business success in the U.S., but common to all the tales of woe is one overriding issue: the paucity of qualified executives able, or willing, to lead the charge.
"There is nothing more impacting on a company than hiring a good CEO," says Frank Bohnke, managing director at Wellington Partners in Munich. Liautaud worked for Oracle and then mimicked its corporate culture in an American setting, but few European executives possess such a deep knowledge of the U.S. market and the skills necessary to guide what is likely to be an obscure European technology company in a new and vastly complex market.
"The wrong executive hires kill companies very fast, and that's what so often happens," agrees Ben Anderson, managing partner of high-tech recruiting specialist Capital Christian & Timbers in London. "We've had to come in and clean up too many European companies to mention that have gone over to the States and made the wrong hires."
Indeed, between 1997 and 2003 European venture capital firms poured 42.7 billion euros ($55 billion) into more than 15,000 companies, according to PricewaterhouseCoopers. Yet only a handful of companies--such as Business Objects, GlobespanVirata (now part of Conexant Systems), Autonomy and ARM Holdings--have ever had a measure of success cracking the North American market.
Finding the right people
Many European start-ups have the requisite technological prowess, especially in areas such as wireless technology and biotechnology, where Europe has a competitive edge, but something happens when they try to airlift their businesses to the U.S. Whether it's an ignorance of the U.S. market, the inherent parochialism in U.S. tech circles, an unwillingness to pay the higher compensation demanded by American executives or cultural differences that become apparent only after it's too late, most transatlantic jumps fail because they are led by the wrong people.
"There is a relatively small population of Europeans that will comfortably make the transition to president or CEO of a business resident in Delaware," says Charles Cotton, a director at Cambridge, England-based
tech research firm Library House. Cotton also is a former CEO of Virata, a DSL chipmaker that moved from Cambridge, England, to Santa Clara, Calif., and had a wildly successful IPO on Nasdaq in 1999 before morphing into GlobespanVirata via a U.S. acquisition. "I had lived and worked in the U.S., so I had the right experience but not the right accent," observes Cotton, an Englishman and Virata's third CEO.European venture investors, after some very expensive lessons learned during the past bubble-fueled start-up migration to the U.S., are beginning to change how they go about luring top-tier executives in the U.S. But even in these more cautious times, the process can be still remarkably unsophisticated.
The same careful investors who spend months vetting a business and its underlying technology will often go on little more than intuition and a cursory background check to select a leader to steer a company into which they have just poured millions.
As outsiders to the U.S., Europeans are seldom able to tap American VCs' vast network of local talent, and they operate at a disadvantage at home because Europe's much younger tech industry offers a shallower talent pool. Consequently, finding an outside executive and key salespeople in the U.S. is a task that often falls to headhunters.
Yet these efforts often fail as well. "Americans are exceptionally good at marketing themselves," says Cotton, who is also chairman of Level 5 Networks, a fabless chip company with operations in England and Silicon Valley. "They are used to talking about themselves from an early age. So the difficult thing for people without the requisite experience is seeing through what is a pretty thick veneer."
Pay is another problem. European start-up CEOs, for example, typically get an equity stake of 3 percent to 5 percent in their companies when they are parachuted in to run a start-up. American CEOs often expect double that percentage.
"They are absolutely brutal about it," Anderson says of aggressive, experienced American CEOs. "They really know how to lean in and be aggressive. It's always a question of 'How much money can I make out of this?' "
The psychological edge
There is also an unabashed superiority complex that pervades the American high-tech community from Silicon Valley to Boston, making it even more difficult to sell a European story to an American executive who has three or four other offers at known entities backed by familiar investors. "You have to create an aura around a company," says Wellington Partners' Bohnke of his executive-recruitment efforts in the U.S. "If you're not able to do that, to create that aura, you will meet with snobbery."
Jo Taylor, global head of 3i Group's venture capital business in London, agrees. "If you just come out as a European company saying, 'We're coming to America,' you get a third-tier sort of sales and marketing vice president who doesn't really do much but sit around for a year and get fired and walk off with the cash."
The alternative, of course, is to retain current management, yet a basic knowledge of the U.S. is still key. "It's a sine qua non," says Laura Morse, Atlas Venture's "human capital" partner, whose job is dedicated to recruiting and retaining managers for portfolio companies. "If you're going to send somebody into the U.S. who is European, the person must have had U.S. experience--minimal would be U.S. education. But to send someone who's never worked or acclimated to the U.S. for a key role is something we wouldn't do."
But while culture is crucial, it goes both ways. "Entrepreneurs check out more at an earlier stage in Europe than they do in the U.S.," 3i's Taylor notes. "They make 30 million pounds on an exit and say, 'Fine, I'll just play golf for the rest of my life.' We have found it more difficult to recycle good management because they get comfortable rather earlier than we would like."
A sea change in the collective psyche of European tech executives seems, at least in the near term, an unlikely proposition, which means that venture capitalists in Europe will have to continue to rely heavily on the U.S. talent pool. That's a mixed blessing for high-tech recruiting specialist Anderson at Capital Christian & Timbers.
"We're getting better at it," Anderson says, "but trying to recruit Americans in European companies is still really tough."
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