For Europe to emulate the technological success of Silicon Valley, it should change its startup financing model

Tech startups can be delighted message that Silicon Valley enterprise capital (VC) veteran General Catalyst is on the verge of raising $6 billion (£4.8 billion) to back start-up corporations. The heat is hot on your heels announcement from Andreessen Horowitz, one other big VC, recent $7.2 billion investment fund. These are some of the largest fundraising events in years and took place during a difficult situation in the VC sector silencewith total global investment falling from $644 billion in 2021 to $286 billion in 2023.

The bad news, depending on where you reside, is that almost all of your income will likely be invested in the United States. American startups absorb about half of all global VC funding, while Europe and the UK are lucky to receive a quarter. This is despite the proven fact that Europe AND Great Britain they have a barely larger share of global GDP than the US (17% vs. 16%).

VC investments by country (US dollars)

This helps explain why the three leading US technology corporations, Microsoft, Apple and Nvidia, are price around $7.5 trillion, while their European counterparts, ASML, SAP and Prosus, are price around $700 billion. So what could be done to change this example?

The edge of Silicon Valley

Silicon Valley success could be assigned to a series mutually reinforcing aspects, many of which sowed their seeds a long time ago. These include lucrative government contracts, nearby entrepreneurial universities, and the accumulation of wealth and talent from tech giants equivalent to Apple, Nvidia and OpenAI. This kind of advantage is difficult to replicate.

American investors often invest hundreds of thousands of dollars in relatively early-stage corporations, a sum that other ecosystems simply cannot match. But startups normally have to do this first demonstrate adhesion with customers, normally in the form of sales revenue or number of users. This differs from technology investment hubs equivalent to Berlin and Scotland, where investors typically only require a strong team with an idea for a startup to be regarded as having good investment potential. Our research suggests that this may occasionally be the underappreciated reason for Silicon Valley’s success.

After conducting in-depth interviews with 63 entrepreneurs and investors from Silicon Valley and Berlin, different investor expectations are very noticeable. For example, the founders of a company based in San Francisco AirBnb they’d to use their bank cards to keep the company afloat and even resorted to selling boxes of cereal before they finally secured financing.

So do the creators of food delivery apps DoorDashbased in San Francisco, built a full prototype and self-delivered for almost half a yr before launching its first round of investment.

This is a stark contrast to European ecosystems. Recent examples from Berlin include the language tutoring market Hey, Lama, which secured financing almost immediately after launch. Meanwhile, the launch of animal care Rex inside months of launch, it had raised over $5 million.

And yet in the years 2020–2022 $44 billion quite than investing in early-stage deals in Silicon Valley $5.8 billion in Berlin. Evenly, more or less 31% in the US but only 19% of Europeans Startups at the seed stage advance to the next round of fundraising.

This doesn’t necessarily mean that corporations that do not raise additional financing are failing, but it may help explain why silicon Valley market exits average $403 million compared to $53 million for market exits Berlin.

So why is not it the case that American startups have more difficulty when they have to meet higher expectations to get funding? Could other ecosystems catch up by adopting the same strategy?

“Death valley”

The journey of a business idea from its inception to early implementation is often referred to as “Death valley”. During this era, the startup must proceed to develop the business, build the product and develop a reliable business model. There is no one-size-fits-all approach and many corporations fail, either because the idea is unfeasible or they run out of money.

Silicon Valley’s preferred financing model of investing in startups with traction goes some way to reducing the risk of VC failure. In the future, this should result in more resources to reinvest in recent startups, which has likely helped the entire ecosystem flourish. Entrepreneurs also profit from delaying fundraising until they show good traction because the startup will likely be price more. This means they will get extra money or surrender a smaller percentage of their business.

This would suggest that European startup ecosystems should consider moving towards this model. But this comes with a major downside. Few entrepreneurs have enough money to keep their company afloat in the valley of death – and normally they do longer and deeper for the most revolutionary ideas. This is especially a problem for entrepreneurs from underrepresented groups, equivalent to people from socioeconomically disadvantaged backgrounds, women and immigrants, who are less likely to have the mandatory resources or connections. Thus, adopting the American investment threshold may make the world of startups much more inaccessible to them.

To reap the advantages of the American system without harming diversity, this is mandatory supporting structures existing programs equivalent to incubators and acceleration programs to help start-ups gain momentum. Even so, they need to be rigorously designed to ensure this signal reliabilityand thus help – as an alternative of making it harder – securing the first investment round for incubated corporations.