Definitely an overlooked matter with multiple ramifications. The ability to size up and down is critical to enable fast iteration and adaptation of young ventures. The consequences on talent attraction are also dramatic. Leaving a well paid job after a >10-year tenure, foregoing severance/exit bribe, to found or join an innovative company is outright irrational for many in most of continental Europe. Talent is just rotting away, waiting to cash out an oftentimes life-changing sum.
However, as a VC myself, I don't think obstacles to restructuring are directly weighing down in the risk appetite of European VCs, as implied in the article. At least they are not too high in the list. It is well researched that VC returns are disproportionally driven by large wins rather than by minimising losses, which will be capped by the corporate veil in a failed venture, as opposed to a large corporation trying to innovate.
Very interesting to hear your personal experience with this. Do you think it has effects on corporate buyouts of start-ups? What about EU start-ups ability to grow into huge winners?
I am sure it does on both, directionally. European companies have to be more wary about any misstep and hence might be slower and less bold with investment, which surely result in opportunity costs.
Thank you Inigo. I agree with you that restructuring cost do not impact the risk appetite of European VC. The point made here is that it may impact the exit price likely to be paid by large groups like SAP, Microsoft or Google when the acquired team is in Europe. The impact of European VCs is a reduced IRR, therefore less available funding from the LPs. See details in my book Europe, Tech and War, chapter 9. www.EuropeTechandWar.com.
You should write (and model) more about what this implies for SMALL enterprises (and indeed startups). Perhaps there is still a valid effect there, because if larger enterprises also see the risk of taking in a startup company because of potential layoffs, this will also reduce the value of the small company and hence the risk/return calculus changes. That should show for instance in M&A data.
Good idea on the M&A data. An aspect I didn't get to cover is that even though smaller firms are largely unbound by these rules, it likely indeed has a very corrosive effects on buyouts. A second channel which is underrated is that (at least according to some people I have been talking to) it also hurts enterprise customer acquisition for EU start-ups. U.S firms are more willing to hire a new team to try incorporate a new product, which increases demand for small firms.
I've met numerous "refugees" from Europe in Silicon Valley doing their own startups, often driven here with tales of woe trying to get their startup past unfunded garage-mode to hiring-first-few-employees mode.
Employee benefits and sundry other stuff is a huge financial cliff in northwestern Europe that is very hard to ascend...
Small tech companies in Silicon Valley typically don't offer severance at all if they fail - you're lucky to have your last paycheck/direct deposit clear. I've been in a couple where the "severance" was "take your company laptop/desktop/monitor home and grab whatever office furniture you want as otherwise the landlord will sell it all".
We all knew the score on this and didn't expect anything different...
While technically, this remains an area where member-states have autonomy, the EU is increasingly taking an active role. The collective bargaining directive is already shaping regulations and there are perennial discussions of EU minimum wage rules &c
Every single EU election has candidates across the board promoting a "more social Europe" (and we used to hear a lot about the risks of "social dumping" back when Poland was poorer than France)
I would still think Hogarth is right with regard to startups. If you're a small company in Germany, severance payments are not that big: it is half your monthly salary per year you worked at a company. The bigger the company gets (and the more people you want to lay off), the more complex it gets because you either have to involve the works council or reflect the social situation of your employees in your layoff plan. So restructuring a large company (such as Volkswagen) is expensive, but not so much failing with a small-ish startup. But restructuring in Big Tech is expensive, too, as you can see on the balance sheet of Big Tech in recent years.
The U.K. has a lot more flexible EPL than Europe, and a lot more venture activity, so that is compatible with this story. But Coste and Coatanlem make the case that while good EPL is a necessary condition, it is not sufficient. So UK struggling on other fronts (e.g. land use or shallower capital markets) means that UK firms still operate at a sizeable (albeit smaller) disadvantage. Add to that winner-take-all markets and you get the current US dominance.
Great post and publication, thank you, Pieter.
Definitely an overlooked matter with multiple ramifications. The ability to size up and down is critical to enable fast iteration and adaptation of young ventures. The consequences on talent attraction are also dramatic. Leaving a well paid job after a >10-year tenure, foregoing severance/exit bribe, to found or join an innovative company is outright irrational for many in most of continental Europe. Talent is just rotting away, waiting to cash out an oftentimes life-changing sum.
However, as a VC myself, I don't think obstacles to restructuring are directly weighing down in the risk appetite of European VCs, as implied in the article. At least they are not too high in the list. It is well researched that VC returns are disproportionally driven by large wins rather than by minimising losses, which will be capped by the corporate veil in a failed venture, as opposed to a large corporation trying to innovate.
Very interesting to hear your personal experience with this. Do you think it has effects on corporate buyouts of start-ups? What about EU start-ups ability to grow into huge winners?
I am sure it does on both, directionally. European companies have to be more wary about any misstep and hence might be slower and less bold with investment, which surely result in opportunity costs.
Thank you Inigo. I agree with you that restructuring cost do not impact the risk appetite of European VC. The point made here is that it may impact the exit price likely to be paid by large groups like SAP, Microsoft or Google when the acquired team is in Europe. The impact of European VCs is a reduced IRR, therefore less available funding from the LPs. See details in my book Europe, Tech and War, chapter 9. www.EuropeTechandWar.com.
Very clear, Olivier. I will check out your work. Thanks for putting this important matter on the radar.
Congrats, fantastic post!
Great analysis, Pieter!
You should write (and model) more about what this implies for SMALL enterprises (and indeed startups). Perhaps there is still a valid effect there, because if larger enterprises also see the risk of taking in a startup company because of potential layoffs, this will also reduce the value of the small company and hence the risk/return calculus changes. That should show for instance in M&A data.
Good idea on the M&A data. An aspect I didn't get to cover is that even though smaller firms are largely unbound by these rules, it likely indeed has a very corrosive effects on buyouts. A second channel which is underrated is that (at least according to some people I have been talking to) it also hurts enterprise customer acquisition for EU start-ups. U.S firms are more willing to hire a new team to try incorporate a new product, which increases demand for small firms.
I've met numerous "refugees" from Europe in Silicon Valley doing their own startups, often driven here with tales of woe trying to get their startup past unfunded garage-mode to hiring-first-few-employees mode.
Employee benefits and sundry other stuff is a huge financial cliff in northwestern Europe that is very hard to ascend...
Small tech companies in Silicon Valley typically don't offer severance at all if they fail - you're lucky to have your last paycheck/direct deposit clear. I've been in a couple where the "severance" was "take your company laptop/desktop/monitor home and grab whatever office furniture you want as otherwise the landlord will sell it all".
We all knew the score on this and didn't expect anything different...
“Google didn't rely on PageRank alone — it went on to build YouTube, AdSense and Android.”
That should be “buy”, not “build”.
Great post!
While technically, this remains an area where member-states have autonomy, the EU is increasingly taking an active role. The collective bargaining directive is already shaping regulations and there are perennial discussions of EU minimum wage rules &c
Every single EU election has candidates across the board promoting a "more social Europe" (and we used to hear a lot about the risks of "social dumping" back when Poland was poorer than France)
I would still think Hogarth is right with regard to startups. If you're a small company in Germany, severance payments are not that big: it is half your monthly salary per year you worked at a company. The bigger the company gets (and the more people you want to lay off), the more complex it gets because you either have to involve the works council or reflect the social situation of your employees in your layoff plan. So restructuring a large company (such as Volkswagen) is expensive, but not so much failing with a small-ish startup. But restructuring in Big Tech is expensive, too, as you can see on the balance sheet of Big Tech in recent years.
Excellent post. I wonder where that leaves the UK, perched half way between the free-wheelin’ US and the over-cautious EU?
True. Talent for actually commercialising ideas is a rate-limiting step IMO (at least regarding biopharma-my own speciality).
The U.K. has a lot more flexible EPL than Europe, and a lot more venture activity, so that is compatible with this story. But Coste and Coatanlem make the case that while good EPL is a necessary condition, it is not sufficient. So UK struggling on other fronts (e.g. land use or shallower capital markets) means that UK firms still operate at a sizeable (albeit smaller) disadvantage. Add to that winner-take-all markets and you get the current US dominance.