When Michel Casas started ACTE SA, a chain of business centers based in Paris, he didn't tell his lawyer, his bank, his clients, or his suppliers about the little electrical repair company he had founded back in 1960; the only ones who knew were the friends from whom he raised the capital. His earlier company, you see, had failed -- and in security-minded Europe, going out on your own and failing means winding up in disgrace. Had all those people known Casas's shameful secret, ACTE might never have gotten off the ground.
Cathy Williams, a British electrical engineer, started two companies -- a distributor of opto-electronic equipment and a manufacturer of liquid crystal displays -- with her husband, Chris. She had plenty of scientific credentials, having worked as a development engineer at Marconi Space and Defense Systems and as a lecturer in electronics at Huntington College. But did she or her husband have management training? "Oh, no," she says. "I can't think of a course offhand where technology is combined with management." Although her previous work had provided her with some managerial expertise, launching the new ventures was a kind of on-the-job training ground in actually running a business.
In Europe, the phenomenon represented by Cases and Williams is big news. France, West Germany, England, and half a dozen other countries are in the grip of a sort of start-up fever, with significant numbers of new businesses springing up for the first time since just after World War II. It is a phenomenon, moreover, with a powerful political edge. European economies in the past several years have virtually stagnated, generating relatively few new jobs, and governments of every political stripe have begun to look longingly at new-business formation as a source of economic salvation. Nothing short of a rebirth of the entrepreneurial spirit, the thinking runs, is capable of pulling Europe's tradition-bound economies into the competitive world markets of the future.
Yet the obstacles faced by Casas and Williams are typical as well. Unlike most of their American counterparts, European entrepreneurs must start their companies in societies in which fear of risk is endemic, and in which institutional support is at best fragmentary. Such obstacles have so far kept the entrepreneurial revival small by U.S. standards. What has kept it going, however -- and what will likely fuel its growth in the future -- is the emergence of a new breed of entrepreneurs who are undaunted by the difficulties, and who seem oddly immune to the fear of failure that permeates their societies. Although still few in number, they are already taking advantage of the favorable political and financial climate to pursue their ventures. Barring economic or stock-market diaster, the momentum for change that they are creating won't easily be stopped.
Solid statistics on the number of new businesses in any one country -- let alone in Western Europe as a whole -- are impossible to come by. Still, the signs of the entrepreneurial boomlet are everywhere.
In France, for example, Casas's 50 business centers -- operations that provide advice and logistical support to start-ups -- have serviced some 6,000 clients in the past five years, with another 1,000 or 1,500 projected for this year. In Berlin, more than 200 new enterprises have opened their doors in the past two years. In Geneva, fledgling venture capitalist Les Hawrylyshyn, a former bank officer, sees two or three proposals a week. Budding technology centers -- "Silicon Glen" in Scotland, "Municon Valley" in Bavaria, and the M4 corridor west of London -- give the boom a high-technology flavor. But it extends well beyond such centers, and well beyond the technologies they represent. According to French government statistics, more than 80% of new businesses are in the service sector; even among manufacturing companies, only about a fifth of new businesses can be classed as high tech.
The American ancestry of Europe's new entrepreneurship shows up in any number of ways. Gilles Macherey, for example, says he "caught start-up fever" at UCLA, where he spent two years getting an MBA; returning to France, he and two partners, also Frenchmen who studied at UCLA, set up an instant-printing business that now boasts some 40 shops. Pierre Grouvel, who founded a company last year called Alcatel Thomson Gigadisc, had worked for IBM, Xerox, and Prime Computer, and had taken a course in advanced management offered by Stanford University Business School at the European Institute of Business in Paris.
More important than America's tutelage of individual entrepreneurs, however, is its impact on policymakers and investors. The reason isn't hard to fathom: While Europe's economies were running out of steam in the past several years, the U.S. economy virtually exploded, creating millions of new jobs. As a result, governments, financiers, and even big corporations have all been trying to figure out how to import and support the American spirit of enterprise. New laws and tax policies have been passed to encourage start-ups. Government agencies and savings banks have begun to lure new businesses to their regions with subsidies. New securities markets have been created to facilitate selling shares in small companies. And start-up money itself is abundant -- far more so than qualified start-ups, experts claim.
Even with all the government measures, the business climate still leaves much to be desired by U.S. standards. Britain recently lowered its top personal tax rate to a stillhefty 60%. Throughout Europe, it is as difficult to fire people in private industry as it is in the U.S. civil service. And there are no investment tax credits or rapid depreciation allowances to encourage struggling young businesses.
Still, important measures are being taken. Britain has begun a gradual reduction of its corporate taxes from 52% to 35%, and companies in high-unemployment areas are sometimes exempt from some national and local taxes. In France, the government has recently enacted laws to encourage venture capital investment. Sometimes aid comes down to curiously small levels. Belgium, for example, has begun to grant partial relief from certain taxes as well as awarding premiums to a person who starts a new company, so long as the founder is under 35. The purpose: encouraging young people to stay off the country's burgeoning welfare rolls.
Some examples of governmental support for new businesses are enough to make an American entrepreneur's mouth water. Pierre Grouvel received almost half of Alcatel Thomson Gigadisc's initial $20 million in capital from various agencies of the French government. David Stafford moved his small biochemical company from Cambridge, England, to Cardiff, Wales, to take advantage of Welsh relocation benefits worth ?94,000 (about $133,000). He has already received half the total. He is also eligible for local grants covering part of his capital expenditures. Similarly, when Integrated Ceramic Components Ltd. started up in Livingston, Scotland, last April, it received a package of government assistance that included a Regional Development Grant, Selected Financial Assistance, and a European Training Grant -- the last item coming half from the United Kingdom and half from the European Economic Community itself. All told, the aid came to ?650,000 (about $920,000) -- not bad for a company with only ?1.1 million of initial equity.
As important as the government programs is the creation of markets for the sale of small-company shares. Until recently, it was difficult or impossible throughout Europe to sell small businesses or take them public. "And if you have no exits," observes Richard Fitzalan-Howard of London's Robert Fleming Investment Management Ltd., "your entrances collapse." Susan Lloyd, editor of the London-published U.K. Venture Capital Journal, dates start-up fever in Britain from 1981, and attributes it in good part to the launching of the Unlisted Securities Market, Britain's rough equivalent of NASDAQ. Herve Hamon, who runs the French venture capital company Sofinnova, says that only two to four new issues were floated every year until the coming of the Seconde Marche in France; since its inception in 1983, 100 issues have come to market. Now there is another market for the shares of even smaller companies, called Marche Hors Cote d'Acclimatation -- roughly translated, the Unlisted Kindergarten Market.
Government support and the growth of securities markets have led to an explosion in the amount of venture capital available to entrepreneurs. According to Ross S. Peters of Glasgow-based Murray Johnstone Ltd., one of Europe's biggest and oldest venture capitalists, just a dozen groups in the United Kingdom are trying to raise more than ?350 million ($493 million) for investment in small businesses. Nor is Britain alone. The venerable Frankfurt private bank B. Metzler Seel.Sohn & Co. has entered into a team arrangement to make venture investments; it was 1 of 28 German venture pools on a list compiled last November, and only 1 on the list existed before 1982. In France, a venture capital association was founded in September 1984; today it has 40 members, and those 40 have from 1.5 billion francs to 3 billion francs ($174 million to $348 million) available for investment in France alone.
Not all of this, to be sure, is classic venture capital money. Some is for leveraged buyouts, some is development capital for existing businesses, and some is earmarked for the Business Expansion Scheme, the United Kingdom's controversial program that offers tax breaks on certain types of investments. Even so, there is considerably more start-up money available than the figures suggest, for they don't include such major sources as government agencies, local savings banks, and corporate or family pools.
Some of the new-venture financing, in fact, comes from the same older, bigger corporations whose economic dominance the new businesses are challenging. "I'm pushing corporate venturing very hard," announces Michael Stoddart, the imaginative British dealmaker who runs the Electra Investment Trust PLC. "We're going to corporations and saying, 'What product do you have that needs developing that isn't central enough to warrant great resources, and where you can identify someone within the company capable of running it?' If they have such a division, we put up the research and development funds and structure the deal through which it is spun out." The Electra-backed firm that engineers such buyouts, Candover PLC, started a scant five years ago; it has been so successful that it recently went public at a valuation of 60 times its original capital.
For all that, venture capitalists eager to invest and to help companies take advantage of the government programs complain, in the words of Sofinnova's Herve Hamon, that "the opportunities are not developing with the same rhythm." Adds Geoff Taylor, who heads the relatively new hands-on venture unit of Investors In Industry Group PLC, a British group that dates from the 1940s, "We don't need more money for new ventures -- we need more bloody entrepreneurs!" More qualified entrepreneurs, that is: Potential investors are seeing "astonishingly numerous proposals," in the words of Metzler's Hans Hermann Reschke, but relatively few that they want to finance.
As a result, entrepreneurs with a modicum of business experience and a decent plan find that they can pick and choose among suppliers of capital if -- and this is a big if in Europe -- they are prepared to give up significant equity. Most approach a start-up with quite a different mind-set: They think "financing" means prying money from extremely risk-averse banks against ludicrously high and varied collateral. "I had to give a personal guarantee, mortgage both my apartment and my business, and have the loan insured, adding two points to my interest cost," says Paris-based Mike Wallace of Plein Pot SA, a chain of muffler shops. Less experienced entrepreneurs are astounded to find that they can get equity investment instead -- but are equally astound when the price is decreased ownership.
Why have qualified entrepreneurs been so slow to appear in Europe? One reason is that, traditionally, technical and management skills are taught separately. That is beginning to change, but there is still a whole generation of would-be company founders, like Cathy Williams, who know either products or business but not both. To compound the problem, says Uwe Burkheiser of TVM GmbH & Co., a Munich venture fund, "scientists' understanding of themselves is that pure science is good, applied science is not so good." Burkheiser recalls a meeting with a scientist who wanted to set up his own concern. "He gave us to understand that of course he wouldn't sully himself with the business; he'd just consult on the science. Our willingness to give money dropped to zero."
An unexpected source of change in this area, notes Geoff Taylor, has been the austerity imposed on European governments in recent years. "The [Thatcher] government has done a lot to bring academia and business together," he says, "mainly by taking a meat cleaver to university budgets." To support themselves, academics have gone into consulting and developing companies with a university base -- "all that good stuff you take for granted in the United States."
One big incentive to entrepreneurship in the United States -- the frank desire to get rich -- is considered, well, unseemly in much of Europe. "In Germany," says Bernd Ertl, whose company, Portfolio Management GmbH, helps small businesses sell their shares, "you have to excuse yourself if you make a lot of money." A Swedish entrepreneur who chose to start his business in France and England explains why he did so: "Everybody has to have it equally miserable in Sweden. I know a man who owns a tool company who bought a secondhand Mercedes; if he bought a new one, there would have been a strike. Someone who left that firm to form another one bought a new BMW -- and now the people in his old shop won't speak to him."
But probably the main reason for the relative dearth of entrepreneurs is the European attitude toward security and risk. Germany, not surprisingly, seems to be the most extreme example: "You must remember that our parents lost everything twice, once in the great inflation of the '20s and once in the war," points out Burkheiser. But concern for security is high all over Europe. So are the incentives to stay put. High taxes and relatively low salaries make it difficult for middle managers to save enough money to consider leaving the corporate nest, while generous perks and pension benefits make it attractive to stay. In some places, leaving a job voluntarily is considered tantamount to betrayal.
Finally, the European attitude toward bankruptcy differs dramatically from the American. "In the States," comments a Swiss banker, "if someone loses $10 million, it's considered money spent to acquire an education for his next venture. Here, you have to change your name, you have to move. You can never get funding. Forget it." In Frankfurt, Metzler's Reschke adds with chilling finality, "There are no more possibilites for that person." Little wonder, then, that Michel Casas, when he started his business centers, forgot to mention that little electrical shop that had failed.
Siemens AG, the German electronics giant, encountered a striking example of the stay-put mentality when it decided to entice potential entrepreneurs out of its 340,000-employee work force. Like most large companies, Siemens is constantly researching products that it ends up deciding not to produce. For this and other reasons, it established an in-house venture group known as VCB to lure would-be entrepreneurs into developing such products on their own. Siemens would capitalize on its research by sponsoring the companies, so the theory ran, and if it needed the product, it would gain a supplier. The capital could come from TVM, in which Siemens has an interest.
But Siemens has had only one taker so far, although a second -- finally -- is in the wings. In early 1984, four electronics engineers formed a company they called Integrated Circuit Testing GmbH, and began marketing test equipment developed in Siemens lab several years earlier. To help with ICT's initial capitalization, Siemens placed a million-dollar order, with more than a third of the total prepaid. "And Siemens helps sell ICT's testing equipment by demonstrating its own use of the product," adds Carl Bewerunge, who heads VCB for Siemens.
Why has only one group responded to such attractive conditions? "There are not a lot of men willing to do this," says Bewerunge, attributing it to the comfort "of a 35-hour week versus a 24-hour day, the pleasant offices versus working in your garage." But it is also, without a doubt, the fear of failure. "The cultural shock of leaving Mother Siemens is much greater than it would be in a U.S. company," explains David Cooksey, a board member of TVM. "If someone who left failed, he'd be virtually unemployable by a large corporation." Wouldn't Siemens take the failed entrepreneurs back? Not necessarily. All over Europe, when someone leaves a big company, it is hard to get back in.
There is a certain irony, of course, in expecting entrepreneurs to come from the ranks of large companies, and in expecting those companies themselves to fund many start-ups. Still, the complaint all over Europe among would-be investors is that there are too few good projects, and that management talent in particular is lacking. Thus the "corporate venturing" route may be the most promising, especially because larger start-ups -- requiring managers experienced in bigger companies -- are beginning to appear. Five years ago," says David Cooksey, "new entrepreneurs were loners who could never build a company on their own, because they couldn't respond to rapid growth. Now there are a lot of people in larger companies who can be shaken loose."
Another source of management support will be a coming surge in the number of U.S.-style hands-on venture capitalists. At present, even in the relatively advanced United Kingdom, only a half-dozen venture firms play the sophisticated oversight role that is typical on this side of the Atlantic; the others are passive investors. But now, both in Britain and the Continent, it is becoming fashionable to be an active investor in locally based start-ups. One veteran venture capitalist with hands-on experience estimates that he receives a job offer a month from companies seeking to tap his experience. Few start-ups, so far, have access to anything comparable.
In the meantime, it is not hard to forecast the short-term effects of such difficulties as too much money chasing too few deals, the dearth of management talent, and the ingrained antientrepreneurial attitudes that plague Europe's economies. The current round of start-ups, observers say, will be winnowed and winnowed again, and legions of troubled or failed small businesses will litter the landscapes of Europe's industiral parks. Experienced venture capitalists salivate at the prospect of picking up equity cheaply. "The third-round financings will sort out the men from the boys," says Electra's Michael Stoddart. "They'll be at a quarter of the first. The entrepreneur will really be squeezed."
Long-term, however, the prospect is more hopeful. What is needed, as much as anything else, are some dramatic success stories to lend credence to the new government policies, the new markets, and the flood of investment capital. Beyond that, Europe simply needs time -- time to create management talent, time to solidify the various support systems that new companies require, time to change old attitudes. If the competitive world economy permits that kind of change, the new breed of entrepreneur may be able to overcome the obstacles that trouble Europe's start-ups, and to spawn future generations of successors and competitors. And that, in turn, might transform today's entrepreneurial boomlet into tomorrow's economic boom.