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24.8.14

Startup ecosystems: US vs. France (continued)

(Part 2 in a series) Without further ado, the conclusion of the comparison begun in my previous post.

In our last episode…

So far in this comparison, I have attempted to show that:

  • The US now has a huge advantage in access to capital, which will likely hold or decline ever-so-slightly over the next decade, while France, currently so-so for fundraising, will see significant improvement while not quite catching up to the US;
  • The educational environment in France, while highly-regarded worldwide, does not do as well as the one in the US at producing startists; and while both countries’ educational outcomes will improve in the next ten years, France has more momentum, and will likely see more improvement, than the US;
  • The workforce in France is hampered by a number of traditions, policies and attitudes that are hard on startups, while the US shines in this regard. But here again, the will and the momentum for rapid change in this area favors France over the next few years.

Let’s move on then to the three domains (little methodology reminder here) that are more important in my view than the three just mentioned.

Legal / Administrative
US France
now2024

Many aspects of running an organization simply do not yield a significant competitive advantage. Performing such functions inadequately will hurt the business, but doing them superbly doesn’t add value. The trick, therefore, is to do these things just well enough, devoting the minimum energy and resources needed to get them done. Case in point: conformance to any legal, administrative or bureaucratic requirements for launching or operating an enterprise on your home turf.

France is a dreadful place in this regard. Not to prove, but just to illustrate this point, the following table compares the administrative and tax burdens of the most lightweight business-entity options available in each country. In both the US and France, these are structures that, allegedly, have been deliberately designed to simplify and facilitate the creation of very small businesses.

Simplest way to… France US
Sell products and/or services; no liability shield Régime auto-entrepreneur – income cap 32,000 EUR per year. Cannot hire employees. Taxed according to a complex schedule that varies based on profession / business activity. Taxable income is based on an official percent-of-sales figure regardless of individual profit/loss. A business net loss does not affect tax liability. Sole proprietorship or Partnership (Blumberg form X201). No income cap. Can employ others. Filing fee $10-$50 varies by state. Taxed on profits at individual rate, using one additional form (Schedule C: Profit or Loss from business). A business loss reduces total tax liability.
Sell products and/or services with liability shield EIRL (“Enterpreneur Individuel à Responsabilité Limitée”). Cannot hire employees. No revenue cap. Convertible to EURL (“Enterprise Unipersonnelle à Responsabilité Limitée”) whose taxable income is based on profit/loss. A business loss reduces total tax liability. Subchapter S Corporation, limited to 75 shareholders. LLC (Limited Liability Corporation), unlimited shareholders. Both offer “pass-through’' taxation (owners’ profit/loss from business is reported on their individual tax returns).
Minimal corporate structure with liability shield, with employees and with no revenue cap SAS (“Société par Actions Simplifiée”) a deliberate effort by the French government to create an equivalent to the LLC. Subchapter S Corporation, LLC

The French clearly intend to encourage small-business creation. But they have multiplied the experiments to facilitate them, without eliminating the underperforming experiments along the way. The result: a Kafkaesque maze of overlapping legal structures from which to choose, many with quasi-punitive restrictions on the would-be startists.

The tax burden is higher across the board in France: in their number, in the complexity of their filing requirements, and of course in their cost. The French enjoy a more mature and much more thorough “social safety net” than the Americans, in education, health care (even after one factors in the new Affordable Care Act a.k.a. “ObamaCare” in the US), and in logistical and financial support for the unemployed. Many French are justifiably proud of this system and pay into it gladly. The burden of this system, however, is as much administrative as it is financial – and the administrative burden costs energy and time, the two most precious resources for startups, without adding value or improving the safety net’s protections for anyone.

It is the comparative simplicity of the US system, more than its lower tax rates, that gives its startups such a huge advantage.

In the US, it is ridiculously easy to start a business. A Google search for “incorporate online delaware” yields over four million search results. The first few pages of those results are services that will set up your corporation for as little as $70 or so.

Governments move slowly; markets move quickly. In the US the market, not the state, is the dominant source of influence; in France, it’s (nearly) the opposite.

There is a dark side to starting and running a business in the US, and its name is Litigation. In 2011, there were 53,774 lawyers admitted to the bar and licensed to practice in France – or 85 lawyers per 100,000 inhabitants. In the US, the 2011 figure was 1,225,452 – or 395 per 100,000 inhabitants. According to this paper from Harvard Law School, in 2010 there were 2,416 lawsuits filed per 100,000 people in France. The US figure: 5,806 per 100,000 people.

While the US may not fully deserve its worldwide lawsuit-orgy image, it is a highly-litigious business environment. Legal action is a commonly-used instrument there, and not just a weapon of last resort.

We find once again the same dialectic explored in the “Workforce” section of the previous post: in France it’s hard to get a job, in the US it’s hard to keep a job. From a legal & administrative point of view, in France it’s hard to launch a startup, in the US it’s hard(er) to keep it going.

Bottom line: Today, the US remains way ahead in administrative and legal simplicity for starting a business. And France is arguably one of the more difficult environments in which to start. But bureaucratic and legal hassles grow quickly in the US as your business grows. In France, on the other hand, while the financial cost will remain high, the bureaucratic burden, also too high, is a more fixable problem. Expect the situation in the US to remain stable, while France puts its bureaucracy on a serious diet over the coming decade.

Culture

Culture
US France
now2024

Herbert Marcuse, one of the more articulate Marxist critics of capitalism, once wrote “We submit to the peaceful production of the means of destruction, to the perfection of waste…” It is no coincidence that he was living in the US at the time he penned those words. The US is a society heavily invested in the notion of the disposable. It is the world capital of the paper plate, the “TV dinner,” and the “Styrofoam” coffee cup (they’re actually polystyrene foam). This disposable, single-use mindset has seeped into US startup culture. If an idea doesn’t fly after a year or so, it’s euthanized and members of the team, together or separately, move on to the Next Next Thing. It’s not that Americans lack determination, it’s just that their threshold for the “minimum acceptable level of success” is higher; and the costs (financial and societal) of giving up are much lower than in France.

In the US, absent additional details, quitting – a job, a startup attempt, school – is regarded in a neutral or slightly positive light: the assumption is, you quit to seize a better opportunity. In France, quitting is equated with failure.

Specific instances of this general dichotomy abound:

  • In the US, bankruptcy is a speed-bump. In France, be it personal or business bankruptcy, its consequences are more profound, and last longer.
  • In the US, nearly everything is bought on credit. Quite a few startups were launched by borrowing up to the limit on the founders’ credit cards. In France, with the exception of home ownership, borrowing at all is seen as a symptom of lack of financial discipline (except if the government is the one borrowing).
  • Bill Gates dropped out of college to devote his full attention to Microsoft. Thirty years later, Mark Zuckerberg would drop out (from the same college) to immerse himself in building Facebook. The American Wikipedia site even boasts a list of college-dropout billionaires. In the US, it is practically a startup badge of pride to drop out of school to launch your first startup. In France, a college-dropout will be widely perceived as someone who has already failed, and whose startup is a greater investment risk.

Daily life – personal and professional – is more structured, and considerably more homogenous, in France than in the US. A go-to phrase characterizing American culture is “do your own thing” – to which a French person would hastily add, “oui, mais avec des limites!

The most blatant example of this difference is the month of August. In the US, August is known in some sectors of the economy as “Fiscal Follies” – many large companies end their fiscal years August 31, and there is a rush to spend departmental budgets lest they be renewed the following year at lower levels. It’s a very busy month. In France, the nation practically screeches to a halt in August. The highways to the sunny parts of the country are jammed, the large cities become eerily quiet, and most email replies are “See you in September” auto-responses.

Startups are, by their nature, intense, immersive and always-on. The summer “dead zone” that is a given of the French lifestyle does startups a disservice. But most French startups make intelligent use of the collective downtime by preparing splashy, announceable work product for “la rentrée” – the back-to-school / back-to-work event in September.

The relationship between employees and management is more adversarial in France than in the US. Organized labor was once a mighty force in the US, but that time has passed, while in France, albeit with less vigor than it once had, it remains influential. There are still, for example, nationwide strikes, often in sectors (such as transport) that have widespread impact. The US is the country where Ronald Reagan fired 11,000 air-traffic controllers at the stroke of a pen.

A secondary cause of this difference – the reason I mention it in the “Culture” section – is employee mentality. Americans, by and large, perceive their employers more as customers than as nemeses. And the US has, to a fault, a quasi-obsequious, customer-service oriented culture.

This makes it harder for French startists to recruit talent from outside the startup scene – as they encounter prevailing attitudes about employment that are at odds with the realities of startup life. It also contributes to the attitude of the French to the startup scene itself: “what are these people doing, working fifteen-hour days, making collective decisions, eschewing hierarchies, and trying to please customers? There must be something wrong with them…”

Sexism and Racism

It is far beyond the scope of this post to provide a complete analysis of sexism and racism in these two countries. These are vast and complex issues, and deserve their own post. But their impact on the startup ecosystem is profound, and their manifestations differ greatly in each country. Here then, with apologies for abbreviating a massive topic, is a snapshot of how the two countries compare in this regard.

In both the US and France, women face educational, economic and societal disadvantages. While both countries have quite a bit of progress to make before real gender parity is achieved, the US currently fares slightly better than France.

Benchmark

US (Fortune 500)

France (CAC 40 + SBF 120)

Women…    
CEOs

4.6%

0

C-level Management

14.6%

0

Board members

16.9%

25%

Top-earner compensation (% of Men top-earner comp.)

82%

66%

It is tempting to seek a glimmer of hope in the higher percentage of women board members in France. Sadly, I believe the number primarily represents an attempt by big business in France to placate critics in the most expedient manner possible. Board membership in France, as in the US, is to some extent an emeritus position – a sort of recognition of the influence the board member already wields by other means. Putting someone who is not already a member of the “club” in the boardroom is very much like throwing your goldfish in the shark tank.

The French establishment, to its credit, is not blind to the issue. In 1974 it created a government post that evolved into the current Ministry of Women’s Rights, with a mission to monitor and enforce gender parity through education as well as legislation. Most recently, the current Minister, Najat Vallaud-Belkacem, sent a letter to the CEOs of the 528 largest French companies to underline a requirement, established in a 2011 law, that 40% of publicly-traded companies’ board members be women.

This “affirmative action without backup” approach, by rushing the issue without allowing time for a sufficient number of qualified women to emerge from an education system likewise altered by gender-egalitarian policies, will likely create a backlash. The Ministry of Education for its part has had to thread the needle on its own efforts to teach gender equality in the classroom (owing in large measure to the far right jumping on the issue). In short, France is a country in which the demise of sexism will be slow, agonizing, and antagonizing.

To these facts & figures, I add one corroborating personal anecdote. I have been party, over the past thirty years, to several hundred conversations involving only men, discussing a female coworker or job candidate. In the US, occasionally, I’ve heard a man mention a woman’s ability or competence before mentioning her attractiveness or the odds of her having children in the next few years. In a few cases, her ability to do the job was the only topic discussed. I have yet to be privy to an all-male conversation in France in which attractiveness or child-bearing aren’t mentioned first.

The numbers are likely even worse if we restrict our gaze to the startup scene. I say “likely” because there’s no conclusive data available. The research I was able to find, which is abundant, focuses on tech startups. As with the overwhelming majority of statistical research, the premise is based on the past – looking behind us to a world that no longer exists.

Women are less likely to launch “tech” startups because there’s no compelling reason to wade into a world that excludes them. But the future doesn’t belong to “tech” startups. The next generation of startups may heavily leverage technology and the Internet, but tech will not be at the center of the value proposition.

In the course of the next decade, talk of “Internet startups” will become as silly as calling yourself an “Electricity startup” because you all have lamps on your desks.

I believe that women will shine in this new landscape, because it requires a level of social insight and adaptability with which they have been imbued for generations – the very skills men are socially encouraged to overlook (or, if you prefer, discouraged to develop). Skills acquired simply to get through the day as a member of a disadvantaged group tend to be highly valuable in startup life.

It is much more difficult to compare racism in the US and France. France is the more ancient nation, but has a shorter history of dealing with statistically-significant levels of racial and cultural diversity than the US. The most egregious elements of US history in this regard are well-known: genocide of the indigenous population, slavery, the painfully slow, centuries-long struggle for civil rights, including a civil war. But, precisely because they are so well-known, the public debate over racial equality has been very transparent. Since everyone knows the story, there is nowhere to hide. Not so in France, which is still digesting the consequences of its comparatively-recent colonial divestitures.

In both countries, one hears outrageous ideas about immigration from the far-right fringes – primarily because, when your ideas are fundamentally out of step with the zeitgeist, outrage is a pretty effective way to get media attention. At their cores, both societies are inclusive. It just takes several generations before inclusion really starts to happen. And the US has a head start of several generations in that process.

Why does this matter for startup ecosystems, you might ask?

Gender and racial equality are not just moral or human-rights issues. They are economic and energy-management issues.

Solar cells, wind power, electric cars, they’re all fine, but the greatest renewable resource on this planet is the Human Being. It is also, by a mile, the most grievously mismanaged.

To work their rapid-growth, disruptive magic, startups depend on an even playing field. The more just and equitable a society is, the more evenly distributed its opportunities are, the more likely that society will be to foster a robust startup ecosystem. What’s more, cultural diversity is to idea generation what biodiversity is to natural ecosystems: the essential prerequisite for sustainable growth.

Yet the American Dream is getting murky. Starting with the Kennedy assassination, the public impact of the Vietnam War, through the 9/11 attacks, the Iraq War, the 2007 financial crisis and most recently, the controversy surrounding the NSA, the myth of American exceptionalism has taken quite a beating. Add the ascent of China (really, the entire BRIC block) and a much more polarized political spectrum than the one in France, and you have the perfect conditions for stymying the very forces that have given the US startup scene its terrific momentum. American culture is puerile, and Americans thus enjoy that essential advantage of youth: the ability to achieve great things simply because it never occurred to them that those things were impossible to achieve.

As the sun sets on the American Century and the nation enters squarely into its troubled adolescence, it might engender a more cautious generation. This will leave room for other ecosystems to find their own hubris. France, which harbors a strange mixture of admiration and disdain for the US, is particularly well situated to fill this vacuum.

Bottom line(s):

  • American culture embraces risk and rapid change; France is, on the whole, incrementalist and cautious.
  • In the US, startups are expected to succeed fast or vanish. In France there is more patience, but also frequent flogging of dead horses. Each ecosystem could learn much from the other in this regard.
  • Laissez-faire might be a French expression, but it more aptly describes daily life in the US. French startists have learned to be nimble and minimize the impact of the more homogenous French lifestyle.
  • Employees and Management are not always the best of friends in the US, but prevailing attitudes are not as profoundly “us vs. them” as those in France.
  • Both ecosystems still struggle with issues of gender & racial equality and cultural diversity, with the US slightly less abysmal than France on women’s opportunities in the workplace. Both have the basic ingredients to become fully-inclusive societies, but the US has had its “melting pot” on the fire for a longer time.
  • The US is showing early symptoms of a collective identity crisis. No longer the “indispensable nation,” its culture is moving toward one that is more risk-averse. This shift will benefit all other startup ecosystems worldwide – France perhaps more than others.

A ten-year window is too short to speculate on how the cultures of the two countries may evolve. Still, expect the US to lose some steam, and France to gain some, in the decade to come.

Access to Markets

Access to Markets
US France
now2024

We come at last to this Most Important Topic.  The best ideas, executed by the best minds, in an ideal work environment… all come to naught if you cannot reach customers.

One’s first thought might be of the tremendous home-court advantage of the US in market size. 2013 consumer spending there was about US $13.7 trillion, compared to $2.25 trillion for France.

The Internet, however, squarely flattens this advantage. What matters here is getting your product/service to market, not the size of the “home” market you can reach by default. The US pays a strange price for its dominance as an exporter of popular culture: the French “get” American trends far better than Americans “get” French ones. In both educational policy and culture, the US is a monolingual nation, whereas France teaches English (and typically a second foreign language) to all of its secondary-school students.

Ironically, France has a strong inferiority complex concerning the prevalence of English-speakers among its citizens. Indeed, it rates near the bottom among European countries in the level of English proficiency. But this is of secondary importance. Out of necessity, and a fortiori as a member of the Eurozone, the French have a far better grasp of operating in, and selling to, foreign markets, than Americans do.

About this Eurozone… primarily a monetary-policy construct, it still gives France access to a “virtual home market” of 18 countries with a single currency, minimal trade restrictions, and an aggregate GDP of roughly US$ 10 trillion (or about 70% of the US GDP).

Most important, the Eurozone may have relatively homogenous trade policy, and a single currency, but it is still made up of different countries, languages, cultures and business practices. French startups have no choice but to think from the start about building services / systems that are multilingual, and highly adaptable to local business & legal practices. Fulfillment of these requirements increases time-to-market and launch costs, but it yields businesses better prepared for market expansion at an earlier phase in the startup lifecycle.

In short, US startups have an intrinsic advantage on Day 1, while French startups enjoy a more valuable, longer-lasting advantage on Day 365+. A US startup can launch and grow successfully by serving its home market exclusively, but should it wish/need to expand beyond its home turf, it will typically face a greater challenge than its French counterpart.

Bottom line: US startups enjoy a home-market advantage, but that advantage is lost, indeed, becomes a liability, after a few furlongs of growth. France, historically better at looking outside its borders, as an EU + Eurozone member, and last but not least as part of a diverse, multilingual, multicultural continent, is more apt to create startups that can develop international markets.

And the winner is?

My own scoring + weighting system for this comparison (based on my methodology) yielded a result I did not anticipate when I first started writing: the “today” score for the US works out to 83.5, France gets 57.3. No surprise there – right now the US is by a long shot the most promising ecosystem for startups. But the “ten years from now” score for the US is 75.5 vs. 76.5 for France. Translation: looking at current trends and extrapolating to 2024, France may edge ahead of the US as, all things considered, the most fertile startup ecosystem.

Of course, given the high level of short-term uncertainty on all fronts (political, economic, cultural…) there is really no way to tell if these trend lines will get a chance to play out over the next ten years. My methodology is far from rigorous, and besides, as markets become increasingly global, a bilateral comparison (that doesn’t mention Brazil, or Russia, or China, or India) is arguably of little value.

The one defensible take-away I claim from the foregoing analysis is this: there is a plausible path, over the next decade, by which France becomes a more compelling startup ecosystem than the US. Whether that happens depends on many factors beyond anyone’s control or powers of prediction – but above all, it depends on the energy, determination and focus of the players in these two countries, and how they will make use of the advantages granted them by their respective home turfs.

If you’re planning a startupand you’re in the unusual & enviable position of having the choice between starting in the US or France… and if you foresee an exit or pivot within five years… start it in the US. But if you foresee an exit or pivot seven or more years away… start it in France.

TL;DR

  • Access to Capital – the US has a well-documented, colossal advantage; but Europe (and France individually) is moving faster to embrace “post-VC” approaches to financing, particularly crowdfunding
  • Education – the US is better at breeding entrepreneurs; France has greater awareness of the problems in its education system, and a greater determination to address them, than the US
  • Workforce – the US has a more startup-friendly workforce, as well as labor laws that are more pro-business. France wants to improve, but lacks the cultural & political consensus to implement significant change.
  • Legal & Administrative – in the US it is very easy to start a business, and not much harder to end one. France makes it harder to do either. The market determines too many of the protocols involved in a US-based business, while in France, too many are determined by the state.
  • Culture – the US is the birthplace of startup culture and enjoys a huge advantage over every other country in this regard. But the conditions that gave rise to that advantage are eroding, while France may finally be “finding its hubris.”
  • Access to Markets – US startups have it easy, perhaps too easy, since their home market is so accessible & attractive. French startups learn early to cater to different languages, legal systems & cultures, making for a slower lift-off but a greater capacity to expand into new markets.
  • Bottom line: there’s no crystal ball, but it is possible, even plausible, that France will edge past the US in terms of startup viability over the next ten years.

1 comment:

  1. Fascinating comparison of 2 cultures and business climates. (My work experience in France was limited to big companies and organizations and my startup experience in the US was pretty much just a year working for the briefly promising social network site hi5 (bigger than facebook in a few countries like Thailand) before it fizzled out into a spammy cheesy internet gaming site, going from the 'next big thing' to the 'closest quick buck.')

    One point here that really resonates is the vastly different attitudes toward education, and how that can impact the work culture. In the US there's a kind of status to having dropped out, or not sticking with anything that doesn't immediately inspire you. People say "Oh I'm so ADD" as if it were a badge of honor, which it clearly is, even when it's not strictly true. Unfocused is not the same as ADD. Maybe there's a link between that and the sometimes stupendous shallowness and narrowmindedness of our engineers, designers and product directors outside the realm of their expertise.

    The HBO series "Silicon Valley" did a good job of satirizing that when every company competing for funding makes the obligatory argument that their product will "make the world a better place," usually motivated by the search for the next big thing, rather than any clue as to what the world might actually need.

    Interestingly enough, serial entrepreneur Elon Musk has criticized that show for not GETTING the culture because, among other reasons, it didn't include any reference to Burning Man, which he said "IS Silicon Valley." I suspect that Burning Man IS indeed a emblematic of something regarding startup culture in the US.. If only as a reminder how increasingly wealthy and insulated people tend to treat this increasingly elaborate temporary playspace as a microcosm of some fundamental reality.

    Or just another example of the very different ways in which the two cultures spend their month of August. : - )

    http://www.nytimes.com/2014/08/21/fashion/at-burning-man-the-tech-elite-one-up-one-another.html

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