There was an interesting piece in the Economist this week about how European’s economic challenges are related to the region’s failure to develop an environment that supports and encourages entrepreneurs. A quote that really caught my eye was:

Europe’s culture is deeply inhospitable to entrepreneurs; wanting to grow a start-up into a behemoth is quite as countercultural as piercings and performance art.”

Everyone knows that small growing companies are a key driver of any successful economy. At the same time, I think most people would agree that Europe has not created an environment that allows entrepreneurs to flourish. There are numerous theories for why this is and what could be done differently.

As an investor in European entrepreneurs I think about this subject a great deal – indeed I wrote a postabout it few months ago.

But what really struck me about the Economist’s piece was the way they put the subject in a historical perspective. This graph is taken from the piece and shows when the world’s largest companies were founded, comparing Europe with the US. You can see that, up until the end of the 19thcentury, Europe created far more of the world’s largest companies than the US. From 1876-1900 nearly 10% of the world’s largest companies were founded in Europe.

From 1900 onwards the US is increasingly in the ascendancy with the most recent period form 1976-2007 showing Europe creating only 3 of the global 500 as compared to 25 in the US.

This is a fairly depressing trend and definitely supports the view that Europe is not a great place for entrepreneurs or for turning small companies into world-beaters.

While the US has become more and more dynamic as an economy, and led the way across a number of industries, with technology perhaps being the most important, Europe has gone backwards. There are various reasons for this that include growing fragmentation, a cultural reluctance to change or take risks and an increasing move towards socialism.

But the more interesting question is whether Europe can reverse the tide? I think there are a few encouraging signs as follows:

  • The awful state of the economy is forcing people to rethink their once safe career choices and consider alternatives
  • In the tech industry people and resources are starting to coalesce more and more around central hubs, with the main ones being London and Berlin
  • Governments across the region are recognizing the need to support and encourage entrepreneurs leading to a wide range of initiatives from funding support to tax relief
  • The economy and limited funding has led to the costs of starting and growing your business to be reduced, especially in terms of skilled people

Of course there is still a long way to go but there are definitely some signs that Europe is starting to create a better environment for entrepreneurs. It really could be one of the silver linings from this long and painful recession that being an entrepreneur starts to be seen as an increasingly viable alternative to the region’s older industries.

I still think that the best thing that governments could do is to just get out of the way, especially in areas like employment law, regulation and immigration, and that this would remove so much of the friction. But these things are so firmly rooted across Europe that it’s going to take time, and probably the economy to sink even further, before these entrepreneurial barriers will be broken down.

But all in all I’m hopeful that a more dynamic, a more mobile and a more risk embracing Europe can emerge from all this mess but it’s difficult to see that right now.