Thoughts on the European Open Source Funding Climate
Like many others interested in the European open source startup ecosystem, I enjoyed the recent article in Sifted about the challenges, particularly the funding challenges, that founder of open source startups in Europe face.
Overall, I agree with the premise: startups based in Europe tend to raise smaller rounds, and they have to be more mature at each round. When I think about companies I’ve worked with, the seed-stage European companies are usually at the same level of maturity, product and business-plan wise, as series A companies based in the US. And a seed round in Europe is likely to be smaller than a seed round in the U.S.
But there were a couple issues I think the article brings up if you read between the lines. Before I do, I should say it was a perfectly good article. I was once a journalist myself and know how the sausage is made: You have 3 days to write an article, you call 20 people for comment and only 2 call you back, and then you have assholes like me nitpicking the article. With that in mind…
Issue 1: Some glaring omissions
First of all, any story about open source in Europe that fails to mention the Cyber Resilience Act has a hole in it. Many open source foundations worry will, at best, dramatically complicate commercial support of open source projects and, at worst, completely torpedo the European open source ecosystem. I’m don’t know enough to have a strong opinion on the subject, but there’s enough worry in the ecosystem about it that this should be been address.
Second, there are two companies that I think should have been mentioned. The first is Odoo, a Belgian open source company that has been around for over twenty years. I couldn’t find the exact 2023 valuation, but last year it was put at about €3.2 billion — in other words, unicorn status. So obviously is it possible to build an open source company in Europe! But Odoo tends to be ignored in commercial open source conversations, I think because a) it does not make DevTools and b) it’s not just in Europe, it’s in a small country in Europe.
The second omission is Docker. Docker was founded by a team of Frenchmen in Paris and then moved to the U.S. Technology-wise, no one has been more successful than Docker — the technology is used by something like 80% of developers. But Docker also failed to monetize. Here’s a really good, really long article about what happened. But the takeaway for me is 1) actually, monetizing open source is hard, so those European investors who are wary might not be morons and 2) having wheelbarrows full of cash can actually hurt your company long-term, because you aren’t forced to focus. More on that later.
Issue 2: Calling out some bullshit
So the team behind Coqui.ai kept their headquarters in Berlin but incorporated the company in Delaware?
Companies incorporate in Delaware because the state’s tax policies and laws are very advantageous to corporations. When you tell me a company incorporated in Delaware, I assume it’s because they went shopping for the best tax and legal jurisdiction — and it’s worth noting here that this is very common knowledge in the US, but I suspect less so for a European audience.
My point is, I’m skeptical of the claim that the company moved to Delaware because European VCs don’t understand open source. It seems just as likely that it was incorporated in Delaware because it’s a legal tax evasion scheme and also gives the corporation a more advantageous legal system than in Europe. I’m not saying there’s anything morally wrong with that, it’s what business is about. But I like honesty: We incorporated in Delaware because we didn’t like the tax and legal framework in Germany, plus we had to or we wouldn’t get investment from US venture firms.
Second, Hugging Face was part of Station F, a startup accelerator in Paris, joining in 2017 as a team of 4. So even if it was first incorporated in New York, it seems disingenuous to say it was a US startup ‘from scratch.’
Questions that this article raised for me:
— Is more money, sooner, always better? I can absolutely see why, as a founder, you would want access to money that is as plentiful as possible. Who doesn’t want free money? But I do not think it is always good for the company in the long term, because you’re not forced to focus, you’re not forced to prove that your business model works, you’re not forced to find a commercial product and commercial model that are profitable. If you get huge and haven’t figured it out, it hurts.
— What is the role of the VC? Is it to fund open source projects? Or is it to maximize the chances of positive returns on investments? I’m asking because I think there’s a legitimate question to ask about whether US investors might be too bullish — naive is the word I might be looking for — about open source startups. I don’t think an investor who wants proof that you have both a business model and an awesome technology are idiots. But I’m not a VC, so 🤷♀️. Obviously I think open source startups can be financially viable, but I also think it’s naive to think that just because an open source project has massive adoption that the commercial product will as well. Project market fit does not always translate nicely into fat revenue numbers.
— Why do US venture funds only invest in companies in the US? Or DO they only invest in companies in the US?
— Is Great Britain part of Europe? I heard about Brexit and all, but I thought geographically-speaking it was still part of Europe, kind of like most people assume Switzerland is in Europe. Maybe the British Isles moved a bit and I didn’t notice?
— What about funding for startups from other regions? There are loads of Indian founders, both in the US and in India, what is the funding situation like for them?
Now I’m going to get philosophical:
I believe that you should live where you want to live. This is absolutely how I live my life. What the hell is the point of founding your own company if you can’t even control such a basic part of your own life? Not everyone has the luxury of doing this, but if you are in a position to care about the relative funding situation for open source startups in Europe versus the US, you are.
If you think that moving to the US sounds like a fun adventure, than you should do it, regardless of the venture climate. If you don’t like the idea of paying $4,000 a month for a studio apartment and having people shooting up on your front steps (just kidding, sort of), maybe you should stay in Europe. Or maybe you have parents you need to take care of, or a spouse who isn’t keen on the move and you’d rather not divorce, or a shared custody arrangement for your kids that won’t work super well if you’re 9 time zones away.
I don’t personally think the point of the startup ride is to get rich; I think it’s to have fun and hopefully get rich too. If your only goal is to get rich, how will you feel if your startup is one of the many, many ones that don’t make it? If, on the other hand, your goal is to play the game, you’ll look back on the experience fondly even if you don’t end up “moving” to the Cayman Islands at the end. It’s your company, which means you also get to choose some of the rules of the game. One of them is where you headquarter the company.
I’d love to hear your thoughts on this, too! So reach out, or respond to the email if you’re on my list. Incidentally, my overall vision for moving to Paris is to help open source founders in Europe get rich (haha, I mean play the game successfully) without moving to the US. Because in addition to there not being tons of VC funding for open source startups, there’s also less access to people with experience in commercial strategy for open source startups in Europe — a point actually that a number of VCs, both in the US and Europe, have made to me. Is that why I moved to Paris, though? See above: I moved to Paris because I wanted to move to Paris.