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Resilient But Exhausted
Although 2020 has the potential to be another record-breaking year in terms of capital invested in Europe, it has been an intense and difficult ride for many founders.
This chapter sets out to understand how the journey of starting and building a company has evolved in 2020 against the backdrop of the ongoing Covid-19 pandemic and uncertain and volatile macroeconomic conditions. As well looking in the rear-view mirror on the past year, this also takes a forward-looking view at the journey ahead.
Almost 50% of founder respondents to the survey believe the ecosystem has proven resilient in the face of an extraordinary year. But the challenges of 2020 have also taken a toll on the founder community. When asked to share the three biggest challenges that they have personally experienced over the past 12 months, the most frequently cited challenge has been maintaining mental wellbeing. The challenges of navigating this year have not only taken an individual toll on founders, but have also created a set of new challenges for their teams. This is reflected by the fact that the second most frequently cited challenge shared by founders has been motivating and encouraging their teams.
The most frequently cited personal challenges cited by founders varied according to the gender of the founders. Men most commonly experienced challenges related to motivating and encouraging their teams, enabling smooth collaboration among remote teams, and maintaining mental wellbeing. Founders that are women were more likely to have cited the challenge of maintaining mental wellbeing, more likely to have felt insufficiently supported by their investors, and also more likely to have felt a lack of advice and mentorship on how to navigate the uncertain times. Founders that are women, however, are less likely to cite internal communications and team motivation as challenges compared to founders that are men.
The responses also showed material variance when looking at the experience level of founder respondents. The impact of the past 12 months on first-time founders appears to have been greater on their ability to maintain mental wellbeing than for more experienced, repeat founders. They do, however, appear to be less likely to have felt that they experienced challenges in getting sufficient support from their investors. Based on the survey responses, one of the main advantages experienced by experienced, repeat founders was their ability to tap into a network for advice and mentorship on how to navigate the uncertain times.
In the last 12 months, what have been your three biggest challenges as a founder?
Legend
- First-time founder
- Repeat founder with limited experience in scaling own company
- Repeat founder with significant previous experience in scaling own company
- Note:
- Founders only. Numbers do not add to 100 as respondents selected up to three options.
During the crisis's peak, our focus was to listen, support, and connect the entrepreneurs to the right opportunities.
The pandemic made the Maria 01 community stronger and proved how this startup campus transcends the space. Furthermore, during a crisis, people resort to people as a means for support and guidance. During the crisis's peak, our focus was to listen, support, and connect the entrepreneurs to the right opportunities. The measures taken to support our startup companies went from granting rent waivers, actively sharing information related to grants to weekly peer support calls to listen, and map out struggles from the entrepreneurs and possible solutions.
Founders were also asked to share the challenges they faced at the company level. The most frequently cited challenge by far was securing access to capital, followed then by pivoting their products, managing revenue declines and maintaining company morale. In many ways, 2020 has been a year of the pivot as companies sought to respond rapidly to adapt their products and operating models to accommodate the 'new normal' in terms of changing working and personal behaviours and to find ways to creatively grow revenue.
In the context of the responses founders shared around the biggest challenges they faced in 2020 on a personal and company level, it's perhaps unsurprising that fundraising is cited as the most important form of support they seek from their investors. The strong level of pull from founders for supporting in defining their go-to-market strategy and in securing new customers also makes sense in the context of the uncertainty in the spending environment that many founders will have experienced. Last year, 25% of founders shared a sense of isolation and loneliness at the top so it's interesting to see a need from founders to feel part of a 'community' to connect with other founders.
It is interesting to see how the needs of founders evolve as their companies scale. As founders move along the company-building journey, investor support with fundraising and people-related challenges are increasingly cited as important. Unsurprisingly, as they scale and reach product-market fit, founders are less likely to cite the importance of support on generating new sales. There are some areas where the level of need from founders was consistent across founders from companies of different stages of development: support with leadership coaching and access to a founder community.
The lack of an advanced ecosystem can be a challenge for building a tech company that wants to win the global market from Italy. That said, overcoming those challenges in the early days can strengthen you, and in the long run, those challenges can even turn into advantages.
Managing a Team
For tech companies, talent is a critical competitive advantage, and the ability to attract and retain the best people plays a - if not the - pivotal role in the success of a company. Remote work and the adoption of distributed recruitment strategies undoubtedly add complexity to unlocking that talent advantage.
The speed of scaling an organisation can be so influential on success. Go too fast and you put everything from runway, execution and culture at risk. Go too slow and you risk underinvesting and falling behind the pace of the market or competitors. It is a delicate balancing act and uncertain market conditions only make that harder. It's interesting then to see how founders adjusted their hiring plans in 2020. A third chose to stick to plan and made no changes to their hiring plans. Another third hired slower than planned, while one in five founders actually accelerated their hiring plans, presumably emboldened by positive tailwinds experienced by their company. Only 10% of founders froze hiring altogether and just 5% shared that they had also conducted layoffs.
Stock options are an effective tool to attract, incentivise and retain talent and the latest generation of companies from Europe are rewarding their most talented executives and employees at levels on par with companies from the US now. There is still work to do, and we are starting to see different degrees of ambition around Europe. Countries like Germany are currently working on a set of very concrete measures around employee stock options schemes and preparing a draft legislation that includes incentives to increase the distribution of shares to startup employees.
Employee ownership by funding round in the 50th percentile by region
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- Executives (Europe)
- Executives (US)
- Staff + Other (Europe)
- Staff + Other (US)
- Unissued (Europe)
- Unissued (US)
- Note:
- This details equity held by employees and unissued options excluding founders shares. Equity not related to salary nor incentives.
Remote working has been a huge adjustment for the tech industry and the global economy as a whole and has, of course, created new considerations for founders in how to best manage their teams and build and nurture their culture. The effect of the pandemic has been to clear shift sentiment around remote work to be far more favourable than previously. 76% of founders responded that they are supportive of remote work for the long-term future, an uplift from 54% before the pandemic. The future of work will be reshaped.
The degree of support for moving towards a remote-first culture varies by stage of the company. Interestingly, founders of larger companies were less in favor of fully flexible work location, while founders still at inception and building their company, seemed more open to exploring a fully distributed setup.
One of the potential challenges of remote work is the ability to build a strong culture and sense of belonging. One way to bring people together and to align them is to have a clear mission or purpose. The past 12 months appear to have placed an even greater importance on the mission / purpose of a company for its employees, especially for larger organisations where maintaining a strong culture at scale is that much harder.
The rise of purpose-driven companies in tech is accelerating, but, for now, it would appear that employees working in several other industries, including the non-profit, healthcare and education sectors, are more likely to feel inspired by the purpose and mission of their organisation than those working in tech. The average score their employees provided on this question is 5-10% higher than for tech workers. In fact across the 12 industries tracked by Peakon, tech ranked in the bottom half.
Perhaps unsurprisingly, the share of remote jobs has picked up steam since April 2020 but the pace of change has been different across Europe. Only a handful of countries have seen a steep acceleration such as the UK, Ireland and Spain.
The shift towards remote work is forcing founders to reimagine the purpose and value of their office space for their teams going forward. One factor that will unquestionably play a role in those decisions is an assessment of the cost and return on that investment. Covid-19 has impacted the demand for office space in cities across Europe to varying degrees. It's too early to make a call on the depth and long-term implications, but it's interesting to look at how the cost of prime office space has changed in different European tech hubs. The differences are striking; while prices in London and Stockholm have started to fall, they have actually continued to rise in Paris and Berlin.
In this context, the choice of location for founders remains an interesting and important question. London is a key destination for tech and entrepreneurial talent, but the changing nature of work and, specifically, an increased appetite to build remotely or in a distributed way has the potential to change the incentive models that have attracted talent for so long. What makes a city vibrant is the density of startups, talent and investors, but the premium cost of certain locations might become unjustified as more players in the ecosystem adopt remote work and/or distributed teams.
There are stark differences in the cost base of primary and secondary hubs and with Europe continuing to see tech activity grow in those cities, the rise of remote work might very well act as a strong tailwind to drive increased geographic diversification of entrepreneurial activity and startup communities across a greater number of hubs.
Although office space is perhaps not a top priority for founders right now, the data certainly helps understand the relative cost of different cities and the current direction of travel - this can be helpful for founders entering the new year with expansion plans and seeking access either to new customers or new talent pools.
As a relocation company directly affected by the pandemic, we saw very clearly that even throughout the turbulent year for travel, our number of relocations continued to grow. In fact, our relocations grew by 365% during 2020.
On one hand, technology helped improve the experience of the lockdown and many organisations saw that they can in fact operate remotely. On the other hand, we were more strongly than ever before reminded about the importance of human connection and, maybe for the first time ever, the limits of technology. As we come out of this new experience, organisations will increasingly trust their employees to work independently, and thus people will have more freedom to choose their own paths. At the same time, people will value physical togetherness much more than before the pandemic. This will create more organisations with greater flexibility for remote work, but will also balance that new paradigm with more meaningful time together in the same physical space. As a relocation company directly affected by the pandemic, we saw very clearly that even throughout the turbulent year for travel, our number of relocations continued to grow. In fact, our relocations grew by 365% during 2020.
Another thing that will likely emerge from this pandemic is the explosion of digital nomads. There are a few things that will lead to this: 1) Employees and their bosses know that they can work remotely. 2) People still have dreams of traveling and with travel having been restricted, this itch will find its relief as soon as the opportunity to travel resumes.
What this will also mean is a new kind of legal hassle for organisations since most countries in the world have not adapted their immigration policy in order to legally accommodate a digital nomad workforce. In order to legally travel and work in a country a person has to have, in most cases, a local employer. If they travel as tourists then they are not allowed to work. It’s possible for 1 freelancer to take a risk and enter a country with a tourist visa, but imagine if Facebook has 5000 employees working illegally across the world - that would be an HR nightmare! Interestingly enough, Estonia approved this visa during the lockdown. Together with my Jobbatical team and Estonian Ministry of Interior we initiated this policy change in order to set an example for other countries. This policy update is something that all countries who are interested in attracting this highly skilled workforce would benefit from adopting.
Budgeting for a (Series A) team
How much does it cost to start and build a team in different European cities? We (still) don’t have a perfect answer, but we are providing a revised version of our illustrative org chart for a Series A stage software-as-a-service (SaaS) company. We think it provides a reasonable benchmark on what a team might look like for this type of business at that stage.
The dataset on rewards data (covering base salary and actual incentives) is provided by Aon and CBRE is providing the prime rent cost of office space dataset. We then built this out to give cost benchmarks for ten key European tech hubs, as well as providing a comparison with the equivalent cost to build the team from the Bay Area. Given the rise of remote work, we have revised down our estimates of sqm per headcount to account for employees who may have an assigned office space but chose not to be based there five days per week.
No methodology is ever perfect, but this should help founders (and others) to understand what it costs to set up and build in different European tech hubs.
