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Differences Between Founding a Company in the US and in Europe Essay


There are definitely marked differences between founding a company in the US and Europe especially in regards to venture capital. To begin with, it is worth to explore the background knowledge on the application of the term ‘venture capital’.

Companies that are in their start up stages often require significant monetary boost so that they can pick up and be competitive like those that are already fully established.

On the same note, the high-risk and high potential firms that are still in the early stages of development demand financial investment in form of venture capital. Money is generated by the capital fund by acquiring the ownership of equities in various firms that have been contracted for investment purposes.

Most of the contracted firms that often benefit from the venture capital include software, IT and biotechnology companies. These types of industries have reputable business models and are also quite competitive in the market.

There are myriads of innovative companies that continue to rely on the venture capital as their key source of funding both the new and old projects. This new trend in the adoption of venture capital is common both in the United States and the rest of the developed world.

In the event that entrepreneurs are not in a position to obtain funding from other sources, the venture capital provides the much needed start up fund for expanding business operations to new markets. In addition, venture capital can be acquired and used by entrepreneurs even before the actual businesses are fully established.

This is in sharp contrast with other sources of business founding that often demand adequately established business platforms. This paper explores the differences between founding a company or business entity in the United States and Europe.

Although there are myriads of similarities in the acquisition and use of venture capital in the US and Europe, there are also outstanding differences between the two economic blocs. For instance, the manner in which convertible resources are handled appear to be completely different.

Other notable differences include deal syndication, exist stage duration, stage financing, and the replacement of past management teams are equally worth considering.

However, the application of convertible resources is the most outstanding difference bearing in mind that it is used three times more often in the Unites States compared to the European venture capitalists.

Stage Financing

Founding a company either in the United States or Europe has its own technical and monetary challenges since both locations are well versed with competitive firms that are also well established. Nonetheless, venture capitalists have the ability to retain certain possibilities of premature financing of a venture.

This can be achieved by staging the financing in a progressive manner. Finances are thus availed for the entrepreneur in order to cater for funding needs of a particular stage of a company. Hence, the venture capitalist is given the choice of doing away with the venture at any given stage of development of a company.

However, it is vital to note that the active involvement of the venture capitalist does not necessarily affect the value obtained from stage financing. Hence, the value that is created usually emerges from the additional business incentives that are put in place in the process of starting up a company.

The geographical preference to invest in particular regions is also evident among various entrepreneurs who start companies both in the United States and Europe. However, it is generally easier to acquire venture capital in most European states compared to the United States.

This explains why founding a company in Europe would be a lot easier than in the United States. However, there are other myriads of factors that should be brought on board before embarking on a conclusive review why entrepreneurs would prefer one region to another.

The role played by affiliations is yet another important difference when founding a company in the United States and Europe. For instance, there is a close relationship or affiliation between venture capitalists and non financial corporations in Europe than the United States.

In addition, the European venture capital investment at the initial stages of development is also known to be smaller in intensity than those of the US counterparts. Hence, the US entrepreneurs seem to enjoy wide benefits when it comes to the issue of economies of scale among newly started companies.

On the other hand, the buyout experience is completely different and opposite when the two regions are compared against each other. The latter can be described by the fact that the manner in which venture capital is defined in both regions is different.

The exit stage period is also a significant difference between the United States and European entrepreneurs. Other differences that will be reviewed in this paper include syndication, replacement of past management teams and the CS use.

These differences are mainly evident because most venture capitalists in the European markets often encounter minimal liquid marketing environments compared to their counterparts in the United States. This can also be further explained in terms of the entry and exit of human resource power that dominates the labor market at any given time.

Hence, this scenario has compelled most entrepreneurs in Europe who found companies to take a long time when selling their share capitals. As a result, it makes it quite cumbersome to replace the major labor force that is needed in the newly started companies.

The tax and legal requirements when acquiring the venture capital are also another vital consideration to put in place due to the great propensity to invest from one region to another.

Liquidations are extremely costly in Europe because they take a longer period of time than in the United States. Most entrepreneurs who start up companies in Europe tend to waste a lot of financial resources due to the delay time before they can eventually invest appropriately.

This trend definitely lowers the liquidation value. However, it is vital to mention that the mean value of the financial rounds is almost the same between the United States and European countries. In spite of the presence of such similarities, founding a company in either the United States or the European economic bloc has its own merits and demerits.

The latter can best be accounted through the existing differences especially when seeking venture capital. Hence, it is necessary to discuss dominant seminaries at some point if a balanced view of the topic is to be attained.

It is also understood that the use of convertible securities in the process of acquiring venture capital also demonstrates a marked difference between the United States and European markets. For instance, the use of convertible securities is three times greater in the United States than among the European entrepreneurs who start up companies.

Although this finding may prove to be quite surprising, it clearly indicates that the use of convertible securities is limited to certain regions due to their unique attributes that tend to favor some regions against others. In other words, convertible securities are not favorable for all entrepreneurs who may need venture capital to start up their companies.

The contract is not sophisticated in most of the European markets. On the same note, the Canadian market also lacks major sophistications.

This explains why there is a difference in the adoption of convertible scurrilities in both of these two regions. The fact that the United States market is already complex in nature, it makes it necessary to use such securities when acquiring venture capital.

Another possible reason for this difference is the fact that most entrepreneurs in the United States can easily obtain tax advantages compared to those in the European marketing bloc. Lack of major tax advantages in Europe has been significant drawback since it hinders easy acquisition of the much need venture capital.

The venture capital companies in the United States and European countries also have varying types of management and organizational structures that significantly account for the difference in the use of convertible securities. It is worth to mention that different organizational structures have unique goals and objectives.

Therefore, the manner in which various organizations may use convertible securities is completely different. In any case, there are organizational structures that may not need convertible securities during start ups.

In addition, common shares may be preferred by venture capitalists over preferred shares especially if the exit requirements are of less significance than issues regarding control.

The venture capital firms have lower affiliations in the United States market than the European market mainly due to the varying organizational structures that exist between these two regional economic blocs.

Another emerging difference between founding a company in the United States and Europe is evident in the manner in which syndication is carried out. It is without doubt that the United States experiences more incidents of syndication than Europe.

On the same note, the United States has a higher mean size of syndicates than countries located in Europe. This implies that the level of syndication in both geographical regions is a key determining factor when exploring the ease with which a company can be founded.

Nevertheless, syndication is relevant in both the US and Europe since it has a remarkable influence in the manner in which venture capital can be acquired by companies that are still young and in the startup stages.

Although the overall level of syndication is higher in the United States than in European countries, it has been established that most of the European countries often experience higher levels syndication with colleagues at the regional level.

This is not the same case with individual states in the United States. Moreover, government partners in the European bloc also experience higher levels of syndication among themselves thereby making it easy for companies that are being started to acquire venture capital.

In particular, governmental partners in the European bloc provide a legal and well monitored environment through which entrepreneurs wishing to start companies can easily establish themselves in a smooth and least complicated manner.

The issue on syndication is also bolstered by the argument that the European markets are not very much developed and are also less liquid compared to that of the United States. Hence, when seeking for a potential buyer, it is obvious that the pool of available contacts is increased by syndication.

The age of venture capital firms is also another vital and interesting distinction that can be made between founding companies in the United States and Europe. For instance, the European venture capital market is believed to have had its threshold way back in 1997.

Although the aforementioned year is relatively young, it marked an important era in the evolution of the venture capital market in Europe. This was the year when the venture capital market in Europe was marked with intense inflows of capital resources.

This marked increase in terms of the venture capital investments in Europe was also experienced in the United States. However, the two regions experienced an increase in venture capital at different times altogether. In addition, the intensities of capital flows were completely different.

The young and well established firms in the United States and Europe also demonstrate marked difference in terms of their venture capitals. Most developed and old firms in the United States find it easy to acquire additional venture capital in order to expand their operations.

Hence, it is quite easy for old firms to start up other subsidiary companies compared to most old firms located in the European region. However, there is some form of convergence between the European and the United States industry.

The age of the venture capital companies is also closely linked to the use of convertible securities in the process of acquiring venture capital needed to start up companies. It is generally noticeable that younger venture capital firms are more aggressive in investing during the initial stages of a firm

The Level of Activity

Most empirical research studies have confirmed that most venture capital fims in Europe are not very active. For instance, they are known to use convertible securities less often than their counterparts in the United States.

If it is indeed true that the European venture capital firms are quite dormant, then an investor would opt to invest in an intensely active market like in the United States. The latter guarantees huge and significant flow in capital flows within a relatively short period.

For companies that target to reach a wider market with large consumer base, then it is advisable to seek venture capital in the US market.

Moreover, the venture capital firms in the European markets do not syndicate their deals quite often. Hence, starting a company in any European market will imply that the company will benefit only from the local partnerships and miss out on the external levels of syndicates. On the same note, founding a company in the European market implies that the firm will have extended round durations.

The multivariate setting shows the overall benefits and demerits of investing in Europe and the United States although issues such as replacing the past management teams do not feature at the aforementioned level.

Since the European markets have proven to be less liquid, companies that are founded in this region are highly likely to encounter stagnated growth especially if the set objectives are to be met in the short term.

The latter scenario is equally worsened by the fact there are no adequate hands-on entrepreneurs in the European market compared to the markets in North America.

There are standard incorporation procedures that entrepreneurs may use to start up companies in the United States. Each state has its own legislative measures that must be followed by investors wishing to start companies or venture capital firms in the United States.

The reason why incorporating is important is because individual assets are safeguarded from civil liability. It is also worth to mention that the individual shareholders of an incorporated company are treated as separate entities from the corporation. Therefore, the corporation bears its own tax identification number, responsibilities and liabilities.

The choice of a business entity is also another important hurdle to go through when starting up a company in the United States. It is vital to explores the various business options and cost implications of starting any type of business. For instance, the creation of the Limited Liability Companies is not permitted by some states in the US.

Therefore, it is necessary to seek help and further guidance for the United States accountant and attorney. In addition, there are associated fees and taxes that are usually paid to the respective states where a company is being started. These fees may sometimes interfere with the capped amount that has been set aside for venture capital.

Additional, if the company to be founded will be dealing with exporting products, then it must adhere to the rules and regulations that have been set by the United States Department of state. It works closely with the departments of defense and commerce.

There are many would-be entrepreneurs who are usually discouraged by the many hurdles of setting up companies in Europe. There are myriads of complex procedures that are equally costly that work against entrepreneurs who are eager to invest in Europe.

As already mentioned, most of the European markets are still dormant in terms of accessing venture capital needed to roll down new investment ventures. Hence, some entrepreneurs are finding it more advisable to form mergers with other companies in Europe than working alone in setting up new establishments.

This approach has been found to be relatively cost effective and also cuts down the risk level that a new business entity has to face upon establishment.

To recap it all, it is vital to reiterate that there are myriads of differences between founding a company in the United States and Europe. However, this paper has exclusively explored the topic based on the ease of accessing venture capital in both geographical regions.

Some of the key indicators that have been used to discuss the topic include the level of syndication, convertible securities, replacement of past management teams, the age of firms and activity levels of both the United States and European markets.

Although both regions have experienced massive growth in the venture capital market in the last two decades or so, it is evident from the discussion that the United States still remains as a more dominant, potential and extremely active capital venture market.

The latter argument is attributed to the fact that the European market has not evolved fully in terms of the capital flows in the venture capital market.

This Essay on Differences Between Founding a Company in the US and in Europe was written and submitted by user Geraldine Flynn to help you with your own studies. You are free to use it for research and reference purposes in order to write your own paper; however, you must cite it accordingly.

Geraldine Flynn studied at George Mason University, USA, with average GPA 3.62 out of 4.0.

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Flynn, G. (2019, June 18). Differences Between Founding a Company in the US and in Europe [Blog post]. Retrieved from https://ivypanda.com/essays/differences-between-founding-a-company-in-the-us-and-in-europe/

Work Cited

Flynn, Geraldine. "Differences Between Founding a Company in the US and in Europe." IvyPanda, 18 June 2019, ivypanda.com/essays/differences-between-founding-a-company-in-the-us-and-in-europe/.

1. Geraldine Flynn. "Differences Between Founding a Company in the US and in Europe." IvyPanda (blog), June 18, 2019. https://ivypanda.com/essays/differences-between-founding-a-company-in-the-us-and-in-europe/.


Bibliography


Flynn, Geraldine. "Differences Between Founding a Company in the US and in Europe." IvyPanda (blog), June 18, 2019. https://ivypanda.com/essays/differences-between-founding-a-company-in-the-us-and-in-europe/.

References

Flynn, Geraldine. 2019. "Differences Between Founding a Company in the US and in Europe." IvyPanda (blog), June 18, 2019. https://ivypanda.com/essays/differences-between-founding-a-company-in-the-us-and-in-europe/.

References

Flynn, G. (2019) 'Differences Between Founding a Company in the US and in Europe'. IvyPanda, 18 June.

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