How startups stagnate behind Europe’s new iron curtain

startup systemsBubble or no bubble, it’s become crystal clear that investors value social-networking applications. The dollar signs surrounding Facebook’s IPO, its $1 billion Instagram acquisition, and Path’s recent $40-million fundraising round are only a sampling of the proof. And it’s not only big names: New concepts like Everyme and Priv.ly have also gained their fair share of VC attention.

These startups have targeted the market at a perfect time, when privacy and group-focused applications are all the rage and during a period of bullish investing in social networking.

But the Internet has become a confusing and complicated – and dangerous – place for startups. Ideas are nearly impossible protect, and originality isn’t necessarily rewarded. With the launch of Everyme and Priv.ly, one founder saw his ideas yet again become a reality, after nearly two years of being stonewalled by German VCs who preferred time-tested concepts and feared the unknown.

Closar: Right idea, right time, wrong country

Back in April 2010, Malte von Medem was a studying Communication Science in Germany when he came up with the idea for Closar. “I wanted to find a way to anticipate how dominant media or communication systems would iterate in the future – which was seen as being impossible by definition in our field of study at that time.” His course of study only concerned itself with analyzing services that already existed.

“When I first came up with the idea of an alternative, peer-group-based social interaction tool in April 2010, I just thought: ‘this is it – this can change everything.’”

how closar works

One professor told von Medem to take his idea and run. “He told me to look for people that had the means and skills to help me [make] Closar a reality as fast as possible.”

The result was Closar, an app currently featured on German crowd-funding site StartNext. It’s built around the idea of grouping your contacts specifically and then saving yourself from embarrassing, obnoxious, or damaging oversharing. It’s a concept we’ve been hit over the head with for about a year now: a solution to the saturated news feed on social networks.

So Closar’s relatively early stab at pinpointing this market seemed well-timed – von Medem says he was contacting VCs as early as fall of 2010. And as we now know, the same feature was coming to us from other platforms — like Google+ — in the near future. But unfortunately, things only became more complicated for Closar.

A different kind of German wall

There are significant differences between the US and European startup ecosystems. To summarize, the general consensus is that US venture capitalists and accelerator programs are more willing to fund early, concept-driven ideas. Largely speaking, European VCs tend to take big risks with their money – but only on “proven” projects.

“When they have seen a concept proven right in the States or some place else in the world, [VCs] put out more money than reasonable – because they have the safety of telling their bosses that they cannot be wrong, it already worked out before,” says von Medem. “Or if you are already huge, then they will throw even more money after you. Which kills almost all chance for innovation or young founders in Germany.”

This conservative approach has stifling a scene bursting with potential: Incubators and investors are interested and want to be part of building momentum, but a collective resistance to “new” holds them back.

“In France, it is impossible to get a Twitter-like company because we are lacking early-stage investments and perspectives of exits for B to C startups,” Guillaume Martin, founder of startup Pictarine recently told me. “All these startups are moving to the US, and that is what we are doing right now.” He’s not alone; von Medem says he was advised to take his concept to the States instead of attempt to sell it in Germany.

“You are from Germany, we sell stuff – we do not invent it,” He says he’s been told. “VCs kept telling me I needed a running version to get seeding, developers told me I would need a budget to pay them in order to get a running version.”

It’s part of what’s propelled the clone factories, incubators that spot successful startups and build their own extremely efficiently, with every intention to sell and line investor pockets. “Germans are just not pioneers today, they are administrators,” says von Medem. “I think it is about the German Zeitgeist in general. It is the fear of failing – or the fear from being proven wrong.”

In seeking out seeding, von Medem avoided contacting the Samwer brothers through their Rocket Internet incubator for fear they would copy his idea and sell it themselves.

And while originators do exist, the environment they’re attempting to live in is stifling. “It is not that all European startups are focused on cloning – rather it is that we all learned our piece from watching only copycats being financed well and the success that comes with it.”

Meanwhile, stateside…

Back in 2010, the first whispers of privacy-focused social tools were just beginning. Diaspora and Path had both launched, but were still outliers seen as unlikely Facebook alternatives. Still, these new ideas were getting plenty of attention for what was considered outside-the-box thinking.

“Two years ago, my crazy student idea of small social group based sharing was new,” says von Medem. “The idea of non-persistent data [which is what Priv.ly does] was even more unrealistic at that time… But I wanted everyone to be able to share with fun and without mistakes.”

everyme and pathAnd so did US startups. While von Medem struggled to get Closar off the ground, a new wave of social networking niches took hold stateside. Google+ launched in summer of 2011, introducing Circles to the world. Shortly thereafter, Facebook refocused on Lists, allowing users to better group their contacts for more specific sharing. Path’s November 2011 re-launch revealed a highly stylized way to utilize the exclusive social network. And now their novelty has worn off as similar services are coming out of the woodwork, finding their own paths to funding or acquisition.

So von Medem has watched as these similar concepts gain traction and his is still playing the waiting game. “I saw Facebook Groups, Google+ Circles, then Path, Everyme, and Priv.ly pop out of the ground in other countries. And I saw German VCs paying one copycat after the other just to sell them to even more stupid (or helpless) media companies that only ran behind innovation from outside of Germany.”

privly and google circles

The greener grass

Despite Closar’s difficulties, von Medem isn’t giving up on the app. “I am still writing VCs and hoping for seeding,” although he notes that the launch of Everyme is yet another challenge. “We are hoping to reach our funding goals on StartNext in 60 days – although it is probably unrealistic.”

“I believe that in the States, if you have a great idea, you will get the backing you need,” says von Medem. And he’s right – although that’s come with its own consequences (or worries about consequences, depending on your perspective). Although Closar may have fared better as a stateside startup, you have to wonder if our VC climate borders on “too much of a good thing.” All bubble-fear mongering aside, the immense amounts of money being thrown around on intangible innovation deserves pause. “Instagram founders Kevin Systrom and Mike Krieger ought to get down on their knees every night and thank Ben Bernanke,” Reuters columnist James Saft recently wrote. “That’s because the Federal Reserve chief has been crucial in creating an atmosphere in which two 20-somethings can sell an 18-month-old company with 13 employees and no significant revenue for $1 billion.”

So you can see this atmosphere as a positive way to foster innovation or a dangerous inflation of conceptual worth. Either way, it’s resulting in a saturation of social media startups for us, all the while ideas like Closar struggle to gain credence abroad. What we need to do is find the happy medium between a critical eye and risk-taking spirit. It’s a difficult balance to establish, but one that all involved parties — from founders to accelerator programs to investors — should so we can ditch the extremes and keep founders from getting stuck in startup purgatory or suffer the cries of overvaluation.

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