Culture: Europe & U.S. Divergence. Part 1.

A guest piece by Owen Reynolds of Teklas Ventures, the venture arm of the FO associated to Teklas.

This piece is a guest piece written by our good friend Owen Reynolds from Teklas Ventures, the VC arm of a family office associated with Teklas.

Owen is an armchair economist and leads Teklas Ventures, the venture arm of an automotive family office, covering both venture fund investment and direct industrial tech investment strategies. He is a former US Peace Corps Volunteer, founder of a sustainable construction company, and economist at the US FERC. After his MBA, he started in impact investing at an Omidyar fund in the US, then spent two fund cycles with Expon Capital in Luxembourg. 

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The recent investment and economic divide between Europe and the US has sparked a lot of soul searching (at least on this side of the pond). The recent Draghi report, a two-volume, 397-page report damning Europe's lack of competitiveness on September 9th hit new depths. 

From the venture and tech corners of the investor community, the divergence is painful. For founders, for GPs, and for LPs based on the continent, it’s not only an ego hit, but a practical question for where founders should live, work, invest, and start families. 

While I’m not an economist (any more), as an American venture investor and LP in Europe, I can’t help but chime in. So join me on a fools errand to (over)-simplify centuries of cultural, economic, political, and business differences down to a few blog posts!

• Culture (today!)

• Dollar Reserve Productivity

• Monetary Premium & Investments

• Exits & Liquidity

• Structured Failure

• Self-Identity & Compensation

• Portfolio Construction

It would be unforgiveable to write about the differences between Europe and the US without starting with culture. But while cultural differences may inform the history of institutions, the economic institutions themselves play larger roles than whether you hold your fork in the left or right hand. 

History

I’ll point out the Captain Obvious things to lay the foundation. Europe has been the chess board for repeated and often reciprical waves of war, famine, fraticide, infanticide, genocide, and the unspeakable since time immemorial. The US actively created its own tragedies, using genocide to wipe out those histories and slavery to build a new one, absolved of humanity and responsibility by Manifest Destiny and long-debunked psuedo-science. 

There is too much tragedy and human suffering, so much wrong and so many peoples wronged and wiped out to do justice here. Both regions are stained in blood—but one was reactive and recipricol while the other was tragically proactive and one-sided. This left Europe resenting past transgressions and the US with the false sense of a clean slate. I will not attempt to explain these sad chapters of history, but it has informed the business and investing world we occupy today. 

People also think of Europe as the “Old Country”. But as the FT points out, the US has been a unified entity for longer than Italy, Germany, or Austria. And more importantly, Anglo-Saxon law is case law, as opposed to rigid coded (Nepolianic) law. There are downsides to be sure. But the US’ two centuries of case law, with an emphasis on posession and ownership, lends itself maliable to complex business negotiations. 

Immigrant Stories

One critical way these two histories informed today’s business climate is who moved to the modern US. 

A handful of well-known European families were granted land in the “New World”. But make no mistake—many of the new transplants were the lowest on the socioeconomic ladder. My multiple family branches arrived to America penniless and uneducated, from both the Old World and the New. 

These adventurers at the very least tilted the story to favor future risk-takers, builders, and entrepreneurs. Some have suggested such a self-selection process may have even selected for more risk-taking genes. Whether genetic or cultural, there is an inherent pride in building, founding, or starting just about anything new in the US. 

Seeing The Builders

Perhaps more importantly, the works of entrepreneurs are tangible to all. Carnegie Hall, University of Chicago (Rockefeller), and Ford Foundation are alive and well today, making the work of entrepreneurs visible and seemingly attainable. Even with today’s slipperier socioeconomic ladder, American entrepreneurs like Bezos and Gates are still more likely to come from the upper-middle class than from the upper-upper classes. 

The same natural human instinct for adventure must have also sparked the wars, castle-building, and alliances of the not-so-distant past in Europe. However, whether perceived or real, it no longer feels like there is room for new entrants into those upper echelons in the Old World. As America ages and congeles, I anticipate that its entrepreneurial spirit could also run its course. 

In Europe, showing off like the Rockefellers, the Carnegies, or the Fords would be looked down on. Across European languages, the word for ambition has a negative conotation. As a result, ambition is not celebrated as often with public works and is not as visible or tangible. 

It trickles down to all levels. American children probably spend a dangerous amount of time comparing themselves to others, trying to one-up each other. It boggles my mind, but my children’s German friends spend the same amount of time and effort to make any differences with their friends unapparent.  

Coffee Cake Economics

Europeans also have a cultural tendency to do more “in-house”. Coffee cakes, gardening, mushroom picking, and family members driving each other are but a few examples that I see far more frequently in Europe than in America. These activities are often exchanged, deepening and maintaining both family links and long-term friendships. 

Closer family networks are also evidenced by less social and geographic mobility. This means that the critical social bartering system not only maintains network ties, but means more productivity in-house, not taxed, and not reflected in GDP. 

I call this “Coffee Cake Economics”. It’s a subset of the informal economy, sadly a lot smaller than the narcotics component. The US sells more of these goods and services, which show up on the official statistics, and make the US economy look larger and “more productive”. It’s reflected by some estimates of the US having the world’s smallest informal economy.  

Another reflection of those connections are how close and how long friendships last. Most of my friends in America are from my high school, college, or early work years, when I grew into my own identity. My German acquantances’ friend groups tend heavily towards childhood neighbors and primary school friends. The joke is that “to make friends in Germany, you go to Kindergarten here”. 

This is an accounting of “working to live” as opposed to the American “living to work” mentality. But it plays a deep role in how businesses work internally—where you are traditionally not expected to “make friends” or “joke around”. That’s what you have real friends for. 

Filtered Education

I have two children in the German school systems and I’ve compared it with my US experience, as well as that of friends in Belgium, France, and Spain. Another gross simplification: my takeaway is that European school systems tend more towards their filtering functions. 

Schools balance the goals of life-long learning, social cohesion, and filtering different workers. 

My childhood in the Chicago Public Shool Systems started like any one else in my neighborhood. Singing the national anthem and saying the pledge of allegience every morning, there was plenty of indoctrination and social cohesion. And by going to progressively more demanding schools, I was filtered out for sure (towards the top fortunately). 

But I remember clearly being told we were learning for life—learning to learn. The joy of discovery and self-directed learning was always emphasized. I wouldn’t go so far as to say it was purely Montessori, but self-direction was increasingly delegated over time.

In contrast, from start to finish, the French, Belgian, and German school systems lean heavily towards filtering first. Because university is nearly free (a blessing for us parents!), and there is no financial risk to filter, it behooves school administators to identify early those that will succeed in which field of work. 

Similarly, there are significant technical school investments that can truly inspire and unleash the potential out of even the most indifferent of students. European citizenry is generally highly educated, and they remain more informed than Americans as part of their civic duty. So the social cohesion and civic reciprocity should not be understated.

The consequence, though, is European school systems less frequently emphasize a life of learning, ambition, and thought leadership.

Fear of Being Bested vs. MBAs

Despite the differences, one common denominator is that corporate and bureaucratic culture is universally driven by a fear of not looking stupid. The most noxious way to look stupid is to be bested by your competition. 

The most natural fear of competition is one’s colleagues—those in your same cohort who you are competing against for a raise, or a bonus. While mass meditation may eventually dissuade this human fear, until that’s common practice, it can only be guided, not erased. 

Americans have instituted MBAs as a formal education for managers to direct this exact fear outward, rather than inward. As fluffy and seemingly old-school as many MBA programs are, they provide training for grown-up team work. 

The focus is constantly on beating external competition—not the competition you have in the office next door. Instead of being intimidated by upstarts, MBA students are taught to “hire up”—hire people that are better than you, empower then, and help your organization grow as a whole. 

According to one count done in 2022, of the 250,389 MBA students, 155,996 of them were in the US. Programs such as Wharton and Harvard boast over 1,500 students/year. Top MBA programs publicize between 35 – 50% of international students, but I can attest to few European students in my full time MBA program at Chicago Booth. 

The result of fewer MBAs Europe is a business culture that less frequently rewards talent and more frequently silences dissenting voices. Hierarchies more easily ossify in such an environment—and top talent cannot percolate to the top. 

Things are changing, though. Over the last 20 years, European schools ranked in the top 100 MBAs, as ranked by the FT, went from 15% to 25%. And over the same period of time, the downsides of an MBA (group think, non-technical skills, financial-only focus) may increasingly be weighing against the good they have done for corporate teamwork. 

Ultimately, compensation is really the driver of household decisionmaking. When and where top talent is compensated best drives the best and the brightest to move. The next few sections will dive into the deeper reasons for why the compensation models are structurally different, and which structures we may want to rethink. 

Limitations to Cultural Differences

The cultural background is what informs the institutions that I’ll cover in the coming segments. There are many more differences and similarites which you’ll have to forgive me for not touching on here. 

I argue that while all these cultural elements are significant, structure is even more important to explaining the divergences of the European and US economies than their histories. In the end, every individual and family pushes for optimization, and while culture surely creates nuances for “optimal”, the economic structures we’ll cover provide the rules of the road.  

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