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EM Forster’s zinger “only connect” referred to individual moral equilibrium. But it reminds the start-up investor that the more interconnected a company and its founders, the more likely it is to succeed. The venture will benefit from low-friction access to markets, talented recruits, smart advisers and patient, knowledgeable investors.

There is a qualification. Nowhere in Europe has the heft of San Francisco as a location for a start-up.

An academic once plotted the connections, formal and informal, between entrepreneurs, investors and advisers in Silicon Valley. The result was a black blot of intersecting relationships. The flimsier webs for European cities looked as if they had been spun by a spider hampered by the low expectations of its parents and teachers.

European centres are bolstered by successes such as Deep Mind, HelloFresh, Arm and Spotify. But Europe remains fragmented as a business environment. Brexit will worsen that, after coronavirus tests it. Entrepreneurs can expect little help from local economic growth, the tide that might otherwise float all boats. Gross domestic product grew just 0.1 per cent in the last quarter of 2019, according to Eurostat, the European Commission’s statistics bureau.

A start-up needs a disruptive proposition that can generate growth that has some chance of becoming sustainable. In the lossmaking years, investors’ capital subsidises every customer purchase. US investors are willing to wait for longer for businesses to break even.

In Europe, the historic problem has been that start-ups lack follow-on funding, let alone public market investors willing to bear years of losses as companies scale up. That is one reason European companies have often accepted buyout offers from large US peers.

When cash profits look to be further than three years away, all forecasts do is bring false certainty to what amounts to informed guesswork. The “total addressable market” calculated by the entrepreneur is most often overblown. If you can halve that figure and the market still looks like it could support the business, it may be worth investing.

Growth rates are typically a function of company size. A small business can triple annual revenues by taking on one big new customer. A large business cannot. The well above average share ratings of Facebook and Alphabet are a testament to their ability to continue raising revenues as they hollow out traditional advertising markets.

That, in turn, reflects the quasi-monopolistic nature of businesses with strong network effects. Here, the job of the investor is to distinguish between websites with a permanent advantage and those whose customers are liable to defect.

There is some comfort for European start-ups: the continent’s fragmented markets may be less of a disadvantage for web-based businesses than those in traditional industries. Property and food delivery websites have had some success in creating fortresses with national or even city boundaries.

The ultimate aim of the well-connected business should be to disconnect — from competition and the pricing pressures that come with it.

The writer is head of Lex

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