No one would deny that the startup scene around Europe has changed profoundly over the past several years. The level of enthusiasm, the number of startups, and the amount of money governments are pumping into innovation all indicate that the continent has shaken off its lethargy and wants desperately to step into the entrepreneurial spotlight.
But it may not be enough. Not even close.
In a recent letter, Startup Europe Partnership, an advisory group created by the European Commission, said Europe is failing to support companies in their efforts to scale across the continent. The letter is rather mildly worded, and in fact it highlights just a few of the impediments European entrepreneurs are facing. Some of the remaining obstacles are even thornier, and it’s not clear that the will exists to address all of them.
The letter starts with the good news, and there is plenty of good news to celebrate. The continent is producing more startups, and they are raising more money. Indeed, in the coming weeks, Spotify’s stock will make its public debut, highlighting a huge European success story.
But … there are too few of these success stories. Lots of companies are raising early stage money, but not so many at the later stages.
“Europe has made a lot of progress in producing more startups, but the number of tech companies able to scale up across Europe and internationally is still too low,” the letter says. “Research shows that we have approx. 4,200 tech companies that have been able to raise more than 1 million euros in Europe. But the number of tech businesses that are able to become scalers or unicorns is even lower.”
The result is that these companies are not having enough impact on employment and are struggling to sufficiently grow revenue.
However, the suggestions from Startup Europe are themselves rather vague and milquetoast: Support ecosystems rather than individual entrepreneurs; create a single EU agency to manage startup funding programs that are now scattered over many ministries; focus funding more on VC funds, rather than specific startups; and do more to get sources like pension funds to invest in later stage VCs.
Finally: “Europe needs to produce its own startup champions. EU support should focus to preferably support the startups in the growth phase (i.e. the scaleups) rather than the early stage startups.”
The latter is so broadly worded that it hardly qualifies as actual advice. Of the other suggestions, the EU already does some (it’s the largest source of money backing VC funds in Europe). And most programs already seem to target ecosystems and things like incubators, of which Europe has seen an explosion with dubious results.
In general, it feels like a letter written five years ago. And it seems to reveal remarkably low expectations when it comes to what the EU can accomplish these days.
The more fundamental issues facing startups don’t really seem to be on the table. While the EU appears to be a remarkably borderless entity from the outside, it remains astonishingly divided in the digital sense.
The EU proposed the creation of the Digital Single Market several years ago, but the proposals have inched along. The DSM has resulted in the end of roaming charges for mobile phone users, and the coming end of geo-fencing for ecommerce and digital media content, all of which will make consumers smile. But many other proposals are still stuck in neutral.
Not only does the DSM have limited impact, it hasn’t really changed the fact that someone starting a company in France or Germany still faces a hellish gauntlet if they want to expand into another EU country. The continent’s financial systems remain separate and the labor laws vary from country to country, as do many digital rules. To open in a new market essentially requires the creation of another company to do things like offer stock options, which, as a result, are less widely used in Europe.
The EU’s impotence is also being felt in the race to build 5G networks. At the recent Mobile World Congress in Barcelona, much of the hype focused on the accelerated deployment of 5G in the United States and Asia. But Europe, while it has officially adopted some plans, currently lacks enough funding at the EU level.
Worse, its mobile markets remain highly fractured among dozens of carriers, making it harder to justify the massive investments it will require to build out 5G networks. Europe, once a major center for the mobile industry, fell terribly behind in the development and deployment of 4G. If it falls even further behind on 5G, the effect could be devastating for startups.
The advent of 5G is expected to unleash entirely new classes of services and products to take advantage of the massive speeds and connectivity. If startups can’t access those networks in Europe, or they can’t find enough customers here, they’ll have no choice but to leave for the U.S. or Asia.
Beyond the rules and regulations, entrepreneurs will still have to overcome the continent’s language and cultural divisions.
The startup situation in Europe is hardly dire. And there is tremendous optimism here among entrepreneurs and investors. But if politicians and regulators can’t find a way to tear down more of the barriers, the European ecosystem is always going to be stuck in the rearview mirror of far more unified and agile markets.