Throughout history, Italy has been recognized as an excellence for creativity, style, and outstanding entrepreneurship. This creativity, however, hasn’t translated to tech startups. Italy trails behind every other major European country with an abysmal share of the overall startup investment.

As Europe takes off, will the BelPaese be able to follow?

As a young Italian working for a leading European Venture Capital, I was always tempted to look into Italy’s potential. So, when I was given the responsibility of finding and evaluating the best teams across Europe, with a bit of patriotism, I decided to focus a fair bit of my time on Italy. I would look into the market, find the hidden champions, and state my case in front of our investment committee to get them funded.

As always with startups, things didn’t go as smoothly as planned.
To date I have reviewed ~500 Italian startups, attended several Italian startup events, and spoken with dozens of investors, angels, and startuppers. And I’ve failed to find a startup that can make our fund’s cut.

Italy is an unusual environment where many successful businesses are built outside the grid, so finding them can be really, really tough. Add to that the fact that the firm I work for, EarlyBird, avoids hardware-centric investments (a relevant share of the Italian startup market), and you start to see why I failed to find an Italian startup worth our investment.

Clearly I’m not the only one who’s struggled to find investible companies in Italy. According to PitchBook, from January to October 2016, just $113 million had been committed to startups headquartered in Italy, while in Spain the amount totaled $357 million. The UK led the pack with $4.4 billion in raised capital, followed by Berlin and Paris.

The lack of capital going into Italian startups becomes even more conspicuous when we look at later stages: Italy receives only 0.5 percent of the already limited capital going to European startups at later stages.

But why is that? Why are investors avoiding Italy? Combining my experience at EarlyBird and my insights from interviewing Italian startups, I’ve come up with eight points that partly explain this phenomenon.

1. Too much bureaucracy

In 2016, the Global Competitiveness Report from the World Economic Forum ranked Italy as the 44th country in the world for business-attractiveness — behind Thailand and Kazakhstan.

Small and medium businesses in Italy on average spend 52 percent more time than their European counterparts dealing with bureaucracy. This added complexity costs the state $7.5 billion, 2.5 percent of our GDP (while the new economy represents 3.5 percent of GDP). And this is on top of our stellar taxation (24 percent higher than the European average).

Such an economic environment depletes progress made on the startup side, from 2012’s Growth 2.0 Act to the more recent easing up on investment restrictions and access to citizenship. Startups can embody part of the needed change in our country, but without an overall change in our economy and mentality, they can hardly make the jump we are all hoping for.

2. Lack of a startup culture

In Italy, we don’t know what a startup is and how to make it successful and competitive.

This might be slightly changing in the private sector with many accelerators, online journalists, and communities beginning to provide quality content. But we are still in the phase where everyone is teaching and few are doing.

3. Lack of an Hub

Usually considered a marginal problem, the lack of a hub is, in my view, a critical weakness of our ecosystem.

Today the three biggest startup provinces, Milan (home to 14.7 percent of Italian startups), Rome (8.5 percent) and Turin (4.7 percent) together represent less than 30 percent of the total number of startups in the country.

Silicon Valley, London, Berlin and many other examples show how geographical density of startups is one of the key recipes for success. A serious national plan would select a startup capital (ie. Milan) and then invest in its development: low-cost housing, help with services, etc.

This way knowledge could be transmitted from startup to startup and good employees could move among startups in the event of a failure.

4. Complexity of work relations

A friend who started a successful startup in Switzerland candidly admitted that the reason he chose to build his company in Chiasso (other than tax reasons) was that he could fire people when they didn’t perform. 10 million euros ($10.6 million) a year and 50 employees later, it looks like he made the right choice.

Startups need speed over anything else — speed of execution, speed in solving controversies, and, yes, speed in reshuffling the team when needed.

5. Strong risk avoidance

Italians are one of the most risk-averse people. On a scale of 1 to 100, Italians register a 75 on the uncertainty avoidance index, compared to 35 for the Brits and 63 for the Germans.

This isn’t bad per se. Israel registers an 81 in the same index, and its startups are faring much better than ours. So this is not the main cause of our problems, but is something to be aware of.

6. The funding process is difficult

The funding process in Italy is eternal and the results are quite bleak. As a friend from Bologna recalled, “Startups in Italy chase angels and VCs for months to get 10,000 euros [~$10,000] of funding.

Of course, if other factors started to change, this last point would automatically improve as it is less a cause than a consequence.

7. It’s really hard to raise capital in Italy

As startups face problems raising anything from seed rounds to later stages, Italian VC fund managers go through hell to raise a few million.

There are multiple reasons for this:

  • It’s really hard to ensure a decent IRR to LPs investing in Italian startups. And, actually, most accelerators/VC funds in Italy lose money. In other words,  they provide negative net IRRs to their LPs.
  • In Italy, LPs are hard to come by and the tough economic situation makes investments in high-risk sectors unlikely. In fact, the few Italian companies that seriously invest in startups usually do so outside of Italy, as LPs in big European VC funds.
  • Italian VCs are generally small and focus on the Italian market, a position that is not appealing to international investors. That’s why some of the biggest VC funds in Italy get funds from the government through Invitalia, without which they wouldn’t be able to close their fundraising.

The VC business in Italy is so hard that if it wasn’t for the management fees, hardly anyone would do it.

8. It’s hard to find good investment cases in the country

Italian startups are creating products and services that are at a level of quality lower than their American and European counterparts. This is due to the lack of a strong startup ecosystem and culture in the country, but it has also other origins:

  • Italian startups are usually focused on Italy, and this focus leads to lack of ambition. Italian players should aim at building significant leadership in the European market and from there aim for the world. Italy is too small and too resistant to change to be an appealing market on its own.
  • Italian startups have little market awareness/competitiveness. I came across this over and over when interviewing interesting startups: They just had no idea about their competitive landscape. If I, after a five-minute search on Google, know more about your competitors than you do, it’s not good. Italian startups need to ask themselves the hard questions and prepare to face the competition. It is better to fail fast and refocus rather than spend an awful amount of your time and money on something no one cares about.
  • We lack boldness. The place where you start/found your startup matters up to a point, but eventually you need to open yourself to the global market and aim big. Investors won’t get excited by a half-spirited vision. Dreaming big while keeping your feet on the ground can be tough but is what successful teams do.

Finishing lines

Italy cannot hide from the systemic problems with its startup ecosystem. These problems cannot be solved by a group of enlightened entrepreneurs alone. We need cooperation between the state and the private sector.

The country needs to boost its education system to make people aware of how the economy works, and our startups need to bundle together to get better. They need to be more bold, more aware of their potential, and more aware of the competition. European Ventures are more than willing to invest in Italian startups; they just need the right incentives: quality, vision, and potential.

Little by little the amount of investment in Italian startups is increasing, as is the quality of the startups. Italian exits are on the rise, and the Italian VC landscape is getting more and more populated and active. International investors are starting to show up.

It is hard to predict how things will go. But it will take work to make Italy a better place for innovation and for the future. This work has to come from the startup community, the government, and the investment community. If we will fail, the whole country will have failed.

[A version of this story originally ran on Earlybird’s Medium page. It has been substantially revised here.]

Matteo Amerio is an ex-startup founder and a summer analyst at European VC firm Earlybird.

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