Europe research and innovation is strong, but misses the final piece of the puzzle for growth - European private investment. This might be changing.
The European startup ecosystem saw rapid growth over the last few years. The number of unicorns increased, with already well-known names, such as German bank, N26, English food-delivery service, Deliveroo, or, again, French healthcare service, Doctolib, rising to the top. However, compared to other global ecosystems, Europe still lags behind counterparts, like the US or China. Overall, there is less effective support for businesses as they transition from startups to successful global companies.
The main issue is the comparative difficulty in reaching large funding rounds in later-stages. Often, European startups must turn to global sources for this last step, removing the most promising business models from Europe. This funding gap is mainly due to the risk aversion of private funders, but is further compounded by fragmentation of the European market.
As European companies are less likely to advance to the “last step” of business growth, venture capitalists (VCs) are less likely to invest. This is because they aim for large sales or Initial Public Offerings (IPOs) to achieve high returns on investments. Further, a Mckinsey survey shows ‘about 70 percent of European unicorns had to establish a global or partly global geographical footprint to reach the unicorn stage, as compared with just 50 percent of US unicorns’.
European startups need greater support to grow from seed to unicorn. At present, public funds provide the bulk of support to European startups. However, private investors and larger VCs - such as insurance companies, foundations, and pension funds - should increase investments in later-stages. Private entities have very different goals from their public funding counterparts, and these goals can trigger startups to think bigger. This enables businesses to grow beyond early potential and often expand to international markets. This helps them expand beyond regional markets and boost competitiveness. Governments need to recognise when to step-back and let the market grow and evolve independently. The US and Asia are good examples of this.
On the current wave of digitalisation, Europe is experiencing a new trend of investing more in startups. They were initially recognised as a driving factor for technological development. And, after the Covid-19 crisis, they are expected to be a primary pathway to European economic recovery. This trend is evident both at the European and national level. The EU is launching new projects, such as Startup Europe. With this initiative, the EC is working to support European startups to strengthen their networks and speed up growth. The Startup Nation Standard is another EU-level project, with a political focus. It aims to foster member states’ commitment to best practices regarding startups and to better enable startups to expand across their regions.
At the national level, many member states are launching domestic programmes to support Small and Medium Enterprises (SMEs) and startups locally. Recently, Germany announced the “Future Fund”, which will provide €10 billion by 2030 for late-stage tech startups. Berlin is one of the biggest hubs for innovation in Europe. Yet, German companies struggle to receive funding from local investors.
The Future Fund aims to become an ‘umbrella fund’ to attract a further €20 billion in private investments. Initial investments are from the German state-owned development bank, KfW, the European Investment Fund (EIF), and public-private VC, High-Tech Gründerfonds, among others. This ‘fund of funds’ model is designed to mitigate risks for investors and mobilise more VCs to invest. It does so by spreading investment risk between private and public funds. Rather than a protectionist model, this attempts to incentivise German and European investors.
Although the German startup community is celebrating the initiative, there are concerns that €10 billion may not be enough to impact the ecosystem. In addition, questions remain about how the funding model will work and who will be eligible to get the money. However, it remains a positive sign and may change public perception, showing how digitisation can benefit society and boosting investment in the tech industry.
In 2019, France also announced a similar initiative. The €5 billion French fund for late-stage tech startups is subsidised by institutional capital. €2 billion will be invested in France-based VCs and €3 billion are intended for global tech funds, which must be managed by French-based asset managers. The Elysée Palace’s primary goal is to attract international investors and make France a leader in the European startup ecosystem.
Investors have three ways to invest:
Over the last few years, President Macron initiated several measures to facilitate investment and attract a foreign workforce, and necessary talent, to France, such as tax cuts or a special fast-track visa. Moreover, Bpifrance played an important role in the nascent French ecosystem. With this fund, the government marked a turning point, handing the baton to the private sector and institutional investors.
Different European leaders and governments realised startups represent a great opportunity to create jobs and revive the economy of the country. Overall, the EU supports this new trend, trying to keep the most promising businesses in the region, rather than selling to international funds. According to different studies, Europe may overcome these issues and improve conditions for startups by:
While there are still bottle-necks in the growth of SMEs and startups, funding opportunities exist, and are actively being promoted by governmental organisations. Providing projects with knowledge transfer from universities and third-parties will only increase the social impact of their products. This makes the whole ecosystem more attractive to private investors, both inside and outside of Europe. By creating an environment that fosters investments from private European funds, the startup ecosystem will take a massive step forward in the available growth opportunities.
Our public funding team is working in the same direction. We strongly believe that strengthening the network of a startup is key to empower businesses to increase their pool of knowledge and resources. It fosters European research and innovation, bringing fresh input and supporting startups. Smarter collaboration and growth opportunities will increase the European businesses competitiveness and support a thriving European startup ecosystem.