Europe needs Scale Ups: Size matters

If we were asked to name the greatest problem of Europe when it comes to entrepreneurship when compared to other regions such as the US and China, what would we say?

Most would argue that we Europeans are not entrepreneurial, that most of us settle for comfortable long-term positions at well established firms. But, is that true?

European countries have made an important effort in recent years to strengthen their entrepreneurial ecosystems. Especially during the 2008 crisis, European governments made a call for entrepreneurship as an opportunity to boost growth and advance towards new knowledge-based economic models -less relying on construction and low-value services-. The strategy was focused on leveraging entrepreneurship and innovation to create employment opportunities for many people who were left behind by the crisis.  

But once out of that crisis, and in the middle of a new one caused by the COVID pandemic, it seems clear that fostering entrepreneurship is just not enough. During the past years, results show that entrepreneurship in Europe has developed very well. Today the EU27 has more than 80.000 start-ups. Investments raised by European start-ups went from 36,6 billion € in 2019 to 41 billion € in 2020, and today Europe boasts more entrepreneurs per capita than the United States.  During the first quarter of 2021, 27 EU innovative companies got a valuation of more than 1 billion € in Europe -the so-called Unicorns-, based on their latest funding round. However, a closer look showed that only 13 of these companies were located in EU27 before the funding round, and that only 7 of them will stay in EU27 after the funding round. Something is still missing. 

Moreover, entrepreneurship, seen just as a sort of new trend to follow in 2008, is today key for Europe’s future as an essential driver for both the European Green Deal and the European Digital Strategy as well as for the development of a more competitive, balanced and growing Europe. Still, to address these demanding challenges, not all kinds of entrepreneurships are valid. Start-ups are okay, but what Europe really needs are Scale-ups and Unicorns. Size matters!

As a matter of fact, Europe has no shortage of successful entrepreneurs and innovative ideas, but European companies seldom grow to scale. Many remain teams of two or three persons, or quite often, just one-person companies. Their innovative ideas remain the exclusive domain of local economies, sometimes entrenched in a single European Union country, others even in a single region within them. They do not become the global and job-generating scale of well-known U.S. start-ups, such as Apple (founded in 1976), Amazon (1994), Google (1998), Tesla (2003), Facebook (2004) or more recently Uber (2009).

Why don’t European start-ups scale-up? 

All the indicators point in the direction that the now 24-year-old programme to make Europe a Single Market of 508 million consumers can be the key flaw for European scale-ups. The European market is still at present extremely fragmented. Despite many political efforts, Europe is still today a big group of different countries willing to harmonize, but each one with its own language, culture, governments, practices. In some cases, this scenario is even replicated inside the countries themselves. This brings in extra difficulties for start-ups, who actually need to open new markets country by country. But learning about these markets and understanding their characteristics, often creating new brands, and adapting to the specificities of the local demand and practices, takes time and great effort, undermining their growth potential. On top of this, Europe’s regulations, in their reach for excellence, are strict and not always addressed or interpreted in the same way in all its countries. 

Crossing the ocean, it seems clear that the American ecosystem’s main advantages are not the lower regulatory standards, and neither a better growth-funding model. It’s the size (once more) and openness of the American market that makes business in Silicon Valley or the Boston Area so interesting. If you succeed in one State of America, there is no reason why you will not in any other, and this can boost you to global markets too. If you succeed in Madrid, you must then start from scratch reincorporating in Paris, Brussels or Stockholm, and so, up to 27 countries. Many European start-ups such as Spotify did not follow this way and decided to move to the U.S. for growth, and then come back to Europe once it was big enough to cope with the complexity of the European market.

And if we look at Venture Capital for example, the European market’s fragmentation makes it very difficult to have access to the existing opportunities having to address the European markets one by one, which happen to be many, small and complex.

The answer is collaboration and creating networks across the borders

The Start-up Heatmap Report 2019 highlights that European entrepreneurship is characterized by two important facts. The first is that location is important, and Start-ups and SMEs from certain locations are much more likely to be successful in raising venture capital than those being in other regions. The European innovation or entrepreneurship ecosystems are clearly unbalanced from one region to another. The second is that European start-ups are constantly increasing their mobility in Europe even in early start-up phases in the need of opening new markets and acquiring talent. The report reveals that the previous circumstances enhance the creation of so-called start-up highways of which the most important one is the connection London, Paris, Berlin, Amsterdam, Barcelona, Lisbon, called the Circle Line, and that eventually interstates are also being generated, providing connections of local start-ups ecosystems to these main hubs. For example, Madrid connects to Barcelona through something we could call the Spanish interstate, as well as Lyon to Paris. This fact shows that many entrepreneurs find their ways to obtain what they need from the hubs or markets they need in a natural spontaneous way outside their local or regional environments. In the same way, Venture Capital looks for entrepreneurs jumping from hub to hub. This phenomenon shows that geographic borders are very weak barriers when nothing governs or regulates a market and such is the case for entrepreneurship capabilities where VC, business acceleration services, technology transfer, talent or best practices are not regulated goods. It is the cultural, language and mental borders of entrepreneurs, business acceleration providers and policy-makers  that must be overcome.

The European Commission is aware of the constraints that fragmented European innovation ecosystems cause for scale-ups and is working in the direction of a single European innovation ecosystem that balances the gaps of less developed innovation regions with those more advanced, promoting the establishment of hubs of expertise and corridors of collaboration between these, in a similar way that start-up highways do. The European Commission has introduced this concept specifically in the Digital Europe Programme for Digital Innovation hubs and in the Horizon Europe programme through European Innovation Ecosystems (EIE). EIEs address entrepreneurship in specific technologies or sectors, such as deep-tech or biotech, promoting cross-regional collaborations between business acceleration services providers. Because the European Commission also knows that size matters.

About Strata

Even as a very small company, at Strata we were born global from our very foundation. A location-agnostic agency, today we have clients from 11 different countries. We work with partners, incubators, companies, Universities and consultants who spread over three different continents including Europe, America and Asia. We provide our clients with our international network of partners as well as innovative business models and tools to internationalize their business. We also support global investors in scouting for startups and funds.

Image by adege from Pixabay

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