EU start-ups are losing out

  • James Tuckett, Managing Director at invest UP

  • 20.07.2015 01:00 am
  • startups

The digital start-up culture of the United States has long been lauded as the benchmark for the European Union (EU) to aspire towards creating. However the cultural and financial differences between the EU and US are vast, contributing to the perceived dominance of the US start-up scene. For instance the EU has not yet been able to create a single Internet company, which is worth above the $10bn mark. The UK prides itself at having cultivated a world leading start-up scene around Old Street, but other than in Stockholm and Berlin this is not been really replicated across the other 25 EU countries. Despite the power of the PR, there’s a very real feeling that the EU start-up world is miles behind in terms of actually producing start-ups. The reasons for this are manifold, but here are the top 3 barriers to start-up nirvana as I see them.

  1. European culture is risk averse

Europe as a culture has never really encouraged mass personal risk taking (unless you count the unfortunate Dutch tulip mania in the 1630s). Professional services, prudence and enjoying leisurely activities have always been cultural priorities, as opposed to taking the life risk of starting a business. The EU was supposed to make the playing field easier, with 28 countries tied together and supported with barrier-harmonising regulation, creating a vast geographic region for start-ups to market to. But the reality of doing business across 28 different languages, borders and economic cycles is not made easy with the twitch of a pen (as proven by the Eurozone), and this has contributed to the raw fact that the EU has not been able to create a Google, Facebook  or Amazon level company.

In the UK this grass roots cultural difference is shown in a 2013 study by Loughborough University, which showed that just 2% of students wanted to join an IT company. Yet 20% of students saw their future in a ‘professional company’, such as either a consultancy, accountancy firm or investment bank. There certainly does seem to be a belief that people have far more to lose than gain.

The German culture (and indeed the EU) has heralded the ‘Mittlestand’ approach as the perfect model. In simple terms Mittlestand companies are mid-sized companies, which do only a couple things, but they do these extremely well and may even be world leading in their field. They are structurally risk averse and arguably a contributing reason why the German economy passed through the economic crisis largely without being damaged. Mittlestand companies find their risk sweet spot and stay firmly there. That’s not a bad thing, but it is not the spirit which creates a rich start-up scene.

  1. Hard to get the cash in the EU

Start-up hubs are all the rage in many areas of the EU (London, Stockholm, Berlin for example). Venture Capital money has been flooding into the EU at rates previously unseen. Seed money is now easier to get hold of thanks to the alternative finance sector, which includes crowdfunding, as well as angel investment. Certainly the influence of crowdfunding in the UK has been profound, with a large number of businesses looking to the sector for funding. Crowdfunding is really only good for seed fundraising levels, although we are seeing slow movements towards Series A fundraises with companies such as Camden Hells and Brew Dog in the UK. In the EU’s other 27 countries the impact of crowdfunding has been held back and stifled by risk adverse regulation. But that is not to say that Europe’s start-up culture isn’t growing. On the contrary it is developing quickly. But this is the crux of it. According to the Dow Jones VentureSource, whilst European companies raised €2.6bn from VC funds in the first three months of the year, this was still a fraction of the $15.7bn raised by American based companies. If you want to get any cash above seed level, it seems you may need to look for it outside of the EU. If the EU start-up scene really wants to be world beating/leading then the amount of money sloshing around for the start-ups needs to grow massively. It’s a chicken and the egg scenario, what do we need to fix first; the low levels of VC funding and our personal as well as cultural low acceptance of personal risk.

  1. Society is structured differently

Sociologists have long argued that the US has more of a can-do attitude, something which is key in start-up-land. In the US a large chunk of their entrepreneurs come from immigrant backgrounds and this again fits in with the belief that to become a successful entrepreneur it’s important to feel like you have nothing to lose. If that’s a force behind a strong start-up scene, it seems in the US more people have nothing to lose than in the EU, although with the recent economic changes across the EU that could be slowly changing.

Perhaps the welfare systems (which we are so rightly proud of) have become the barrier to personal achievement. Is the mind-set for a lot of US start-ups not about trying to build the next unicorn, but rather being able to provide for your family, a feeling that simply does not exist in the UK for instance? I’m not sure. It’s no surprise that in the US start-ups are filled with youngsters. In the UK the much lauded fintech scene for instance is filled with people who have done their time, got the nest egg and can potentially afford to lose (controversial). In the US start-ups have been aided by the building of research-intensive centres of Boston and San Francisco, where it’s no surprise that Silicon Valley developed. In the UK, academic centres play a very different role, and although the links between university, industry and research in the UK and Nordic countries are starting to grow, still these links are not really contributing to world leading start-ups. And then there’s the contributing issue of constrained funding.

To sum up here’s my very early start-up Christmas list, not that I normally get anything that I want. Please can good EU start-ups have access to more cash and people’s aversion to risk be lessened. Lastly let’s also push start-ups to become the powerhouse of the EU economy. Now that would be nice.

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