As China rises and the US wavers, the European political debate is awash with terms such as \u201cstrategic autonomy,\u201d \u201cdigital sovereignty,\u201d and \u201cinnovation made in Europe.\u201d And ever since European tech companies seem to be catching up with their US competitors, European political leaders have begun to express new ambitions for homegrown tech sectors.<\/p>\n
Take French President Macron, for instance, who argues that Europe must switch from its 70-year-old \u201ccatch-up economic model\u201d to instead \u201clead the digital transformation through radical innovation\u201d \u2013 a key priority of the French EU presidency<\/a> that began this month. Such bold assertions are in line with Europe\u2019s trend of geopolitical self-assertion with respect to the US and China.<\/p>\n Suddenly, European startups find themselves in the midst of a new global battle conflating economic interests, new technology, and political ambitions. Their apparent new role is to grow quickly into the new European \u201cDigital Champions\u201d called for by ambitious politicians.<\/p>\n However, a closer look at the European startup ecosystem reveals a paradox. Europe boasts a long tradition of successful research and innovation. And European economic integration offers the prospect of a single market that should compete globally. But the European startup industry appears underdeveloped compared to its global competitors \u2013 despite an explosion in the number of companies setting out to conquer new markets over the last decade.<\/p>\n One simple reason for this stands out. While US startups have received $1.2trn in Venture Capital (VC) investment since 1995, the figure for Europe is just one-sixth of that at $200bn. Optimists point out that Europe is catching up: Its VC market has grown from 4% of the global market in 2004 to 15% in 2020. And European VCs raised record amounts of new funds in 2020. What\u2019s more, a remarkable 38% of global seed-stage capital \u2013 that is, funding for the growth phase \u2013 is raised by European startups.<\/p>\n The crucial figure, however, is this: while Europe\u2019s startups raised more than a third of early-stage capital, the funding raised by scaleups \u2013 that is, companies aiming to grow \u2013 declines sharply to only 9% of so-called \u201cmega-rounds plus,\u201d where funding is beyond $250m. Instead, 50% of such rounds came from the US and almost 40% from Asia.<\/p>\n In short, pretty much every successful company emerging from European universities and startup ecosystems is destined, sooner or later, to leave the continent. This has a direct impact on Europe\u2019s global standing \u2013 by harming its competitiveness, employment, tax base, and indeed the growth of its innovation ecosystem, which relies on virtuous feedback-loop<\/p>\n Unsurprisingly, then, the issue of funding is central in the most recent demands formulated by European startup associations<\/a>, restated succinctly in light of the COVID-19 pandemic and \u2013 for the first time \u2013 aimed directly at European policymakers.<\/p>\n Regarding investment and finance, associations call for a \u201cmulti-tier plan to unleash private funding, especially the VC sector,\u201d and for an \u201cincrease in public funding.\u201d Regarding the crucial issue of late-stage funding, they recommend that the EU create \u201ca tech buy-out fund to accelerate direct and indirect shareholdings in strategic sectors for Europe, such as health, cybersecurity, Artificial Intelligence (AI), quantum computing or blockchain.\u201d<\/p>\n Following intense consultations with the startup sector, the EU has undoubtedly shifted gears. The newly designed\u00a0European Innovation Council (EIC),<\/em><\/a> for instance, began making direct equity investments into European tech startups in January 2021, a groundbreaking development in the EU\u2019s innovation policy. The EIC fund will have the capacity to inject \u20ac3.5-4bn into the market by 2027 and hopes to attract a further \u20ac30-50bn in private investments.<\/p>\n Such efforts would contribute to reducing the gap in VC funding between Europe and the US. And \u2013 at least in theory \u2013 this means that the European Commission, which runs the EIC, could become a shareholder of a future European Google of its own. And the EU is doing more \u2013 InvestEU, the bloc\u2019s guarantee program for European SMEs, will also provide additional support.<\/p>\n In the long-term, however, the lack of large-scale financing in Europe means that the probability of European-bred companies being bought by \u2013 most likely \u2013 American VCs will remain as high as ever.<\/p>\n One of the key differences between the US and European capital markets is the fact that institutional investors play a much larger role in providing VC in the former than in the latter: more than half of the nearly $160bn fundraising in the US between 2012-16 came from institutional investors compared with just over a quarter of the nearly $50bn raised in Europe over the same period. Pension funds make up a large part of these institutional investors.<\/p>\n These profound structural differences make it difficult for Europe to generate the private-sector savings required to support significant VC activities to become the world\u2019s leading region for tech development. Regulatory differences exacerbate the problem.<\/p>\n So even the achievement of more modest goals \u2013 such as a degree of control over strategically relevant tech industries \u2013 would require much larger funding structures at the European level. One answer is the creation of a\u00a0European Sovereign Wealth Fund (SWF)<\/em>. Indeed, plans for such an entity are reported to circulate within the European Commission under the title \u201cEuropean Future Fund,\u201d with a view to investing European public money into sectors deemed strategically important.<\/p>\n However, such a fund quickly ran into political resistance and did not make it into the EU\u2019s 2021-27 budget. Instead, the European Investment Fund (EIF) tested the waters for a\u00a0Pan-European Investment Platform for European Digital Champions<\/em>\u00a0to invest in growth stage VC firms which in turn invest in the pre-and post-IPO segments of European tech startups \u2013 a compromise, given the political obstacles towards going full-throttle towards an SWF. Again, political differences relating to the complex ownership structures that the creation of companies funded through such a mechanism would ensure that the idea has not yet seen the light of day.<\/p>\n The measures set out by the EU \u2013 implemented or posited \u2013 are pioneering by European standards. And as calls for reforms to the EU\u2019s industrial policy become more strident and groundbreaking initiatives on the part of Europe\u2019s competitors begin to bear fruit, more creative initiatives will undoubtedly emerge.<\/p>\n Yet the policies and funding programs in existence at the EU level are unlikely to fulfill the bloc\u2019s ambitions of leveraging the power of European tech startups to contribute to digital sovereignty. Instead, a substantially more active industrial policy<\/a> that focuses on supporting young companies to grow will be necessary. In parallel, progress in completing the Single Market, particularly the Capital Markets Union (CMU<\/a>), will be required to ensure deep, wide, and liquid investment flow across Europe.<\/p>\n Until then, current exertions in support of European tech startups could even be seen as somewhat self-defeating \u2013 at least in the informal view of one seasoned public investor: \u201cImagine setting up a Michelin Star Restaurant \u2013 but instead of developing a full menu, you focus only on high-quality starters. Don\u2019t be surprised if other restaurants buy your starters and you end up a caterer.\u201d<\/p>\n If digital champions in the traditional, US-inspired sense are as of yet out of reach, what might the EU dedicate its attention to in the meantime when it comes to supporting its nascent tech start-up industry?<\/p>\n Interestingly, a closer look at the reasoning behind European policy-makers\u2019 tech-sovereignty-rhetoric suggests that such ambitions are fueled not only by traditional objectives of growth and competitiveness \u2013 but more and more by a realization that disruptive innovation is required to solve the long-term social and environmental challenges faced within Europe.<\/p>\n This perspective is gaining ground in policy circles that were traditionally inclined to view innovation policy as technology- and sector-neutral. Virtually all EU-initiatives in support of startups and indeed innovation as a whole are branded politically as cornerstones to achieving the Green Deal or, more broadly, the United Nations\u2019 Sustainable Development Goals (SDGs), which the EU supports.<\/p>\n The COVID-19 pandemic has intensified this focus, with public funds strategically channeled into the biotech-sector to create a vaccine being the most obvious example of such a \u201cpurpose-driven\u201d approach to fostering innovation.<\/p>\n Using technology strategically to solve genuine social and ecological problems \u2013 that is, inventing green cement rather than yet another pizza-delivery-app – certainly resonates with a new generation of founders, as evidenced by a rapid growth in the field of social entrepreneurship and other forms of impact-oriented ventures.<\/p>\n The European Commission has indeed seized the momentum and followed expert advice to implement a \u201cmission-oriented\u201d approach to its \u20ac100bn Horizon-Europe programme.<\/a> Focus and funds will be centred around five such missions, as diverse as climate neutral cities, healthy oceans and cancer treatment.<\/p>\n As for funding such ventures, ideas for harnessing both public funds and private markets to act as a key lever abound. These range from boosting the role of the European Investment Bank (EIB) as a key, risk-sharing \u201cchange agent\u201d<\/a>, to building up niche areas within global capital markets that are experimenting with purely purpose-oriented finance, such as impact investing<\/a>.<\/p>\n Innovations in the field of accounting complement this shift towards using the force of business to solve societal challenges – \u201cimpact-weighted accounts<\/a>\u201d for instance enable companies \u2013 such as tech-startups – to demonstrate their net contribution towards stated missions. This in turn allows impact-oriented investors to channel funds accordingly.<\/p>\n Harnessing creative tech startups in support of both European sovereignty through a fully revamped industrial policy will take time; given deep-seated problems in the area of funding, the extent to which this will lead to European digital champions remains open. In the meantime, moving forward with steps that support and incentivize the next generation of European entrepreneurs to take on the challenges that matter could be the European way to go.<\/p>\n The EU, then, would do well to push for purpose rather than search purely for scale in developing the European startup ecosystem. In doing so, it would make a virtue out of necessity by playing to Europe\u2019s comparative advantage, while visions of digital sovereignty via digital champions remain elusive.<\/p>\n![\"Graph](\"https:\/\/bst-europe.eu\/wp-content\/uploads\/sites\/20\/2022\/02\/graph.jpg\" "\\"Graph")
<\/a><\/p>\nThe EU joins hands with the sector \u2013 but a funding gap remains<\/strong><\/h2>\n
A different way forward? <\/strong><\/h2>\n