The case for a single European startup ecosystem
Europe’s fragmented startup scene has long existed in the shadow of Silicon Valley and Asia, which for years have gone unchallenged as the world’s leading startup ecosystems. This is why founders, investors and legislators are looking forward to joining forces and creating a unified European ecosystem.
Since 1995, the US investment in startups totalled €1.2 Trillion, compared to €400 Billion in Asia and just €190 Billion in Europe.
The same factors that make the European landscape so diverse, its vast cultural differences and the many languages that exist, might also hinder startups’ ability to scale rapidly.
Legislators, investors and founders are advocating more unity amongst European tech hubs
In early 2020, Filipe Araújo, deputy Mayor of Porto, in Portugal, addressed a digital crowd of international investors with big news.
In a move seen as essential to attracting early-stage investment, he announced the creation of Startup City Alliance Europe or SCALE network. The purpose? To help bring Europe’s tech communities together as one integrated ecosystem.
At that moment, ScaleUp Porto and StartupAmsterdam officially joined forces, with networking events and shared access to VCs.
Mr. Araújo is not alone in advocating for greater collaboration between tech hubs. This is why politicians, investors and founders across the old continent are joining the campaign for a more interconnected European startup ecosystem.
What a single European ecosystem means for startups
What would happen if tech hubs across Europe joined forces and removed barriers? That’s the question VCs, founders and policymakers such as Mr. Araújo have been trying to answer.
A single European ecosystem would bring together tech hubs across the EU, such as Amsterdam, Berlin, Barcelona, Helsinki or Lisbon. By working together, these cities would be able to share their networks, improve opportunities for acceleration, make scaling across Europe as easy as possible, identify and share best practices and work together as governments to devise the best startup strategies.
Combined, EU tech hubs would make up an ecosystem with over 130 unicorns, 30 thousand startups and 2.7 million jobs. Also, a single European ecosystem would be an important first step towards bridging the gap to Asian and US hubs, compared to whom the EU lags behind in terms of funding, jobs, exits and a sheer number of startups.
Take funding rounds, for instance. Since 1995, US investment in startups has reached a total of €1.2 Trillion, by far the world’s leading ecosystem, with the Bay Area taking the top spot. Next on the list, Asia, at €400 Billion, with Beijing the clear winner. In the same period, Europe’s 15 main tech hubs combined have received just over €190 Billion in investment, showcasing just how much work lays ahead to ensure convergence.
Global Venture Capital Invested. Source: Sifted
In another important metric, the number of jobs created by startups, the scenery is similar. The US startup ecosystem represents around 10% of the workforce. In the EU, people working in startups make up less than 1% of the active population.
Why?
It takes a village
Entrepreneurs and investors have long known that it takes an ecosystem to scale.
As Mr. Araújo stressed, combined efforts from key players in different regions are essential to bridge the gap between Europe, Asia and the US.
NATURAL SCALE
Whereas other ecosystems have a natural internal scale, the European market is still mostly fragmented. The same factors that make the European landscape so diverse, its vast cultural and language differences, might also hinder startups’ ability to scale rapidly within its borders, a stepping stone towards international growth. Europe also lags behind in digitalization, pooled knowledge, and common platforms.
Working together, however, might mitigate these barriers.
CONNECTING THE ECOSYSTEMS
In part, the vision of a unified European ecosystem stems from the differences in the rate of growth among EU startups, as well as their governance structure, sources of finance and business models.
Take, for instance, the Nordic region ecosystem. Their unique combination of high-end research, education, innovation and technology makes it stand out in the European Union. These ecosystems are dynamic places for startups in ICT, mobile, biotechnology, clean-tech and design. Several companies such as Skype and Spotify began as startups in this entrepreneurial region.
The Mediterranean, on the other hand, is characterized by the strong presence of startups in the SaaS, Tourism, and Data & Analytics industries. For example, Lisbon concentrates a large number of companies with a high degree of technology and R&D and is now home to over 300.000 companies.
With time, each ecosystem has developed its own strengths, talent pools, universities, business models and sources of funding, with little overlap. A further connection could be the path towards increased sustainability, better digital literacy and modernization, and greater resilience in the face of shared challenges.
TAPPING INTO CROSS BORDER TALENT POOLS
Startups in isolated ecosystems can end up doing things differently simply because they have a different entrepreneurial culture and resource pool. The way job postings in different tech hubs reacted to coronavirus shows the need to improve talent flow within EU borders.
In some markets, such as Portugal and Ireland, the number of tech job postings spiked as job postings in other sectors disappeared from the market due to more aggressive hiring freezes. In others, such as Sweden and Denmark, tech positions declined in volume relative to the broader job market.
Portugal saw the highest rise of tech jobs that are classified as hard to fill - jobs that have remained advertised for more than sixty days - followed by the Netherlands and Belgium. On the other end of the spectrum, employers posting tech jobs in Denmark, the UK and Ireland are least likely to find their position hard to fill.
The ability to tap into cross-border talent pools as it becomes available is critical for those “hard to fill” positions. It is also a way to diversify in-house talent with skills that are more pervasive in other countries and to reduce overhead by staffing in a cost-effective way.
Moving from a “centralised hub” to a “multi-hub” network of locations
Compared to a “central hub”, a ‘multi-hub network of locations significantly reduces the geographical, organisational and technological distance separating people working for the same company in different European countries. It provides greater potential for cross-fertilization of technologies and access to location-specific competencies.
As distributed companies become more prevalent, this hybrid way of working links groups of people in different cities in a cost-saving way to help everyone feel connected. They combine the benefits of face-to-face interaction with the convenience of gathering in groups or hubs.
When contemplating the choice between a centralised hub or a multi-hub, European companies should factor in not just the implication for competitive advantage but also the need and ability to scale each activity across borders and to be close to each market.
The challenges ahead
Despite the progress in recent years, challenges in EU policy still remain. Building a connected startup ecosystem requires legislators to promote change in the following areas.
DATA AND PRIVACY LAWS
Companies looking to establish an EU-wide presence are required to navigate regulations such as the General Data Protection Regulation, including its interpretations that vary by country.
As an additional factor, country-specific regulations and privacy rules from large tech players further complicate matters for founders.
THE ”EUROPEAN COMPANY” CONCEPT
The European Company – also known as SE (Societas Europaea in Latin) – is a type of public limited-liability company that allows leaders to run a business in different European countries under a single set of rules – at least in theory.
The process has a few important requirements, that hinder its usage. For instance, a presence in more than one EU country is required (subsidiaries or branches) with a minimum subscribed capital of EUR 120 000.
Founders are also required to reach an agreement with the employees' representatives as to staff participation in the company bodies, and on how employees will be consulted and informed.
Lastly, some forms of taxation remain unclear. Issues have arisen around income and capital gains, the taxation of dividends, interests and royalties, and the cross-border balancing of profits and losses.
CROSS BORDER TAX
If a business is based in the EU, it may be subjected to different VAT obligations depending on where it buys from or sells to, and whether its trading in goods or services.
For example, if a product is sold to an EU-VAT registered business operating in another EU country, no VAT is charged on that sale.
However, if the same product is sold to the final consumer within the EU, VAT should be charged at the rate applicable in their country.
STOCK OPTIONS
Options have long been used in the US to align the interests of employees with those of the company and the shareholders. These allow the employees the right to buy shares of the company at a set price within a certain span of time.
After years of stagnation, European tech startups are finally beginning to see reform. The hope is that discrepancies, including huge variations in taxation, will slowly subside between countries within Europe, and compared to rules in the US.
Portugal’s role in a pan-European tech hub
Portugal is in a key position to become a cornerstone of a new, united, pan-European tech hub:
Portugal is a cost-effective location to establish a talented software development and customer support team. Portugal is currently ranked the 23rd best country in the world to attract and retain talent. Reasons include government expenditure per secondary school student, language skills, exposure to air pollution, the teacher-student ratio in secondary education, the number of science graduates and the availability of skilled workers.
According to Expats Insider 2019, Expats rank Portugal first for feeling at home and third for friendliness. Close to nine in ten describe the local attitude toward foreign residents as friendly.
Contrary to more mature European hubs, such as Germany and the Netherlands, Portugal is well ranked in terms of employee stock option “friendliness”. The employee tax rate is comparatively low, and strike price treatment flexible.
Salaries are still considered low as compared to most European countries. In 2018, Software Developers reported an average gross monthly salary of € 1,890. The average monthly wage in Portugal stood at €1,180 per month in 2019, compared to around €4,000 in Germany. The minimum wage in mainland Portugal is currently €700 per month.
Since 2016, funding deals have soared in Portugal, both in number and value. According to Crunchbase, the past 12 months alone saw over 553 funding rounds, equivalent to more than $400 M in funding, an all-time high.
As Portuguese policies continue to support companies – both big and small– and the education system keeps on churning out highly qualified tech professionals, Portugal is well-posed to be a dynamo of a unified European startup ecosystem.
The efforts to drive a unified European startup ecosystem are based on the ambition of a greater natural scale for the region, the likes of which have made the Asian and US a successful cradle of innovation.
It takes combined efforts from key players in different regions to bridge the gap between Europe, Asia and the US. The road to unity entails reinforcing the connection between ecosystems, following the examples of Porto and Amsterdam in the SCALE network, tapping into cross-border talent pools and moving from a centralised hub to a multi-hub network of locations.
Policy changes are required to help founders in this journey. Creating a pan-European startup ecosystem will require legislators to simplify data and privacy laws, the complexity surrounding the european company concept, cross-border tax and stock options for employees.
Only then European entrepreneurs will be able to aspire to compete on even terms with their foreign counterparts.
Portugal is well-positioned to be a key player in a unified European ecosystem, a logical choice to establish a devops or customer support team. Its expat friendliness, booming startup scene, access to top talent, relatively low wages and high standard of living at an affordable cost make it a popular pick among VCs, founders and employees alike.
