Born in Copenhagen, Unity Software creates 3D software that powers well-known video games such as Cuphead and Hearthstone. It’s one of 16 Danish unicorns launched in the last three decades – tech innovators with a stock market valuation above $1 billion.
But Unity has moved its headquarters and most of its operations to San Francisco.
It’s a familiar story: Europe is great at producing unicorns, though terrible at making them stay on the continent. Europe’s tech success stories pack their bags, most to the US, to gain access to capital, exploit a large single market, and find qualified staff. In order to keep them home, Denmark and the rest of Europe need to revamp their taxes, ease rules restricting the hiring of foreign talent, and construct a seamless single digital European market.
The stakes are high. If Europe doesn’t act, it risks seeing its commercial base age. Our recent study shows that Denmark’s most valuable companies average 103 years old. Most are industrial or logistics companies such as Maersk and DSV. Although the U.S. has many old valuable companies, young tech high flyers have surpassed them. The most valuable American companies average 36 years. Google is celebrating its 25th birthday next year and Facebook is still a teenager.
The problem isn’t European innovation. Like Denmark, European countries produce unicorns – since 1992, 30 sprouted in France, 50 in Germany, and 100 in the U.K. According to an i5invest report, Europe birthed twice as many unicorns as the US in 2021.
And yet, many European stars end up leaving. In a 2022 survey made by the Danish Chamber of Commerce, more than half of Danish entrepreneurs complain about a lack of access to second-round capital and difficulty recruiting qualified labor.
Startups cannot offer salaries as high as established companies, says Jeppe Rindom, CEO of fintech Pleo. After Pleo grew its customer base to 17,000 companies and 350 employees, Rindom says the labor shortage makes it impossible to grow a tech company from only local employees.
High capital gains taxes represent another barrier. Denmark taxes them at 42% – high even compared to the other Scandinavian countries Sweden (30%) and Norway (31.7%). Although early-round funding is abundant in Europe, the high tax rate discourages big-pocketed local investors from investing when unicorns reach a certain size. Lunar, another Danish fintech unicorn, is struggling to raise a new round of capital, looking abroad. As foreign investors take control, they often want the company to relocate its headquarters.
Our key policy recommendations follow from this analysis:
- Capital gains taxes must be lowered to encourage investment in unicorns over other assets such as real estate, which currently enjoys more favorable taxation.
- Restrictions for hiring talent from outside the EU must be lowered. Stock option programs, currently difficult to set up, must be encouraged to compensate for the salary gap with traditional companies.
Even with these reforms, the US will remain an attractive market for European tech stars. In our survey, Danish entrepreneurs point to “sales” or “access to markets” as a significant barrier to growth. When startups operate in a small market or several smaller markets with different cultures and languages, expansion is expensive. By relocating the headquarters to the US, they are able to target a single giant market.
The news is not all negative. When Europe’s unicorns leave their home country, they don’t break all ties. Successful founders might also move back home at some stage bringing expertise, network, and wealth back with them. Some even create new unicorns. Small European countries such as Denmark punch above their weight when it comes to creating new unicorns. This success story should be celebrated – and reinforced by forging policies and incentives to allow them to grow in Europe.
Jasmina Pless is Head of Entrepreneurship at the Danish Chamber of Commerce
Bandwidth is CEPA’s online journal dedicated to advancing transatlantic cooperation on tech policy. All opinions are those of the author and do not necessarily represent the position or views of the institutions they represent or the Center for European Policy Analysis.