Startups are hot. The incoming European Commission promotes them. Giant industry events this month such as Lisbon’s Web Summit and Helsinki’s Slush celebrate them.
According to a new report from venture capital firm Atomico, Europe’s tech talent pool is growing rapidly and on track to equal the US within the next five years. The continent currently has more than 3.5m skilled tech professionals. Investment in European startups is growing faster than anywhere else in the world, with an average annual growth rate of 13%, compared to 8% in the US. Europe’s investment in artificial intelligence has increased almost ninefold over the past decade, surpassing the US and on par with China.
Yet Europe still lags. By the end of this year, the US will have invested $47bn in AI, compared to Europe’s nearly $11bn. While the continent is adept at spawning a large number of startups, it falls short in scaling them. Complex regulations add hurdles. In Atomico’s survey, 47% of respondents see regulation and policymaking as a barrier to Europe reaching its full potential.
A significant portion of promising European startups relocate to the US to take advantage of access to capital, market size, and a supportive ecosystem. Over the past decade, the growth-stage funding gap amounted to $375bn, with European startups half as likely as their US counterparts to secure large funding rounds. This month, Swedish fintech powerhouse Klarna filed its IPO in New York.
As European policymakers wrestle with these challenges, the question remains: can the continent create the conditions necessary to keep its most promising startups from leaving for Silicon Valley? Or will the gap continue to widen between Europe and the US in high-tech innovation?
Political change is in the air. Subject to approval by the European Parliament, Bulgaria’s Ekaterina Zaharieva will become the continent’s first designated European Commissioner for Startups. She will try to cut red tape and reduce administrative burdens. Another commissioner is tasked with overall simplification. Latvia’s Valdis Dombrovskis will stress-test EU laws and regulations with a view to eliminate overlaps and contradictions.
A priority is reducing costs and administrative burdens on startups and small companies. They will have simplified reporting requirements and reduced penalties for any infringements under the EU AI Act, which prohibits certain ‘high-risk’ AI practices.
Yet more regulation may be on the way. A key player will be Ireland’s European Commissioner Michael McGrath. Under his jurisdiction, staff are preparing a new Digital Fairness Act designed to enhance consumer protection on digital platforms by regulating deceptive practices, addictive design features, and manipulative targeting tactics.
McGrath will also be the key player in building a so-called “28th regime”, allowing startups and other companies to replace national rules with a single bloc-wide legal framework. The goal is to streamline cross-border operations, akin to the Delaware corporation in the US. Industry supports the 28th regime as part of an EU Inc initiative to create a pan-European entity for European startups.
When the concept was first floated back in 2011, the 28th regime faced staunch opposition from countries like France, Germany, and the UK, who feared it could conflict and even hamper their existing domestic regimes. A new push will likely face opposition, as well as long and drawn – out political negotiations. Many startups may not be around to see its fruition. Instead, the short-term priority should be addressing fundamental challenges such as improving access to capital, establishing a harmonized definition for startups, and simplifying cross-border business.
When Donald Trump returns to the White House, Europe can expect a resumption of transatlantic tariff battles. This comes when Europe’s economic powerhouse, Germany, is expected to contract for a second consecutive year in 2024. France, too, struggles with an uncertain economic outlook. More than ever, Europe needs homegrown innovators to drive itself forward. A new political climate promises more coherent regulation and more support. That’s a good start. The present startup season needs to become a startup decade.
Padraig Nolan serves as Chief Operating Officer of ETPPA, a prominent EU fintech association. He is also an advisory board member of the Lisbon-based Europe Startup Nations Alliance. Padraig holds a bachelor’s degree in law and economics (University of Galway) and a master’s degree in European law (Utrecht University).
Bandwidth is CEPA’s online journal dedicated to advancing transatlantic cooperation on tech policy. All opinions expressed on Bandwidth are those of the author alone and may not represent those of the institutions they represent or the Center for European Policy Analysis. CEPA maintains a strict intellectual independence policy across all its projects and publications.
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