Why Europe Is the Next Major Startup Hub
There has been a change in the European startup landscape. Previously seen by some as lagging behind Silicon Valley and Asia, Europe is rapidly coming into its own as a startup hub. Nineteen billion dollars was invested in European startups in 2017, according to a report from venture firm Atomico, a 32 percent increase from 2016, and eight out of 10 of the world's most innovative markets are now located in Europe, according to the Global Innovation Index published by Cornell University, INSEAD and the World Intellectual Property Organization. Following the investors' suit has been a prominent cultural shift, as there is a newfound legitimacy being conferred on the entrepreneurial class. Indeed, 79 percent of founders and 85 percent of investors now say it is "culturally acceptable" to start one's own company, according to a 2016 Atomico report.
Here are some of the factors that have led to Europe's growing recognition as a startup hub as well as the challenges that Europe faces to maintain this momentum going forward.
Compared to the United States, the venture capital industry in Europe is relatively new. While funds in the U.S. were established as far back as the 1960s and 70s, the most mature funds in Europe are just now reaching their teens. However, there is no doubt VC in Europe is maturing. Over half of the funds active in Europe are now over 12 years old. In 2016, European funds raised a nine-year high of €6.4 billion, according to Invest Europe. Europe is now No. 3 in terms of total venture capital invested, behind only the U.S. and China, according to Ernst & Young.
Seed and pre-seed investments are increasingly easy to come by, often through boutique funds such as The Nordic Web. However, businesses that have made it past the startup phase to "scale-up" have less access to Series A and later funding in comparison to their American peers. Government-led initiatives such as the Pan-European Venture Capital Fund of Funds aim to bridge that gap. The relative scarcity of VC funding compared to the U.S. has one positive side effect -- European startups are incentivized to do more with less.
The European Union has put into place a wide range of programs and subsidies aimed at facilitating investment in startups. The Commission has even created an online "one-stop-shop" that aims to easily connect entrepreneurs with the resources available to them.
Despite government support of the startup industry, there remain many challenges for tech companies operating in the EU. While the EU aspires to be the world's largest single market, in reality, it is still made up of 28 countries. Each has its own regulations regarding investment, not to mention barriers such as language that can be tricky to navigate. The EU is attempting to address the investment issue with the Capital Markets Union (CMU), which aims to facilitate the free flow of capital between investors in member states. Though the CMU is still in its infancy, it should eventually make the EU even more attractive to investors.
One other factor that works against investment in the EU is the higher rate of taxation on investment compared to the U.S. The EU has taken steps toward offering tax incentives to venture capital and business angel investors, but more will need to be done in future.
Coworking spaces and entrepreneurial campuses
Another indication of the health of the European startup community is the proliferation and success of coworking spaces such as WeWork. WeWork offers entrepreneur-friendly office space all over Europe and has 32 locations in London alone. The company I founded, FE International, recently moved into WeWork's Aldwych House location.
Google has also taken notice of the EU's hotbed of entrepreneurial talent. Its new Berlin "campus" joins outposts in London, Madrid and Warsaw. Google claims that startups fostered on its campuses have raised over €260 million in capital and created more than 4,600 new jobs.
Facebook is also looking to Europe, opening its first-ever startup incubator in Paris. The Startup Garage encompasses 366,000 square feet of office space with over 3,000 rentable desks available to startups, making it the world's largest startup campus.
One huge question mark lurking on the horizon for tech entrepreneurs in Europe is the EU's General Data Protection Regulation or GDPR. A primary goal of the legislation is to simplify the regulatory environment for international business, a generally positive step. What is of concern are the broad and potentially punitive regulations regarding privacy. Failure to comply with these regulations can result in a potential fine of €20 million or 4 percent of annual worldwide turnover from the previous financial year, whichever is greater. These numbers are intended to show the seriousness of implementing these new regulations to any business owner or stakeholder. It remains to be seen how the regulations will be enforced.
Many have chosen to look on the bright side. I asked my friend and colleague, Erik Bullen, CEO of U.S.-based MageMail and GrooveJar, for his thoughts on how GDPR will affect startups and SMEs worldwide.
"Most regulations have a dampening effect on startups and innovation," says Bullen. "However, the strongest impact will be felt during the early stages of the rollout when uncertainty about the cost of compliance is high. As the market settles and the industry starts to understand the real-world implications, the smart startups will figure out ways to work within -- and take competitive advantage of -- the new framework."
A bright future
Europe's growing status as a startup hub seems unlikely to slow down anytime soon. From Amsterdam to Zurich, there's an A-Z of diverse, world-class cities making up the European startup ecosystem. As they come into effect, regulatory initiatives such as the CMU will positively affect the flow of capital and investment throughout the Union. Major players such as Google and Facebook will continue to invest huge amounts of capital into startup incubators all over Europe. Many countries in Europe are also instituting "startup visa" programs that make it easier to hire foreign talent. With continuing uncertainty regarding the H1-B visa program in the U.S., Europe is well positioned to attract much of the brightest tech talent emerging from the world outside the EU and U.S.
In short, the future for small-to-medium-sized online businesses and startups in Europe looks bright and the team at FE International is very proud to play an active role in it.