The ecosystem of European start-ups is running fast, however, Europe still needs a united political action to close the gap with the USA and record-breaking Asia.
Above all, greater harmonization of regulations at the European level is of crucial importance. This means that the European regulator should take a univocal and focused position in favour of start-ups, with specific rules that apply to all EU countries. The European approach must change. We don’t need a deluge of funds, rather, we need to take risks, focusing on start-up companies that are more likely to become scale-ups and then unicorns. To identify them, one must look at the quality of their management: they need to have an international mindset, in order to attract significant funding from foreign countries.
In this way we will be able to cancel the structural delay of Europe, which does not depend on lesser entrepreneurial skills, nor on the lack of advanced technologies. Rather, it depends on the features of the Old Continent: a jumble of independent cultures and autonomous States, where every growth-aiming start-up must test its business model in each country’s market. In order to have a similar base to that of the USA, a start-up would have to extend its range of action to the whole of the European Union. Which is, clearly, a complicated undertaking.
That the European universe of unicorns is increasingly populated and is growing at a frenzied pace – as noted in the report by McKinsey “Europe’s start-up ecosystem: Heating up, but still facing challenges” – is something that we need to celebrate. In recent years, the number of European unicorns has increased significantly, as has the pace at which they are created: of the 99 VC-backed start-ups which have so far become unicorns, 14 “transformed” in 2019. This list includes well-known international names, such as the German digital bank N26, the French virtual healthcare scheduling service Doctolib and the Lithuanian second-hand clothes marketplace Vinted.
However, on average, European start-ups are still the least present in the global arena and receive the least funding. Besides, European start-ups have a lower chance to complete their life cycle – be it getting C funding rounds (that turn start-ups into scale-ups), going public or being sold.
Europe generates 36% of all start-ups, but only 14% of unicorns. By comparison, 45% of global start-ups and 50% of unicorns come from the USA, while Asia produces 17% of start-ups and 33% of unicorns. In proportion to population and GDP, the number of European start-ups in their seed phase amounts to 40% of US start-ups.
Historically, the European ecosystem has been less effective than the American one in driving start-up companies to the advanced stages of their development. Studying the start-ups that received seed or angel funding between 2009 and 2014, McKinsey noted that, on average, European start-ups were 30% less likely of being involved in exit operations than start-ups that raised early stage funding in the USA in the same years. This does not mean that their default rate is higher, but just that, at some point, European start-ups stopped growing. And this is precisely the point: businesses are good, but they remain small.
The explanation lies in the fact that Europe’s internal value pool is highly fragmented: the Continent has formally demolished its borders and opened its markets, but it is still a melting pot of different countries with many languages, cultures and governments. This has profound effects on the focus that start-ups must have especially in the first years of their life.
For example, customer behaviours vary among countries, which means that companies have to adapt their brand, marketing policy, sales channels to each of them. Even the simple fact that we are addressing peoples with different languages and cultures (also in terms of consumption and payment habits) means that start-ups need to make a huge effort to think of a new business model for each country. This greatly amplifies costs and time-consuming activities, especially if compared to the actions required to develop a start-up business in the US market. Further complications arise from the European regulatory landscape, which has been simplified, but is still stricter and more fragmented than that of the United States. “There is also a wide range of variability across industries and vertical regulations,” as stated in the Repot by McKinsey.
In order to get USA-like evaluations, European start-ups should in fact start a journey towards internationalization, expanding rapidly and simultaneously in 28 heterogeneous countries. But this is often too expensive, and hence many start-ups choose to give up growth. Even if they might be better than others. All of this could change if institutions finally started to work at a unification.