Sweden’s Spotify, founded in 2006, introduced music streaming in Europe before moving the bulk of its operations to the US. Stripe, founded by two Irish brothers, became a major global player in payment services as a US headquartered enterprise. Portugal’s Sword Health entered the US market in 2020, allowing it by the following year to reach a unicorn $1 billion valuation.
For Europe, it’s a troubling trend. Although Europe is generating a flood of startups, US firms are 40% more likely to have secured venture capital funding in their first five years of existence and many of Europe’s best and brightest are flocking across the Atlantic Ocean to scale.
Fragmentation represents the key problem. Across the EU, a patchwork of rules and regulations plague the much-lauded Single Market. Tax and stock option regimes, for example, differ country by country. So do rules on how founders or investors can cash out. Most European startups struggle as they attempt to navigate the red tape of doing cross-border business.
Cross-border fund-raising remains problematic. The EU’s plan to create a single market for capital, the Capital Markets Union, dates to 2014. It has yet to be fully realized. The US, in contrast, is a large and unified domestic market. Startups scale.
Europe’s real problem is not seed capital. European startups raised $13.7 billion in the first quarter of 2024, up 5% year on year. The continent’s share of global VC reached 17% in 2023. Yet 60% of European venture capital was raised in just three EU member states and the United Kingdom.
The biggest challenge comes in the second stage of funding needed for minnows to grow into full-fledged unicorns. The US boasts a large pool of venture capital targeting later-stage startups.
The US is also more attractive than Europe for founders and investors to cash out. It benefits from a long-established IPO market and a large pool of potential acquirers. In contrast, regulatory divergences and different national corporate codes slow sales in Europe.
Moving forward, investors are pouring money into artificial intelligence. AI accounted for 11 European mega-rounds of $100 million+. French startup Mistral AI raised €600 million this month to challenge ChatGPT owner OpenAI. It already had raised €400 million.
European leaders are aware of the startups’ challenges. In a recent joint op-ed, French President Emmanuel Macron and German Chancellor Olaf Scholz acknowledged the urgent need for reform. “Too many European savings are being invested abroad rather than in Europe’s most promising start-ups and scale-ups,” they wrote. “We have to get serious about a truly integrated European financial market.”
A report ‘Much More Than A Market’ authored by former Italian Prime Minister Enrico Letta makes similar suggestions. Another report, from yet another former Italian Prime Minister Mario Draghi, due to be published in the coming weeks, is also expected to focus on increasing EU competitiveness.
Recent European Parliamentary elections and the upcoming appointment of a new European Commission offer an opportunity. Calls are growing to open up alternative investment sources for startups via pension funds. Stock option policies need to be modernized and streamlined. An EU passport scheme could improve access to talent and tackle work visa issues for startups. A Commissioner for Digital Entrepreneurship should be appointed.
The EU stands at a crossroads. Choices made in coming years will determine whether it succeeds and whether it can reverse the trend of “crossing the pond.”
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 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.
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