Reinventing the European economy from within

| Report

It may go without saying that innovation is the heart of entrepreneurship. What might need stronger messaging, however, is that entrepreneurship is becoming a pillar of a solid and competitive economy. The legacies of century-old institutions should not be discounted, but the start-ups of the 21st century have been game-changers. As a result of their growth and innovation potential, start-ups also carry significant potential to improve a region’s economy by adding jobs and market capitalization.

Start-ups and the innovations upon which they’re built are the drivers of modern economies

A clear example of this is the storied growth of US-based technology champions that grew massively between 2000 and 2021 and bolstered the US’s leading global position. In just the last ten years, US GDP has grown from around $16 trillion to $26 trillion. This pace allowed the United States not just to close its 12 percent deficit compared to Europe (including Norway, United Kingdom, and Switzerland) in 2012 but to arrive at a 20 percent advantage over Europe in 2022. Launching more start-ups and scaling more start-ups have been critical components of economic growth in the United States over the last ten years (Exhibit 1).

The economic gap between Europe and the United States has grown in recent years.

One key contributor to this widening economic gap between Europe and the United States is a significant difference in innovation between the two regions: while the United States significantly invests in innovations that will create economic value in the future, Europe’s investment levels are significantly lower—as observed in terms of R&D spending (Exhibit 2).

Compared to the United States, Europe is lagging behind in R&D activity.

Europe’s economic competitiveness and sovereignty depend on its ability to build a thriving start-up ecosystem

A clear indicator of the US’s commitment to, and investment in, innovation is the number and scale of start-ups that put the United States well ahead of most European markets (Exhibit 3).

European countries differ in their ability to enable the foundation and scaling of start-ups.

If Europe is going to close the gap with the United States, it must nurture its own start-up ecosystem. The good news is that across 29 countries, there are already markets in Europe that are performing exceedingly well. Not only are Estonia, Switzerland, Sweden, and Germany performing well ahead of their European peers along key fundamentals of innovation, they are actually outperforming the United States in the areas of funding, patent applications, R&D spend, and STEM graduates in post-secondary education—a few of the hallmarks of start-up success (Exhibit 4).

European pockets of success: Individual countries succeed at fostering human capital.

Assuming that European countries were able to learn from the best practices already found in different parts of the region and boost their performance across multiple areas of start-up success, we expect them to significantly increase the number of start-ups founded and successfully scaled. This effect would result in the addition of up to 200,000 start-ups as well as the creation of up to 8.1 million jobs across the region. Additionally, improving the performance of European start-ups by fostering their success could create significant wealth and more than double the current market capitalization of start-ups, taking the combined value from $2.3 trillion up to $5.6 trillion. This would also result in a total market capitalization of up to 3.5 times the current value of Germany’s DAX (Exhibit 5).

Significant economic potential exists in Europe's start-up ecosystem relative to its status quo.

Homegrown successes offer a set of best practices for European markets

Looking at the pockets of success within Europe—the individual countries that have managed to excel in their entrepreneurship—our analysis has distilled ten key priorities that comprise a set of best practices within a given entrepreneurship ecosystem.

European countries can significantly improve their individual start-up ecosystem’s success by following the best practices that have been key drivers of the selected successes seen across Europe. These practices address the fundamental areas of the start-up ecosystem, including R&D, talent, regulation, capital investment (both amount and source), and leadership and accountability. They span measures to improve human capital, increase the availability of critical financial capital, and boost the technological backbone of the ecosystem while laying the foundation for successful entrepreneurship.

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If applied individually, these practices could boost each and every start-up ecosystem to new levels. To implement them, a commitment by local stakeholders including entrepreneurs, investors, and local authorities will be key. Together these practices foster successful venture formation and scaling and can drive individual start-up ecosystems to a new level.

1. Build the domestic talent pipeline. Several initiatives could increase the number of would-be entrepreneurs, including spin-out incubators and entrepreneurship curricula in universities. Oxford University Innovation and Cambridge Enterprise in the United Kingdom are examples of institutions that foster an entrepreneurial spirit and help equip innovation-minded individuals with the skills to found companies.

2. Pave the way for international talent. Attract international talent by offering unbureaucratic and fast visa processes for international talent together with founder- and employee-friendly ESOP regulations, including reduced (capital gains) taxation and share options—for example, as provided by the start-up visa in Estonia.

3. Foster the development of best-in-class technology. By ensuring sufficient R&D spending, markets can make critical investments in the development of technology. By designing competitive access to funds, countries can promote regional innovation and business hubs focused on selected technologies or sectors, such as the “Trust Valley” AI hub in Switzerland.

4. Incentivize investment. Tax incentives, such as those offered by SEIS and EIS in the United Kingdom, can boost both private early- and late-stage VC investments, giving start-ups the capital they need to launch and, critically, to scale.

5. Expand the set of funding sources. Allow institutional sources of funding like pension funds or universities to commit investments to VC to increase the availability of domestic capital, as enacted by Swedish pension fund regulations.

6. Show clear political commitment. Local authorities can boost the country’s start-up ecosystem by showing commitment and clear accountability by the government/senior policy makers to fuel the confidence of ecosystem stakeholders.

7. Establish leaders. Supporting emerging champions to scale successfully will create role models that refuel the ecosystem with investments and expertise—comparable to the Swedish founders’ community.

8. Define a vision. Set clear priorities and define a vision with concrete targets, regular performance tracking, and initiatives tailored to issues identified, as introduced by La French Tech in France.

9. Create accountability and ownership. Mandate clear ownership for the execution of the start-up ecosystem strategy and an “account management” system to support emerging champions, similar to the La French Tech initiative in France.

10. Reduce bureaucratic obstacles. Easing the process of starting a business through digitalization and fast, uncomplicated and low-cost administrative processes, such as the e-business register in Estonia, lowers the threshold and cost for entrepreneurship.

A three-part “pan-European” strategy can remove the barriers to start-up success and promote a more robust ecosystem

In a simpler landscape, a more competitive Europe would emerge as a direct result of individual countries “simply” adopting these best practices and finding that their start-up ecosystems have begun to mirror the successes of the countries that are already leading the pack. Of course, the landscape in Europe is far from simple, and the complexities of a region that is unified in many ways but highly diverse in others can be barriers to overall success. To this end, we offer three high-level strategies—largely rooted in cross-border communication and regulation—that seek a level of “pan-European” harmony that facilitates the growth of start-up ecosystems while recognizing and maintaining the uniqueness of individual markets.

Promote scale through defragmentation in regulations and resources

Reducing fragmentation through harmonized cross-border regulations and the bundling of resources can fuel venture building and scaling across Europe. To drive harmonization and position Europe as an attractive talent market, there are two key levers: first, advancing the European single market by developing a single European corporate rule book as a “28th regime” for high-growth firms, including driving the harmonization of standards for taxes, company regulation, labor rules, and administrative processes; second, Europe should double down on favorable employment regulations to attract and retain highly skilled talent—for example, by creating best-in-class ESOP regulations similar to the Baltics. In addition, bundling resources, especially the pooling of public innovation funding via a competitive grant allocation, can support the build-up and scaling of international technology superhubs. This can be further fueled by softened regulations for institutional investors, especially pension funds.

Create a level playing field across Europe

Providing a safe space for European start-ups to scale before competing on the global market will support young start-ups in their plans to scale alongside large corporations and compete internationally. To set up such a support and protection system, large corporations should be deployed more as supporting structures than as competitors. Within this model they would, for example, offer start-ups access to their networks. In addition, to reduce the burden of high fragmentation and competition within Europe, regulating the competition with international players will be key to offering a safe space to European start-ups in their development of a global presence. Finally, to support such changes and push the effort for cross-border scaling, a single point of contact at a transnational level is needed. This position would also help to create clear accountability and maintain open communication in the evolution of the European start-up ecosystem.

Pick up the pace

Speed matters in start-up success. Instead of passively focusing on precautionary consumer protection from new technologies, Europe should focus on a solution-oriented regulatory approach to help European start-ups shape critical technologies and drive the region’s innovative footprint. This is in line with implementing an accelerated approval process for tech innovation similar to the European Medicines Agency fast track. Taking a proactive approach to disruptive technologies will be key for Europe’s success in being an innovation driver.

Altogether, we see significant potential to be unlocked in Europe both through improving the performance of individual start-up ecosystems and by tackling the systemic hurdles characteristic to the region. Members of the European start-up ecosystem can learn a lot from each other and then implement the models, initiatives, and regulations that further facilitate the launch and growth of successful start-ups. A close collaboration of national and regional stakeholders, including entrepreneurs, investors, legislators, government officials, and non-governmental organizations, could help establish the basis for this success. The time is now to learn from each other and tear down existing boundaries, finally enabling European start-ups to thrive internationally.

See our report, Reinventing our economy from within, for benchmarking data as well as case studies on Estonia, Switzerland, Sweden, and France and a perspective on how elements of these countries’ individual successes might be proliferated in service of a more economically thriving and sovereign Europe.

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