Europe is home to an impressive roster of business heavyweights including Deliveroo, Revolut, and Bolt. Even so, experts are concerned about an international innovation gap.
On a global scale, more than 100 private start-ups passed the $1 billion valuation mark last year, reaching so-called “unicorn” status. That term is given to a company that reaches such a valuation without being listed on the stock market.
Of these new unicorns, roughly 20% were in the Europe, the Middle East and Africa (EMEA) region, compared with 50% in North America, and 30% in the Asia-Pacific area.
While Europe has increased its unicorn quota over the last decade, the region still lags behind international counterparts – namely the US and China.
“We must remember that the number of start-ups per year in Europe is exactly the same number of start-ups per year in the US,” said Carme Artigas, co-chair of the AI advisory body at the UN, speaking at South Summit business conference in Madrid.
“The problem is that we don’t have the start-ups that find the solution to grow up and become unicorns from Europe.”
Tackling this gap is not only a means to boost economic growth, but also to extend international influence. How, then, can Europe keep up?
Capital to materialise European ambition
As of the start of this month, figures from PitchBook showed there were 1401 active unicorns worldwide, 702 of which were in the US.
China, close on American heels, recorded 291 unicorns, followed by India, with a total of 65. In fourth and fifth place are the UK and Germany, with 49 and 25 unicorns respectively.
When comparing this list with venture capital investment levels, we can see clear parallels, emphasising the importance of funding.
The US is at the head of the VC ranking for 2024, with $80 billion (€74.5 billion) ploughed into firms. Trailing behind are China, the UK, and India.
The US’ success is down to a range of factors, notably the scale of its market, the high concentration of innovation hubs and the nation’s long history of supporting entrepreneurship.
In a number of cases, funding disparities have led to a relocation of European companies across the Atlantic. Swedish music giant Spotify, for example, is listed on the New York Stock Exchange.
Commenting on last year’s investment trends, Boston Consulting Group said that Europe is catching up with the US in terms of early-stage or seed funding for start-ups.
Even so, it added that “there is still a significant gap in the share of late-stage funding between Europe and the US”.
“The clear challenge for Europe’s start-up community is to turn their recent early-stage success into a robust pipeline of funding across the full investment spectrum.”
Aside from VC funding and IPOs, there is also the potential for more capital to come from angel investors and government support schemes.
Attracting and fostering talent
Europe’s start-up ecosystem can’t flourish without skilled workers, although performance on this front varies across industries.
According to the State of European Tech report 2023, Europe is a net beneficiary of global talent, with more than 10,000 individuals joining the tech scene – even after accounting for those who are leaving for other regions.
One explanation for this is that many European countries are “simply nice places to live”, said Ikhlaq Sidhu, Dean of the School of Science and Technology at IE University in Madrid.
Looking particularly at the EU, the bloc has a strong focus on safeguarding citizen’s quality of life.
Giving the example of AI development, Professor Sidhu explained: “The EU is protectionist in the sense that it seeks to avoid as many major disruptions as it can.”
On the other hand, Europe’s caution is “also something that holds it back”, he added, specifically if innovators are tangled up in compliance laws.
The region’s talent pool is equally boosted by its educational institutions, many of which are connected to start-up hubs.
By working with academic centres, small businesses are closer to skilled workers, research facilities, and cutting edge-technology.
Cracking cross-border cooperation
Although Europe is taking many of the right steps to foster talent, this doesn’t mean there aren’t skills shortages.
In a recent survey conducted by the European Commission, nearly two thirds (63%) of small and medium-sized businesses said they cannot find the talent they need.
One solution put forward to solve this problem, despite its political contentiousness, is migration.
If skilled individuals are allowed to move more freely within the continent, businesses have a larger pool of workers from which to choose. Added than this, start-up visas can allow countries to welcome foreign founders into their fold.
Some 55% of US unicorn companies, according to research from the National Foundation for American Policy, were started by immigrants. Almost 80% have an immigrant founder or an immigrant in a key leadership role.
Despite the principle of free movement within the EU, experts have also suggested that more work is needed to make this right a reality.
Relocating EU citizens must, for instance, currently spend time navigating fragmented employment and pension regulations. This process could be facilitated if systems were homogenised and better-designed to receive foreigners.
Regulatory fragmentation similarly throws up obstacles for entrepreneurs in terms of cross-border funding and the scaling-up of firms.
An American entrepreneur wanting to expand across state lines will currently face fewer difficulties than a European business owner wanting to spread operations across the EU.
Playing to European strengths
In seeking to boost competitiveness on a global scale, Europe’s start-up engine not only needs to be fed by talent and investment, but it also needs a vision.
“The mistake Europe countries make is that they follow, like a herd, strategies that the venture capital firms in the US are interested in,” said Carme Artigas.
“Why do we follow to this extent?” she asked. “All of the money that goes to these ventures doesn’t go to areas where Europe is stronger than others.”
When pursuing success, she suggests Europe’s best bet is therefore to innovate in its own way, rather than looking over its shoulder.
Although Europe’s diversity can be a hurdle, it can also help to forge a vibrant and unique start-up culture.
This article was based on a roundtable discussion at South Summit Madrid, an event co-organised by IE University. The conversation was led by Professor Ikhlaq Sidhu, founding member of Rise Europe, a network designed to support Europe’s start-up ecosystem.
