Start-up companies have enormous potential to increase innovation and competitiveness in the national economy. Through effectiveness, they succeed in responding to existing needs on the market and serving new requirements through innovations.

The development of start-ups is different between countries. For instance, only one of the world’s 20 largest start-ups comes from Europe. This is also shown in the area of investments. In 2017, more than four times more venture capital was invested in the US than in Europe.

The importance of start-ups in the EU, and what the EU needs to do to stay competitive in this area are shown by the example of start-ups in the field of artificial intelligence (AI).

Artificial intelligence is becoming more integrated into our everyday lives. Whether speech or image recognition, computer games, or automated driving, almost everyone had contact with AI. This sector is considered as one of the main areas of economic competition. At the same time, innovations are no longer preserved to the large companies and more start-ups are entering the market with fresh ideas.

Given the global competition, economic nations need to provide start-ups with a strong and stable ecosystem. The US has taken the lead in this area. Around 40 percent of all AI start-ups are based there. Europe is in second place with 22 percent, ahead of China and Israel, according to a study by Roland Berger and Asgard. Both companies examined around 3,500 companies and start-ups in the field of artificial intelligence in the study “Artificial Intelligence – A strategy for European start-ups”. This study represented the first detailed data collection in this area, on which basic policy recommendations for Europe were made.

European innovation – quo vadis?

Start-ups respond to new needs in society and can keep an economy competitive, buoyant and healthy. Sadly, though, there are relatively fewer start-ups in the European Union than there are in the United States. One of the main reasons could be the investment climate. There’s more of an investment-friendly climate in the US whereas, European investors seem to prefer to play safe with their money. That’s a huge reason why there are so few Artificial Intelligence-powered start-ups in the EU as opposed to the US.

40% of the world’s AI start-ups are in the US. The lack of capital for investment really hurts Europe in the long term. Countries like Spain, Italy, and France are doing their best to encourage start-ups. However, the EU on the whole would do well to provide a supportive ecosystem for start-ups. They should consider the competition from the UD and China and keep this in mind. Because of the strong international competition, the start-ups need special care and protection. In the US, the Silicon Valley start-ups got great support when they started and are doing well today. Without proper support, the start-ups can’t flourish. Proper support is required for AI start-ups in the EU.

Europe is struggling in the AI start-up comparison

Europe is struggling in a global comparison of AI start-ups. For instance, the UK is in fourth place with 245 start-ups, France is in seventh place with 109 start-ups, and Germany is in eighth place with 106 start-ups.

Looking at these numbers, it is clear that action is needed at the European level and not just nationally.

International competition is huge. Therefore, Europe must offer young start-ups a strong and attractive ecosystem in the face of competitors from the US or China.

If we take a closer look at the sectors focused on artificial intelligence, we will quickly see that some economic sectors in Europe are significantly underrepresented. This includes the energy sector with 2%, the automotive sector with 1%, agriculture with 1%, and public administration with less than 1%.

Considering these numbers, there will be the question of whether Europe can provide important technological developments and thus remain competitive.

But it is not only in the field of artificial intelligence, start-ups in the European Union are still in infancy when it comes to the case of a stable ecosystem for founders. Nevertheless, lively activities can be observed in many European member states. Countries such as Spain, Italy, and France are in the process of promoting start-ups through special programs.

But it is up to the European states and the European Union to set the financial framework for promoting start-ups and ensuring their global competitiveness.

To support and promote new innovative start-ups, capital is needed. This is one of the most important features, if not the most important feature for budding company heads. Unfortunately, this is where most fail.

If you take a look at the United States, you can see that Silicon Valley started the promotion of start-ups originally with funding from public institutions. Later on, after the momentum had developed it became the financially strong ecosystem that we know today.

But the tide is slowly turning and the European Union is recognizing the potentials of the competitiveness offered by young start-ups. In 2019 particularly, there was more growth capital for innovative start-up ideas than ever before in Europe. According to the report, the numbers of capital providers supporting young companies in their growth have substantially increased. This shows that the European start-up ecosystem is slowly gaining strength.

Spotify – a successful example of how innovation can work in the EU

A successful example of an innovative and successful start-up is Spotify. The Swedish music streaming service launched its platform in Stockholm in 2006 as a reaction to the ever-growing illegal streaming problem on controversial platforms like Napster, LimeWire, or Pirate Bay. Over the years, Spotify has become one of the most popular streaming services in the world. The company counts more than 70 million paying subscribers. This shows that an innovative and successful start-up is also possible in Europe. According to the Harvard Business Review, Spotify has even taken on Apple, and given the Internet giant serious competition.

But Spotify is not the only tech giant start-up in the EU worth noting. According to a study by Stack Overflow, there are more than 6 million developers in Europe, a number higher than developers in the US, which is only 4.3 million.

The start-up market continues to grow

It is not just about the example set by tech giant Spotify that shows that Europe can produce an innovative and successful start-up. Also, there is no lack of new young talents. According to the study by Stack Overflow, there are over 6 million developers in Europe, compared to only 4.3 million in the US.

Europe additionally has a de facto lead in fashion, fintech, and gaming. furthermore, according to data from Dealroom, investment in European start-ups is more than doubled between 2015 and 2019, from $15.4 billion to $38.6 billion. According to reports, Europe leads the way in fashion, fintech and gaming. But the investors in the EU need to be more supportive of the start-ups to give them a chance to grow and to become strong.

The European Union – a paradise for start-ups?

It is not only because of the boost of investment, founders need to look beyond the borders of their own country. There is nowhere else start-ups enjoy such great economic freedom as in the European Union. Autonomous exchange of services, capital, and goods are just some of the advantages of the unified and free European single market. Founders have access to over 500 million consumers. Thanks to open borders without burdensome and costly customs duties.

Europe’s population of more than 500 million and combined gross domestic product of 15 trillion euros is also an incentive for start-ups in Europe.

An Eldorado for founders, one might be thinking. But instead of the EU using these advantages to gain a competitive edge and become more competitive, criticism on certain approaches cannot be avoided.

Bureaucracy is a keyword. Many start-ups complain that the EU is degenerating into a complacent bureaucracy bubble. The GDPR introduced in 2016 also caused start-ups to retreat to countries outside the EU.

More so, despite increasing funding, the EU offers little incentive for founders. Also, different rules and a heterogeneous legal framework make life difficult for young start-ups.

The EU advantage

Does being in the EU give a start-up any advantage? The answer is, yes it does. The EU has a 500-million strong population along with open borders, so there are no customs duties to be paid. It’s not surprising, therefore, that start-ups and investments are increasing in the EU. Despite the fact that business activity is not as strong in the EU as it is in the US, the EU is in fact increasing its investment activity year by year.

However, in order to match and give serious competition to the US in this regard, much more needs to be done. But at least we can see that things are going in the right direction. It was satisfying to read in Forbes that in spite of the disastrous start, 2020 was a good year for European start-ups seeking investment. And apart from start-ups, Europe has a lead in fashion, fintech, and gaming, making it a possible paradise for start-ups.

Final remarks

Even though the EU start-up scene is on the right track, there is still a lot of room for improvement.

For example, the EU should focus more on transforming start-ups into long-term businesses to get a higher advantage in the start-up community. That way, the EU can hopefully become the number one nation among the global players in the start-up market.

In conclusion, even if the European Union is on the right track, there is still room for improvement to reliably transform start-ups into long-term business models for ensuring the EU’s competitiveness. A start has been significantly made. But Europe must do more to retain successful unicorns and take its place alongside the global players in the start-up community.

Irene Kilubi
Advocate – EU Tech Chamber