How Will Europe Fund Innovation?

There are numerous European initiatives underway to promote technological innovation. The European Commission’s “The Entrepreneurship Action Plan 2020”  supports education, removing administrative barriers, and reigniting the culture of entrepreneurship. The European Investment Fund has also made significant moves, launching the Jeremie Fund to provide initial capital for venture capital funds beginning in 2007 and establishing the European Angels Fund. Each of these programs have multi-million dollar budgets for the direct funding of startups at various points in their life cycle.

So during my recent Marshall Memorial Fellowship trip it was surprising to hear from leaders in the startup ecosystem that a lack of funding was the primary bottleneck for growth.

Why is funding a major issue if so many government programs are providing financial support to startups? It took me a few weeks of reflection and follow-up discussions back home in San Francisco with European entrepreneurs and venture capitalists to think this through.

The issue is multi-faceted and complex. For one, funding that is available is typically administered by the government. Bureaucrats that haven’t been in a startup or worked in venture capital are likely to misallocate the EU’s largess away from the most deserving programs and companies. Secondly, government funding is not sustainable and often time-limited. In Bulgaria, I learned that some of the most popular sources of funding are running dry, depriving young startups of much needed follow-on capital to grow and scale their businesses. Finally, government funding is often allocated at Series A level and above – largely passing over the high risk/high reward early angel investment stage which is the primary ignition catalyst for startup communities.

Proposals to address the broader systemic issues of Europe’s startup problems have been discussed for years.  One of the most succinct proposals is the Startup Manifesto - an initiative led by European startup entrepreneurs such as Daniel Ek, founder & CEO of Spotify, and Reshma Sohoni, founding partner of Seedcamp. They outline key legal, political, funding, and thought leadership priorities Europe must address to create a strong entrepreneurial environment.

The Startup Manifesto and the recent proliferation of accelerators and incubators are positive signs of the EU spurring growth. But while there are some examples of vibrant startup ecosystems in London, Berlin, and Stockholm, they still sadly pale in comparison to Silicon Valley, New York, and Boston, even on a per capita basis (a recent article in the Atlantic covered the glaring disparity).

So while I agree startup funding in the EU is a critical challenge – it feels like a red herring. Many of the leading technology companies in the U.S. like Uber and Airbnb were formed in the middle of the last recession in 2008/9. The U.S.’s startup explosion and technological developments in the past ten years weren’t reliant simply on funding but rather the thoughtful efforts of leading figures in the startup ecosystem to create a more transparent, supportive environment where young entrepreneurs could find mentors.

What is often underappreciated is that in the past ten years many separate but connected initiatives in the U.S. fed off each other often to create the robust startup ecosystems we have today. People like Brad Feld demystified the venture investing process with his blog and book Venture Deals. Paul Graham launched hundreds of companies by creating the accelerator model at Y Combinator. Chris Douvos nudged venture capital Limited Partners to open discussions about their allocation to the asset class. Andrew Hyde’s work launching StartupWeekend has brought together over 200,000 entrepreneurs across 135 countries for over 3,000 separate events. These relatively new initiatives were preceded by amazing organizations like the Ewing Marion Kauffman Foundation that has promoted entrepreneurship across America and the world for over 50 years.

Each of these initiatives were largely built by entrepreneurs for entrepreneurs (or aspiring ones) with a focus on mentorship as the enabling mechanism for growth (check out Victor Hwang’s book, The Rainforest: The Secret to Building the Next Silicon Valley to understand more about Silicon Valley’s secret sauce). Building and supporting a mentor community is not easy and unfortunately no amount of funding from government programs can single-handedly spark its creation.

And yet despite the grumblings I heard from entrepreneurs on the ground in Europe, I did see the beginnings of these mentor-led communities. In Brussels, Molengeek is an inspiring accelerator transforming the Maelbeek neighborhood into a startup hub after the tragic March 2016 terrorist attack shook the neighborhood. In Sofia, the teams at Betahaus and Start It Smart are doing amazing work sharing ideas and creating investor networks among the Bulgarian entrepreneurial expat network. The payoff of these hard-working community leaders is paying off. In December, LaunchHub, based in Sofia, Bulgaria announced they have closed their second fund at €18M to invest in Eastern European startups.

Today it couldn’t be more important to get this mix of support right. The European economy is targeted to finish this politically tumultuous 2016 with a paltry GDP growth rate at 1.6%. Many other indicators remain poor including high youth unemployment, rising non-performing loans in the banking sector, and increasing fears of lower EU trade due to BREXIT.

Many of Europe’s economic woes stem from an overreliance on the “old economy.” Today all five of the FT’s Top 500 European companies (e.g. Shell, Nestle, AB InBev) were founded prior to 1900. In the U.S. three of the top five companies, Google, Microsoft, and Apple are global technological leaders.

 If Europe can’t quickly reform its economies to focus on technology it runs significant risks. According to research from the Boston Consulting Group, the “Internet Economy” in the G-20 is will grow at 8 percent over the next five years. In emerging markets, growth is expected to be 18 percent. These rates as noted by the Startup Manifesto, “far outpace traditional economic sectors.”

Compounding its reliance on the “old economy,” Europe is also facing some of the lowest rates of entrepreneurism globally according to the Global Entrepreneur Monitor. Bulgaria, Germany and Italy, all exhibit among the lowest rates sampled, with less than 5 percent of the adult population starting or running new businesses.

For the EU to catalyze growth in the tech sector and transform its economies it should find ways to support more mentorship and information sharing across the region while also allocating its government funding more efficiently. When the startup communities are centered on mentorship the money will follow. 

Austin Arensberg is a Principal at Scrum Ventures, a seed stage venture capital firm based in San Francisco. During his Marshall Memorial Fellowship program he traveled to Belgium, Denmark, Greece, Bulgaria, and Germany.