FREEDOM AND SAFETY
The seeds of innovation have long flourished in Europe and its start-ups were set to enjoy unprecedented growth, supported by plentiful seed funding and a political backdrop that prioritized both a digital and green agenda. Then came coronavirus.
Innovators seeking investment in their “scale-ups” – start-ups seeing accelerated growth after demonstrating a product-market fit – which often require complex and long-term investment were suddenly faced with new challenges.
The current uncertainty has left Europe’s economy facing difficult times, and this is particularly true for start-ups. But while the previous funding glut may have dried up, at least in part, the continent’s strong innovation ecosystem is ready for the recovery.
A new World Economic Forum report, Bridging the Gap in European Scale-up Funding, explores the challenges facing technology innovators seeking to regain lost momentum.
Europe’s start-ups generated around 2 million new jobs in 2019, more than any other sector, according to European Commission-backed platform EuropeanStartups.co, and new tech sector positions increased by 10% each year to the end of the first quarter of 2020.
The Forum report looks at how recovery from the crisis can realign governments, start-up founders and investors to develop innovations that address climate change and digitalization.
Europe has strong fundamentals for innovation, growth and economic prosperity, ranging from a strong education sector to firm regulatory systems. Forward-thinking policies like the Green New Deal aim to decarbonize the continent’s economy by 2050, for example, and the European Commission’s Sustainable Finance Action Plan looks set to transform the region’s financial sector.
Climate scale-ups, and green-tech companies specifically, are a vital part of achieving Europe’s green transition. These companies contribute sustainable products, services or programmes across a range of sectors, including power generation, raw materials, transport, agriculture and pharmaceuticals, among others, helping to meet the European Commission's six environmental objectives, shown in the diagram above.
Yet Europe’s start-ups lag behind their US counterparts in their ability to scale up, especially with new technologies needed to realize the continent’s ambitious climate goals. US investment in start-ups remains 3.4 times greater than in Europe, with a quarter of companies reaching scale, compared to just one in eight European companies reaching scale, the report shows.
Since 2015, the US has seen 2.8 times more billion-dollar tech IPOs than in Europe, partly due to the liquidity offered by US stock markets, the abundance of US venture capitalists and the high investment appetite of asset-rich US pension funds.
Here are 4 key areas in which investors, entrepreneurs and policy-makers need to come together to help close the investment gap for tech scale-ups.
While public money offers a way for governments to attract top entrepreneurial talent, securing public funding can involve start-up owners navigating a minefield of bureaucracy and different national requirements. Obtaining public funding must be made more efficient and accessible to entrepreneurs.