Throwing money at a wall and seeing if any of it sticks is not the solution to Europe’s start-up to scale-up dilemma and the European Digital Forum has revealed a 10-point plan to fix Europe’s broken ‘funding escalator’.
A paper, based on consultation with investors, venture capitalists and experts, including Telefónica’s start-up accelerator Wayra, the European Investment Fund and the European Investment Bank, sets out 10 steps that can be taken.
“What does it take for European companies to move from the ‘start-up’ to ‘scale-up’ phase?” the authors asked.
“Why do so many European firms remain static and what prevents them from becoming global champions and driving the growth and jobs Europe so badly needs?”
The paper was formally launched at Startup Europe Summit 2016 in Berlin at a high-level panel of leading venture capitalists.
The European Digital Forum is a think tank dedicated to empowering tech entrepreneurs and growing Europe’s digital economy. The initiative is led by the Lisbon Council, a European think tank based in Brussels, and Nesta, the UK’s innovation foundation, in collaboration with the European Commission’s Startup Europe initiative.
Here are the 10 steps recommended to fix the start-up to scale-up dilemma and bring European start-ups on par with their counterparts in Silicon Valley.
1. Create the fund of all funds
The European Union and the European Investment Fund should increase investment alongside EU member states in a large public-private venture capital funds of funds.
2. Make public markets more accessible to high-growth firms
European initial public offering markets need to become significantly more accessible to promising, high-growth firms. Creating dedicated high-growth segments of European stock exchanges, tailored to the needs of these firms, as well as more flexible alternative segments, could have great impact and become part of the solution.
3. Investors need to invest in more venture capital and growth funds
Corporate and institutional investors should channel more finance into venture capital and other growth-based funding. This could be done through greater public-private partnership, using state guarantees to encourage co-financing on key projects from sources as multifarious as pension funds, sovereign wealth funds and social investments. This would require a better national and European incentive structure, including improved information about opportunities.
4. Better promote Europe’s rising start-up stars
The European Commission should improve communication and public awareness of Europe’s rising stars. One good initiative could be a “Future 100 Europe” programme, modelled on the UK’s Future 50. In this programme, European companies would compete to receive funding and mentoring from larger, more established firms.
5. End tax discrimination for equity investment
EU member states should drop punitive front-loaded taxes on equity options – not just because Europe asked them to but because it’s in their interest that they do so. Tax systems should be adjusted to treat the choice between debt and equity more neutrally. Start-ups should be able to use stock-option packages to attract and retain talent.
6. Make the Digital Single Market more tangible
At the European level, the European Commission and EU member states should work jointly to complete the single market and the capital markets union. A good starting point would be improved business insolvency legislation. A harmonised regulatory framework should allow quick bankruptcy, making it easier for those in need to “fail fast” and offering a second chance to many worthy entrepreneurs.
7. Give a stronger role to the European Fund for Strategic Investments (EFSI), and to digital start-ups within it
“Regarding EFSI, we believe it could serve as a model in future EU budgets, helping the EU move from a traditional grant-based method of funding projects to a more effective investment-led model, which would ‘crowd in’ funds around well-vetted projects. The EFSI has been a success in that regard, bringing funding into relatively risky areas that might easily have been overlooked,” the report’s authors said.
8. Set up a platform-based information hub and database of promising companies
Set up a platform-based information hub and database of promising companies, integrated with the European Investment Advisory Hub (EIAH) and the European Investment Project Portal (EIPP). Its core element would be a pan-European database of EU high-growth firms in different sectors, chosen on objective and transparent criteria, allowing cross-company comparison and benchmarking. In particular, the hub would include a list of companies in their pre-IPO phase.
9. Build a broader investment toolkit to promote and stimulate growth-stage investment
Among the options that should be considered is greater use of so-called “asymmetric funds,” which deliver varying returns to different classes of asset holders (widespread on the Israeli tech scene) and alternative finance vehicles, such as crowdfunding.
10. Start-ups should themselves be more vocal
Start-ups should themselves be more vocal, banding together to provide better, more coherent recommendations to policymakers at the national and European level. A good place to begin would be with a “scale-up manifesto”, a hard-hitting set of policy proposals written by leading entrepreneurs. It should look at the concrete problems of scaling small companies and propose concrete solutions for resolving the bottlenecks.