What start-ups want from Europe

11 Jul 2022

Eileen O'Mara, head of EMEA revenue and growth, Stripe. Image: Conor McCabe Photography

Europe has big goals to grow its start-up ecosystem. Stripe’s Eileen O’Mara has some thoughts on how it can be done.

It has been 12 months since French president Emmanuel Macron announced that he wanted to see 10 technology companies worth €100bn in Europe by 2030.

His statement was one among a series of announcements from European policymakers who have been setting out their ambitions for the future of European tech amid the emergence of an increasingly sophisticated and successful start-up ecosystem.

Inspired by the success of the French ecosystem under the ‘start-up president’ Macron, Tánaiste Leo Varadkar, TD, announced in March that Ireland should be aiming to create two unicorns a year – a target already surpassed for 2022 since Flipdish, Wayflyer and TransferMate joined the growing ranks of Irish companies with billion-dollar valuations.

However, one year on from Macron’s ambitious pronouncement and Europe’s growth trajectory has started to wane. In 2021, tech funding consistently broke records while Europe boasted an accelerated growth rate of unicorns of 400pc, compared with a rate of 124pc for the US.

Similarly, 2021 was a record year for Ireland, with VC funding for Irish tech start-ups reaching €1.3bn, according to data from the Irish Venture Capital Association.

Today, however, European start-ups face a more challenging economic climate, and many are having to make difficult decisions about what to prioritise.

Smoothing out regulatory friction

New research conducted among Stripe customers – nearly 200 of Europe’s fastest-growing start-ups and scale-ups – brings this more complex picture of the future of European tech into sharp focus. Findings show that less than 20pc of these companies believe Europe will be the global tech leader in the next five years, and less than half say they’re optimistic about growth opportunities in the short-term.

Ireland, however, is generally more optimistic about opportunities in Europe. More than half (53pc) of Irish start-ups say they are optimistic about the future of European tech in terms of near-term growth opportunities, compared to 42pc Europe-wide and only 7pc in Italy.

At first, you might assume this relates to the macroeconomic picture. But dig a little deeper and you start to see that the regulatory environment is a major factor in why start-ups are taking a more bearish position.

Firstly, for small companies getting started, without the benefit of large legal, finance and operations departments, understanding the substance of regulations and how they apply can be overwhelming.

A whopping 60pc of Irish start-ups say regulation works best for large companies and that this presents the biggest threat to their business. This is especially the case when the rules are designed for, and more easily implemented by, bigger businesses that have more resources, and – many start-ups suspect – feature higher up the priority list of policymakers.

93pc of Irish start-ups surveyed said they believe the structures of policymaking are best designed for established corporations, while only 7pc feel they are very engaged in voicing their concerns and priorities to policymakers.

Start-ups in Europe are, therefore, spending an enormous amount of time and, crucially, money building their own infrastructure to comply, and the absence of clear guidance can lead to unhelpful room for interpretation. Increasingly, valuable resources which could be spent on building great products get tied up with legal fees.

The sheer scale of this regulatory ‘friction’ (ie long and complex procedures) presents a very real threat to start-up growth potential. And, in light of recent conditions, potentially even survival.

Over half say the time spent adhering to compliance processes poses the biggest problem, and one in three says they actually considered launching their business elsewhere for this reason.

Digital first

To help address this issue, happily, there is some low-hanging fruit. Digitising more government services, as has been pioneered in the Baltics, would be a good first step to spearhead the creation of greater efficiencies, helping early-stage companies get started faster.

The need to establish temporary remote processes for businesses during the Covid-19 pandemic provided a roadmap for digital adoption. Policymakers across Europe should now ensure that every interaction with government can be done digitally, unless an in-person meeting is absolutely essential.

Indeed, over half of Irish start-ups believe that being ‘digital first’ is key to creating a growth-friendly environment for start-ups.

Similarly, to support early-stage businesses in implementing new EU legislation across different member states, policymakers should improve the accessibility of existing initiatives designed to help. Activating and simplifying European ‘one-stop shops’, for example, would help show companies what’s needed in terms of compliance, and thus reduce the time they spend on regulatory requirements.

Policymakers could also introduce a new ‘start-up and scale-up test’ (similar to the existing SME test) to assess the costs and benefits of new policies specific to internet businesses and to evaluate their benefits after implementation.

Educate and engage

The second issue our research identifies is potentially more complex: the question of how to design regulatory frameworks that accelerate tech innovation.

As a technology company with deep roots in Europe, we have seen first-hand how smart regulatory policy can drive innovation. At its best, regulation operates like infrastructure, on which companies can easily build. 80pc of Irish start-ups believe that harmonised and clear regulations like the GDPR and PSD2 are key advantages within the European tech ecosystem.

PSD2, an EU directive aimed at regulating payments, provided a clear, sector-specific framework that helped set the standards for the payments industry. Many of the world’s leading fintechs are European and the companies we surveyed highlighted the positive role played by PSD2.

We now need to ensure this approach is seen as the rule, not the exception. While we know policymakers are looking to use regulation to foster innovation, Europe’s fastest-growing internet businesses tell us they don’t see the impact of that yet. And the suspicion that policymakers do not understand the realities facing start-ups is entrenched.

Part of the solution, therefore, will be found in greater engagement between start-ups and policymakers. Building on efforts already underway, like the EU Startup Village Forum, start-ups should be regularly consulted to ensure their concerns are reflected in any new legislation to help unlock their ingenuity. Understanding how to replicate frameworks like PSD2 will require particularly close consultation to identify priority sectors, and what policies are best equipped to support them.

There is no shortage of initiatives designed to address areas of friction for start-ups, from Scale-Up Europe, to the Startup Nations Standard, to the efforts undertaken by the European Commission around the development of a New European Innovation Agenda. All focus should now be on relentless execution that delivers for Europe’s start-ups, particularly as the economic environment deteriorates.

Bringing together the aforementioned existing efforts should be a top priority for policymakers. To help with delivery, policymakers could create a central go-to point of contact (a commissioner for digital entrepreneurship, for example) to address legislative roadblocks, and work with member states to ensure they follow through on their commitments.

If we collectively get this right, Europe will come out of this difficult period stronger than ever.

The European tech ecosystem still has a lot to offer, including an impressive depth of talent, several top universities and natural geographical advantages – all of which were called out as positives by the start-ups we spoke to.

In Ireland, 80pc of  start-ups cited high levels of education as a key advantage of the European tech ecosystem. And with companies such as Stripe, Intercom, SoapBox Labs and others partnering on initiatives such as the new Immersive Software Engineering programme at the University of Limerick, our impressive talent pool will increasingly benefit start-ups and scale-ups in our ecosystem.

Combine all this with a more supportive, more efficient and more frictionless regulatory environment, and the bull case for European tech becomes hard to ignore.

By Eileen O’Mara

Eileen O’Mara is the EMEA revenue and growth lead at Stripe, the financial infrastructure platform.

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