Why do so many European start-ups leave the continent?

30 May 2023

Image: © Steven/Stock.adobe.com

Europe has been losing some of its late-stage start-ups to the US and Asia, so we take a closer look at what’s behind this phenomenon and how to stop it.

European lawmakers love to think of the continent as a great place to do business. But where does Europe stand on the global scale, when compared to the likes of the US and China?

Of the top 50 largest companies in the world by market capitalisation, only three are from here: Germany’s SAP, the Netherlands’ ASML and France’s Schneider Electric. A majority on the list are from the US followed by many from Asian powerhouses such as China, Japan and South Korea.

But it’s not just large multinationals that Europe has failed to produce. Despite being home to some of the world’s oldest cities where the industrial revolution first took off, only two cities, London and Paris, have placed in a top 10 list of the world’s most developed start-up hubs.

While the US dominates that list yet again, with San Francisco, New York, Los Angeles and Boston all in the top five, cities in China, India and Israel fill up the rest of the top ten spots.

And even though this statistic isn’t as bleak as Europe’s performance in the large company space, the European Investment Bank estimates that around 75pc of all European high-tech companies in their late-stage development are acquired by non-European firms, according to a report from Tech.eu.

“It is clear that Europe still has some catching up to do with its counterparts – particularly in the US and Asia – in producing the world’s strongest tech giants,” said Glory Eromosele, a senior associate at Techstars, one of the world’s leading pre-seed investors.

Companies seek more ‘unified markets’

According to Eromosele, cities such as London, Berlin and Paris have undeniably become thriving global tech hubs, but for the continent as a whole, a fragmented market and heavy regulation are some of the leading causes for start-ups leaving once they get big.

“Scaling a business across multiple countries with different languages, cultures and entity establishment requirements can be very challenging. Companies tend to seek larger and more unified markets, like the US or Asia, to tap into greater growth opportunities,” she explained.

“The EU is also heavily regulated regarding certain topics such as data and privacy. Good as these are, they can also be a heavy deterrent for companies that lack the resources required to meet the demands of compliance laws, such as GDPR and many others across different regions.”

It’s also relatively not as easy to access late-stage funding in Europe, leading to many start-ups being snapped up by US and Asian companies. Coupled with what Eromosele calls “a culture of risk aversion” where people favour ‘safer’ jobs such as traditional banking, law and finance, this does not bode well for budding businesses that call Europe home.

“Nonetheless, many successful European companies like Spotify have made their base in Europe while expanding their global reach from the growing ecosystem, and the European Union is beginning to do a lot more to make this process easier,” she said.

Scales tip in favour of staying put

Silicon Valley has long been the final destination for businesses around the world – European companies are no exception – because of a profound concentration of talent, capital and industry networks. But Eromosele argues that the tide is now turning on the Mecca of tech, partly thanks to Covid-19.

“Silicon Valley’s vibrant ecosystem, access to venture capital, renowned universities and a culture that embraces risk-taking, has made it a sought-after destination for tech companies looking for rapid growth and global impact,” she explained.

“However, this trend is gradually beginning to change as the global tech landscape evolves. Innovation and entrepreneurship are now flourishing in various parts of the world, with emerging tech hubs offering competitive advantages and attracting start-ups.”

With growing acceptance of remote work and distributed teams since Covid-19, which companies have found to be largely as effective, many founders and industry leaders are questioning if geographical proximity to a bigger ecosystem is essential.

Governments are also trying harder to retain companies, investment and talent within their borders to boost business and employment and encourage a flourishing start-up economy.

“While Silicon Valley remains prominent, entrepreneurs now have more options and are finding success by building companies in their local ecosystems or exploring new tech hubs globally,” Eromosele added.

So, to prevent this start-up brain drain of sorts and make the most of what the pandemic has offered in terms of geographical flexibility, the key seems to be in the hands of the lawmakers, who should “implement standards that apply across the EU” to streamline start-up growth.

“The connection between universities and industries could also be further strengthened to promote innovation and establishment,” she added. “By adopting these strategies, Europe can create an environment that better supports and nurtures entrepreneurial ambitions, leading to a thriving start-up ecosystem.”

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Vish Gain is a journalist with Silicon Republic