Europe’s Entrepreneurial Landscape
How and why so many startups from Europe come to the Bay Area is explained by many factors. A slow recovery from the last global recession and a concern that it is losing ground to the United States and Asia is leading Europe to look increasingly to startups—an area where it has underperformed but is seeing new energy—as a source of future growth. This activity is concentrated in a number of major cities, led by London, Berlin, Paris, Amsterdam, and Stockholm; but other cities, such as Munich, Dublin, Warsaw, and Lisbon, also aggregate significant numbers of startups and are beginning to achieve scale as startup hubs.
Most European governments have launched programs designed to help startups grow. While varying from country to country, these typically include tax incentives and some type of investment, usually in the form of small-scale grants and co-investment with private venture firms. The European Investment Fund (EIF) allocates funding across Europe and also co-invests with private venture firms. In 2014, EIF-backed investments supported 41 percent of total venture activity in Europe, and the share of investment directly attributable to EIF was 10 percent.
Challenges in Europe’s Startup Environment
These strategies by national governments and the EU seek to compensate for the lack of scale in Europe’s venture markets: while European angel investors and venture firms are sufficient to support seed and very early-stage growth, the funding pool is shallow when it comes to Series A and particularly Series B and later-stage investment.
The IPO and M&A environment is also weak, as Europe has few markets comparable to Nasdaq that enable emerging technology companies to go public, and more than half of the startup acquisitions that do occur are by companies from outside Europe—primarily from the United States. Other funding hurdles that European startups face include a conservative culture in both venture firms and large companies that frequently fail to capitalize on the growth opportunities emerging companies may offer. This situation is changing, particularly in the last three years, as more later-stage funding has become available and more successful entrepreneurs have started to become investors. But the gap between Europe and the US/Silicon Valley is still large.
The other major challenge that European startups face is lack of market scale, as individual countries lack the scale of the US market, and cultural, linguistic and regulatory barriers inhibit the ability of startups to grow at a pan-European level.
This leads large numbers of European startups to come to the Bay Area, often with support from public and private companies, organizations and institutions. When they do this, many draw on a deep infrastructure of institutional support provided by their governments and by businesses from their home countries that are already embedded in the region. This bridge, composed of overlapping public and private networks, provides European startups with short-term landing pads and with expertise, advice, and connections that can help them grow their businesses. Whether that happens at a global scale, in the US or at home, most absorb the Silicon Valley experience, applying its values and insights to their future business strategies.
Connections in the Bay Area
At least 35 European consulates, national technology agencies, and sub-national government organizations operate in the region, all or most with a focus on startups. They are joined by entrepreneurship programs run by European universities; at least 14 European-sponsored incubators, accelerators, work spaces, and innovation offices; independent accelerators where the largest number of international residents are European; and European-affiliated residential facilities specifically designed for startups. Eighteen European business organizations in the Bay Area include startup support in their programs. Major European companies have 19 corporate venture arms and 47 research laboratories and innovation offices in the Bay Area, which have engagement with startups as a core focus.
The Bridge to Silicon Valley
Entrepreneurs from across Europe who are working in the Bay Area—several hundred on any given day—share a number of key goals. One is access to venture capital, particularly at the growth (Series A or B) stage. A second is scaling in the US and global markets. Others come because their business models are built on platforms created by Bay Area companies; many consumer-facing startups work at some point with companies such as Facebook, Twitter and Google. Nearly all take advantage of the experienced marketing expertise that can be found in abundance in the region.
The startups that come find a rich supporting environment with deep networks, experienced mentors, and an openness to ideas that is difficult to find at home. They also encounter challenges, not the least of which is the region’s high cost of living—a problem shared with Bay Area residents; housing is a particular problem. They also find a highly competitive environment for engineers, who are expensive, change jobs frequently, and have attractive opportunities with larger, well-established companies that unknown startups from other countries find it difficult to compete with. This situation leads many to do most of their R&D and engineering at home, where quality engineers are available at lower cost.
Often, the startups that gain traction will incorporate in Delaware and establish their headquarters in the Bay Area; others keep their headquarters at home and open a US affiliate. In either case, the pattern that most often emerges reflects a division of labor, where different and complementary tasks are performed in the Bay Area and at home. Usually, the founder and top management move to the Bay Area, with strategy, marketing and in some cases R&D based in the region, and engineering support principally based in Europe, where most employees remain located. Both the Bay Area and the home country gain: the Bay Area through an infusion of companies and talent, and the home country through the increased employment, revenue, and visibility that come from having a successful global company that is more competitive and has grown faster than it could have had it stayed at home.
Building a Stronger Innovation Bridge
A number of steps could be taken in Europe and the US to make this relationship even stronger. In Europe, the proposed Digital Single Market (which aims to integrate Europe’s markets for digital services) and a proposed Capital Markets Union (which among other things aims to lower restrictions to the cross-border movement of capital) could—if implemented properly—help European startups expand in a larger, more accessible European market. On this side, Bay Area accelerators can expand their presence in Europe—a process that is already beginning; venture capital firms can also benefit from a stronger footprint as Europe’s startup environment expands. At the national level, creation of a startup visa to help entrepreneurs from other countries come to the US and create and grow companies could expand the number of startups coming to the region, enable them to stay longer, and address an issue that founders often cite as an obstacle to their ability to establish roots and grow in the US.