By: Andrew Chrismer, European American Chamber of Commerce
Founders barely have time to sleep, leave alone navigating a set of 28 distinctly complex regulatory credit and capital frameworks in every single EU member state. This is why many founders agree that scalability in the EU leaves much to be desired. For a tech startup, scaling and marketability in the first one to three years is make or, in most cases, break. For a great and innovative company, scaling in the United States for an American tech company can resemble a game of Pac Man, where the startup can begin to linearly gobble up market share going from ecosystem to ecosystem throughout the country, due to only having to learn and navigate a straight-forward and singular regulatory system for financing, lending, and labor standards. Scaling across the European continent from member state to member state more resembles a game of Frogger, and as one founder recently put it, “it’s much more like starting up 28 times, with 28 different headaches.”
Proposed in 2015 as part of the European Commission’s agenda to boost growth in entrepreneurship and the overall economy, Commission Vice President for Digital Single Market Andrus Ansip announced a plan for better cooperation for startups throughout the EU. Included in this agenda was the idea of completing a capital markets union (CMU), in order to converge financial and capital regulatory frameworks for Europe’s businesses working across member state lines. This ambitious but important proposal would undoubtedly boost financial investment on the continent; some estimates say up to €6 trillion in long-term capital investment. MNCs would be one of the big winners here, increasing market access and capital movement throughout Europe. But startups and the ecosystems that support and grow them would benefit greatly as well from such a deal, and perhaps even allow Europe to be the new envy of the global tech economy. Here are 5 things startup ecosystems and city leaders should know about CMU:
1.) The cities and metro regions with the slowest growth rates in Europe have the most to gain from CMU
Large hubs for innovation like Berlin, Amsterdam, or London will undoubtedly benefit from stronger and more coordinated capital markets, but the cities that will most likely thrive under more coordinated capital markets are the small and medium sized hubs in Europe like Wroclaw, Poland or Eindhoven, Netherlands which may specialize in a few key digital products or services that are buttressed by each city’s unique, albeit less plentiful or diverse, sets of assets. Ecosystems throughout specific countries in Europe already operate through integrated networks across city borders to maximize competitive advantages. Poland’s ecosystems are a vast network of VCs, incubators, policy experts, and early adopters, and many smaller “hubs” in Poland like Krakow or Lodz have focused heavily on core attributes and assets specific to their own city. This has created competitive advantages in many of the smaller cities in Poland. VCs from the largest hub, Warsaw can travel to these smaller hubs and invest easily. If CMU is enacted across Europe, this could propel smaller cities forward, attracting capital not only from their own country’s markets, but from the entire European Union.
2.) As the Tech economy continues to grow in Europe, securing capital will be even more important for local startup ecosystems
In 2015, VCs invested 5.4 times more money in the US compared to Europe. VCs also closed more than three times as many deals in the US as in Europe in 2015. This is due to many factors, the main being that European VCs emphasize seed and stage 1 investment and late stage investments, without closing the important gap of second stage funding. Therefore, too many “bad” startups are being funded and failing in Europe, and capital is not getting to enough “good” firms. This exacerbates the already huge problem throughout European cities in that European startups are being wrongfully accused of being bad at scaling. At the end of the day, it makes scaling for startups more competitive, funding harder to access, and failing more prevalent, causing VC angst. With CMU, investment capital will open up more and better funding opportunities throughout the continent, so where a small “good” firm in Dublin may have exhausted the Irish market for investment asks, the same firm can now appeal to a much broader range of VCs throughout Europe, making success more likely and information in the marketplace more transparent.
3.) Cities must use their leverage to ensure that CMU is a success at the European level
Cities large and small have begun to use their resources not only to build and support budding ecosystems in their communities, but ensure that Brussels understands how important supporting 21st century economic policy is for localities. Organizations like the Committee of the Regions, Factory Berlin, and even municipal representations from around Europe in Brussels have begun to construct narratives that directly support European startup ecosystems. Thus the EU has outlined several plans to converge regulatory frameworks like CMU that would support the growth and scalability of European businesses.
4.) There will be few European unicorns until CMU is finished
VCs are constantly searching for their next startup city, and CMU would help facilitate those interactions. Europe’s unicorns can now boast double digits, but for an economy the size of the United States, a robust population of educated young people, and tolerant immigration regimes that welcome millions of skilled workers every year, Europe should be teaming with unicorn life. Many of the great startups from Europe with unicorn potential have packed their bags and chosen to scale from the valley instead in the past decade. Take for instance Kazaa or Skype. CMU would alleviate many hurdles startups continue to face in the European Union, so Europeans can stop talking about Spotify already! One of the major components of unicorn creation from the valley is that the bay area also has a rather large country with one regulatory framework and 330 million potential customers attached to it. Under CMU many of those regulatory and financial hurdles in Europe would become much easier for scalability.
5.) CMU has the potential to create a more equal playing field for great startups to scale no matter the size of the startup or the city’s ecosystem
CMU is a good idea all around. A continent that is as connected in as many ways as it is divided should, and can, make it easier for job creating businesses to thrive and scale. The European economy has sputtered along now for over a decade, and citizens are hungry for work that is stable and an economy with a bright future. CMU plays a crucial role in foregoing cumbersome regulatory barriers and financial uncertainty for companies that cannot afford them in the first place. The deal would be a large and significant step towards a new era for growth, not only for startups, but for some of the world economy’s most important metropolitan regions.