Europe is home to many of the business’ biggest names, including Deliveroo, Revolut and Bolt. Yet experts worry about an international innovation gap.
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Globally, more than 100 private startups were valued at more than $1 billion last year, reaching so-called “unicorn” status, a term given to companies that reach such valuations without listing on the stock market.
Of these new unicorns, roughly 20% were in the Europe, Middle East, and Africa (EMEA) region, 50% in North America, and 30% in Asia Pacific.
While Europe has increased its share of unicorns over the past decade, the region still lags behind international peers such as the United States and China.
“We must remember that Europe creates exactly the same number of startups per year as the United States creates per year,” Carme Artigas, co-chair of the UN’s AI advisory body, said at the South Summit business conference in Madrid.
“The problem is that there are no startups in Europe that can find the solutions to grow and become unicorns.”
Closing this gap is not only a means to boost economic growth but also to expand international influence. So how can Europe catch up?
Capital to realise European ambitions
As of earlier this month, Pitchbook figures showed there were 1,401 active unicorns worldwide, with 702 of them in the United States.
China followed behind the US with 291 unicorns, followed by India with 65. In fourth and fifth place were the UK and Germany, with 49 and 25 unicorns respectively.
Comparing this list with venture capital investment levels reveals clear similarities, highlighting the importance of funding.
The 2024 venture capital rankings see the United States top the list, with $80 billion (€74.5 billion) being pumped into companies, followed by China, the UK and India.
The United States’ success is due to a variety of factors, including the size of its market, its high concentration of innovation hubs, and the country’s long history of supporting entrepreneurship.
There are many cases of European companies relocating across the Atlantic due to capital imbalances: Swedish music giant Spotify, for example, is listed on the New York Stock Exchange.
Commenting on investment trends over the past year, Boston Consulting Group said Europe is catching up with the US when it comes to early-stage, or seed-stage, funding for start-ups.
Still, he added, “there remains a significant gap in late-stage capital allocation between Europe and the US.”
“A clear challenge for the European startup community is to translate recent early-stage successes into a robust funding pipeline across the full investment spectrum.”
Apart from VC funding and IPOs, further capital could come from angel investors and government support schemes.
Attracting and nurturing talent
Europe’s startup ecosystem cannot thrive without skilled labor, but performance in this regard varies across industries.
According to the 2023 European Technology State Report, Europe has been a net beneficiary of global talent, with over 10,000 people joining the tech industry, even taking into account those moving to other regions.
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One reason is that many European countries are “simply good places to live,” said Ikhlaq Sidhu, dean of the school of science and technology at IE University in Madrid.
Looking specifically at the EU, the EU is focused on protecting the quality of life of its citizens.
“The EU is protectionist in the sense that it is trying to avoid as much disruption as possible,” Professor Sidhu explained, citing AI development as an example.
But Europe’s caution is also “a drag,” he added, especially when it comes to innovators getting caught up in compliance.
The talent pool in the region is similarly strengthened with many educational institutions linking up with startup hubs.
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Collaborating with academic centers puts small businesses closer to skilled labor, research facilities, and cutting-edge technology.
The breakdown of cross-border cooperation
Europe has taken many good steps to develop human resources, but this does not mean that there are no skills shortages.
A recent survey by the European Commission found that almost two-thirds (63%) of SMEs said they could not find the talent they needed.
One of the solutions that has been proposed to solve this problem, despite being politically contentious, is relocation.
Allowing skilled talent to move more freely within the continent would give companies a wider range of workers to choose from, while startup visas would allow countries to welcome foreign founders.
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About 55% of U.S. unicorns were founded by immigrants, and about 80% have immigrant founders or immigrants in key leadership roles, according to a study by the National Institute for American Policy.
Despite the principle of free movement within the EU, experts suggest more work needs to be done to make this right a reality.
For example, migrating EU citizens currently have to spend time understanding disjointed employment and pension regulations, a process that could be facilitated if systems were homogenized and better designed to accommodate foreigners.
Similarly, regulatory fragmentation poses obstacles for entrepreneurs in raising capital across borders and scaling their businesses.
American entrepreneurs wanting to expand across state lines will currently face fewer challenges than European business owners wanting to expand across the EU.
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Leveraging Europe’s strengths
To become more competitive on a global scale, Europe’s startup engine needs not only an injection of talent and investment, but also a vision.
“The mistake European countries make is to follow, like a herd, the strategies that interest U.S. venture capital firms,” Carme Artigas said.
“Why are we following this to such an extent?” she asked. “Not all the money going into these projects is going to areas where Europe is stronger than others.”
Therefore, in the pursuit of success, she suggests, Europe’s best bet is to innovate in its own way, rather than following others’ backs.
Europe’s diversity can be a hindrance, but it can also help build a vibrant and unique startup culture.
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This article is based on a roundtable discussion at South Summit Madrid, an event co-organised by IE University, led by Professor Ikhlaq Sidhu, founding member of Rise Europe, a network designed to support Europe’s startup ecosystem.
