Europe’s ‘inhospitability’ to startups may be about to change – here’s why

The total aggregated market capitalisation of Euronext – Europe’s largest stock market operator, with exchanges in Belgium, France, Italy, Ireland, Portugal, the Netherlands and Norway – stood at €6.5 trillion at the end of June 2024.

For Deutsche Borse, it stood at just short of €2 trillion at the end of 2023.

Euronext and Deutsche Borse are certainly no minnows, being among the largest equity markets on Earth. And yet, they pale in comparison to their American counterparts.

The total market cap of equities listed on the New York Stock Exchange stood at around €25.5 trillion*, with the NASDAQ not far behind at slightly less than €23 trillion.

A large part of the discrepancy can be traced to the huge worth of America’s tech firms, led by the ‘Magnificent Seven’ – Alphabet (Google’s parent company), Amazon, Apple, Meta (which owns Facebook, Instagram and WhatsApp), Microsoft, NVIDIA and Tesla.

Alone, these firms were worth €14.3 trillion in June 2024 – more than the combined worth of all the firms on the Euronext and Deutsche Borse, by a stretch.

This begs the questions – where are Europe’s tech companies?

The answer, often enough, is simple: they’re in the US, which is a far more hospitable environment for startups looking for the funding necessary to grow their operations and scale up.

In his much anticipated report on the future of Europe’s competitiveness, Mario Draghi noted that between 2008 and 2021, “close to 30 per cent of the ‘unicorns’ founded in Europe – startups that went on the be valued over $1 billion – relocated their headquarters abroad, with the vast majority moving to the US.”

Dr Draghi clarified that “problem is not that Europe lacks ideas or ambition.” However, he continued, “innovation is blocked at the next stage: it is not translated into commercialisation, and innovative firms that want to scale up are hindered by inconsistent and restrictive regulations.”

All this causes “many European entrepreneurs [to] prefer to seek financing from American venture capitalists and scale up in the American market.”

Serial entrepreneur Luca Arrigo tells MaltaCEOs.mt of his own struggle to secure finance for Metaverse Architects, a firm he founded and went on to sell.

“It is extremely difficult for entrepreneurs in Europe. There is so much back-and-forth with lawyers and notaries, so much due diligence, that investors simply prefer to look elsewhere.”

For startups seeking relatively small sums, a significant chunk of the investment may be eaten up by professional fees to get the paperwork in order, he says.

Mr Arrigo has since joined the European Accelerationism movement, which is dedicated improving the European innovation landscape by advocating for a pan-European company framework that allows firms to scale up “without the headaches, bureaucracy and hurdles” of each country.

The idea for a “28th regime” for companies – meaning a truly European regime that is separate to the different corporate frameworks of the EU’s 27 member states – has been gaining rapid ground, and is now set to be at the heart of the European Commission’s agenda for the coming years.

In her pitch to be re-elected President of the European Commission, Ursula von der Leyen said that the next Commission will “address the patchwork of national regulations that makes doing business in different EU countries more complicated.

“To support this, I will propose a new EU-wide legal status to help innovative companies grow,” she said.

That promise is already being effected: the mandate for Michael McGrath, the Commissioner-designate for Democracy, Justice and the Rule of Law includes building “a 28th regime to allow companies to benefit from a simpler, harmonised set of rules.”

Mr Arrigo says he feels “hopeful” that Commissioner-designate McGrath’s mandate “will reduce red tape in how EU companies are incorporated and how shares are sold to investors,” although he warns that special interest groups like notaries and lawyers, who “profit from bureaucracy”, will work hard to derail the initiative.

The way the 28th regime is implemented will be pivotal, he says, noting that the private sector should be “allowed to offer tech-enabled legal services,” making the legal side of things more akin to using a Saas [Software as a Service] product.”

A firm believer in digital, he said entrepreneurs “should be able to build or use digital tools to receive investments and manage legal entities.”

Asked if that will be enough to have more tech unicorns Europe, he responds: “It would certainly be a start.”

*All USD figures have been converted to EUR at the exchange rate on the date of publication.