The EU Start-up Strategy’s demand-side dilemma
The European Commission has released its Start-up and Scale-up Strategy – some 40 measures it will put in place to “position the EU as the best place in the world to start and scale global technology-driven companies”.
It’s a welcome initiative. If Brussels has indeed gone all-in on competitiveness, and if most of Draghi’s recommendations on the topic focus on innovation and productivity, (1) then yes, more policymakers should be thinking about start-ups.
Successful start-ups – often disruptive innovators – tend to move technologies up the innovation s-curve more frequently, rapidly and efficiently than incumbents for many reasons. Plus, if a start-up fails, it fails fast and – because of factors like a culture of lax non-compete enforcement – any progress it made along the way tends to get recycled back into the ecosystem and eventually finds its way to consumers.
Because of resourcing, start-ups also tend to be less prone to inducing regulatory capture which artificially caps innovation and productivity gains. The flipside of this, of course, is that their voice tends to be much missed in the EU policymaking process. (2)
It’s a surprise we had to wait so long for an EU-level Start-up Strategy. (3) The EU added value here is clear. Start-ups need large markets to reach escape velocity. National markets alone rarely offer this. But frictionless expansion from, say, a Spain of 48 million potential customers to an EU of 449 million just might.
Indeed, stripping back the rhetoric, the Strategy is essentially a market-building exercise.
Europe’s supply-side solution
Policymakers can build a market from the supply- or the demand-side. Grouping the measures in the Strategy very unscientifically, it seems the Commission is building from the supply-side, particularly:
Increasing the supply of start-ups: making it easier to incorporate, restructure, attract the right talent, and spin out etc. in Europe.
Increasing the supply of start-up products and services in Europe: smoothing regulatory approval processes for innovative technologies, easing access to funding (especially important for getting deep-tech products to market, as the inclusion of the flagship Scaleup Europe Fund attests to), resolving IPR disputes that can keep innovation off the market, and equipping Tech Transfer Offices for new products etc.
Increasing the supply of customers and markets: by building an actual single market for start-ups to expand into (the 28th Regime, European Business Wallet), and leveraging EU trade policy to open new geographical markets.
Each colour indicates a ‘bucket’ in the Strategy: pink (Innovation-friendly regulation); purple (Better finance); green (Faster market uptake and expansion); orange (Support for the best talent); blue (Access to infrastructure, networks and services.)
If implemented, these measures would be a huge step in the right direction. It’s no surprise the Strategy was generally met with a positive reception from the community. (4)
Take, for example, the 28th Regime. For the Commission, it is a genuinely bold step toward a common corpus of EU company law. It has the potential do away with duplicative and diverging national measures and create a truly single market (and therefore customer base) for companies to frictionlessly expand into. In that regard, it is unique in both boosting the supply of start-ups and potential markets.
The scale-up fund, too, can overcome a crippling funding gap, especially for capital-intensive deep-tech sectors where Europe cannot afford to keep lagging. The sums aren’t enough (public funding alone never will be). But – as a signal – if it is complemented by access to a deep capital market, there is no reason start-ups wouldn’t bet on Europe as the place to clear the valleys of death.
Europe’s demand-side dilemma
The other side of the market-building coin is customer demand.
Most of measures in the first three columns could theoretically serve a start-up before the first Euro of revenue has been transferred from a customer to a company. These measures are much-needed but – alone – probably are not enough to achieve the Strategy’s overarching goals, particularly around “scaling global technology-driven companies”.
This is not due to neglect on the Commission’s part. It has acknowledged the importance of the demand-side. I wonder if it is more rooted in the EU’s legal capacity to act. Among the strongest legal bases for the Commission legislating (especially when you get onto domestically-sensitive topics like tax and labour law) is the ‘creation a single market’ – which lends itself to creating the framework conditions from which start-ups can grow.
The Commission has to be much more creative in identifying legal bases for reallocating wealth from customers to companies. So perhaps it is normal that we see fewer demand-side measures.
The strategy is right in identifying procurement as a promising avenue to boost demand. Public procurement accounts for 13.6% of EU GDP but it’s an incredibly burdensome process for start-ups and scale-ups. The revision of the Public Procurement Directive and the forthcoming Innovation Act could certainly nudge customers in the right direction.
Nevertheless, Slush surveyed 1250 founders and investors late last year on the top three challenges founders face. The biggest worry was fundraising, keeping 63% of respondents up at night. After that, the next three all contained some demand-side component: customer acquisition, scaling and growth, and revenue growth.
Conclusion
What founders are most concerned about and where the EU has the most room for manoeuvre are not wholly aligned. Herein lies Europe’s demand-side dilemma.
The Commission should consider a more muscular approach to stimulating market demand for innovative solutions. Removing regulatory barriers to bringing superior, novel technologies to market is a start, but the EU must also explore its other legal bases for regulating out inferior, incumbent products, creating demand for new, superior ones. (More on that next week).
***
(1) Draghi’s report can be summarised as ‘Part I: Innovating in sectors where we are lagging’ and ‘Part II: Doing things we are already doing, but more productively’.
(2) If the sole outcome of the Strategy is the realisation in the Commission that ‘we should listen to start-ups more’, then that’s already progress.
(3) There was an attempt in 2016, but it never really seemed to land.
(4) There has been some debate as to whether the Commission will deliver on the Strategy’s content. My lukewarm take is the Commission is in fact investing quite some political capital in the 28th Regime, the SIU (but it could have been bolder there), and procurement reform. All of these will face pushback from well-organised, well-resourced, well-entrenched institutional and non-institutional veto players. The Commission wouldn’t dip its toe if it weren’t willing to dive in. Kudo to ’em!