Established by the European Commission at the World Economic Forum, Startup Europe Partnership (SEP) is the first pan-European open innovation platform dedicated to transforming European startups into scaleups (> USD $1M funding raised (since foundation) and at least one funding event since 2010). By linking them with global corporations and stock exchanges, SEP is a program where companies can access to technologies, initiate business partnerships and venture corporate investments. Released two weeks ago in cooperation with Mind the Bridge, Tech Scaleup Europe Report 2018 shows that even though there is good progress and the number of scaleups is growing, we have a lot of work ahead of us to be a startup continent.
Sustainable growth from scaleups in Europe is expected to continue
In 2017 scaleups experienced a year of growth which can be described as sustainable and can be expected to continue. Creation of scaleups gained ground last year, with a 28% increase in scaleup volume and a 36% increase in capital raised, meaning more than 1,200 new scaleups in 2017 and USD $22B more poured in scaleups. Upon this numbers the “scaleup density ratio” (0,9 to 1 per 100k Inhabitants) and “scaleup investing ratio” (0,33% to 0,45% of GDP) also increased their percentages, showing that European scaleup economy is growing in absolute terms.
There is not yet a single European way to scale-up for tech companies
Scaleups behave differently according to their ecosystems, countries and regions. In the US for example the route is standardized and there is an expected plan to exit for every startup. In Europe, there is not yet a single way to scale up for tech companies. Some are pursuing the venture capital funding path, whereas others are leveraging investors and family offices. Crowdfunding and fundraising through cryptos (ICOs) have also become ways to access capital, which makes European levers for scaling up diversified and far from standardized.
1220 new scaleups were born in 2017, led by the UK, France, Germany and Sweden
The UK, France, Germany and Sweden are the leading European countries in scaleup numbers, contributing to almost 70% of the total growth in absolute terms. We continue to see the importance of these traditional economic power in the European innovation scene. The UK leads Europe in scaleup numbers (1,168), followed by France (681), Germany (530) and Sweden (489). Regarding capital invested, the UK leads the amount of invested capital with USD $27.5B, and even though Germany is home to only 10% of scaleups, those scaleups took in 18% of the total funding in Europe. By producing on average 3.7 scaleups every 100k inhabitants, the Northern countries outperform other areas of the continent and Sweden (4.9 scaleups/100k inhabitants) and Finland (4/100k Inhabitants) are the leading countries in terms of scaleups density.
A notable performance is that of Eastern Europe, which has become a hot area in the past year. Perhaps this is where the most impressive percentages can be observed; they managed a 40% growth rate, adding 63 scaleups to a total of 220 now present. The region has gained recognition for the relatively lower cost and high-quality workforce, especially for developers.
Most of the total funding capital comes from VC and private investors
While there are major differences between Europe and the US regarding the funding channels (VCs, IPOs, ICO) there are also noticeable differences between European regions and individual countries. These differences are a critical element to understand the total innovation economy of Europe and its growth potential. Acknowledging that USD $70.7B of capital poured into European scaleups comes from venture capital and private investors (85% of the total capital), European scaleups are still depending more on venture capital than any other funding sources.
Venture exits via the public markets are very much the exception, not the rule
Stock markets are not yet a widespread and accessible growth financing option for European tech scaleups, particularly in continental Europe. This situation poses a problem, because beyond providing growth capital, IPOs offer exit opportunities to the VC funds. Without exits, the venture capital engine risks being flooded. While only 12% of the capital raised by scaleups (USD $9.7B) comes from stock markets through IPOs, only 1% of the European tech scaleups have gone public. A larger involvement of the stock market would provide and important boost for European scaleups considering that on average, European scaleups collect about USD $120M in new funding when they start trading on stock markets.
ICOs: The Third Way?
ICOs allow speed and availability when it comes to funding for scaleups. Tech scaleups looking at trading into crypto current markets file for an ICO within a year of inception, and 3% of the capital raised last year (2.8B) was through ICOs. Central European countries – driven by Switzerland – play a dominant role (1.3B raised, 50% of the total) and as example of that, the swiss canton of Zug (European Crypto valley) has 27 scaleups that made an ICO headquartered there having raised USD $1B+. For the first round of financing, tech scaleups ICOs have proven to be a very interesting substitute to other forms of financing (VC, IPOs).
Interestingly, on average the ICO channel provides 4 times more capital than the generic series A raised with traditional VCs (USD $17,6M / USD $4.5M) and while ICOs are “democratizing” fundraising as they are accessible by scaleups in geographies (e.g. the CEECs and the Baltics, where they represent respectively 20% and 33% of capital raised by local scaleups) there are definitively other implications to take into consideration:
European scaleups tend to be based in the capital city
Scaleups tend to be concentrated around few major hubs where supporting ecosystems such as academia, financing, and an entrepreneurial spirit are strong. London is by far the largest, with over 1,100 scaleups based there. Paris follows, and Berlin and Stockholm are slightly behind. Typically, there is one main hub per country, generally around the capital city. Beyond these main scaleup hubs there is another tier two cities and municipalities whose role cannot be neglected.
Europe must multiply their efforts to become a startup continent
To understand our competitive advantages and where we are compared to other innovation economies, we must observe the information of US and Israel. As of 2017, 20,760 scaleups were tracked in the US, meaning approximately a number four times higher than Europe. US scaleups have raised USD $657.5B since inception, eight times more than the USD $83.2B raised by their European counterparts. And, in terms of commitment – meaning percentage of GDP invested – once again the US shines, with investments in scaleups equaling 3.53% of GDP, compared to 0.45% in Europe, almost eight times more. Israel scores better than all European ecosystems (except only the UK) in scaleup population size with 748 tech scaleups. Our competitive advantage is to be united in diversity. Advantage that can only be realized by working at ecosystem level, combining public and private initiatives, encouraging entrepreneurship in universities and strengthening cooperation within startups and corporates.