That Europe lacks the pazzazz of Silicon Valley in terms of its entrepreneurial output has been a bone of contention across the continent for some time now. Some of the most successful startups to have emerged from the region put their heads together recently to outline a number of ways future unicorns could be better supported.
One of their proposals would be the development of a Sovereign EU Tech Fund to address the shortfall in funding that undermines the growth of startups across Europe. They argue for a €100 billion fund that recruits from both public and private sources and aim for a long-term focus.
Such calls for more financial support for startups are not new, with former EU research commission Carlos Moedas arguing for an EU-run venture fund back in 2015, which eventually became the European Innovation Council (EIC) this year. The €10 billion fund aims to back startups with a mixture of grants and equity investments.
Alternative investments
Of course, while financial investments are important, that should not preclude other forms of support from being considered. For instance, a recent report from Grai Ventures highlights the potential for the “media for equity” model to deliver real benefits to startups.
Media for equity is an alternative investment model whereby startups partner with media companies, who rather than providing financial investment into the startups offer up unsold advertising space in their publications in return for an equity stake equivalent to the cost of the coverage.
The report reveals that 22% of startups fail not through a lack of investment but rather through poor marketing. Indeed, they cite data from Startup Genome arguing that more startups fail due to this than through a lack of cash.
“A further research into the statistics shows that startups lack experience when it comes to handling marketing ideas,” the authors say. “Concepts like market fragmentation, market size, competition, user retention, etc. are not initially into the grand vision of young entrepreneurs and young startups.”
Getting in front of customers
Suffice to say, this is a model that is not entirely new, and has actually been around for 30 years or so, with one of the first media investment funds created in Germany in 2000. It’s an approach that has seen around 250 media for equity investments done across Europe, with the approach particularly popular for consumer companies in the software and e-commerce industries.
It’s a model that appears to work, however, as the report reveals that 96% of startups who have undertaken a Media for Equity deal are still operating, with a number of the investments seeing significant boosts to the profitability of the startups involved.
The report highlights the importance of non-financial factors in the success of any startup and underpins many of the things I wrote about in a previous article, which was based on a paper from Wharton looking at the things that underpin startup success.
“The aim of this study was to understand how institutional changes in entrepreneurs’ external environments influenced early-stage start-up selection, and thereby the pipeline of companies that become candidates for further growth and scaling in a region over time,” the researchers say. “The findings showed that reforms that reduced the barriers to entry, growth, and exit for new firms lowered start-ups’ average probability of being selected into venture accelerators.”
Institutional factors
These kinds of institutional factors were also highlighted by the European Unicorns, whose proposals included improvements to public procurement to act as a catalyst for innovation; a pan-EU sandbox to allow entrepreneurs to have smoother and more frictionless access to the entire EU market; and a bolstered Important Projects of Common European Interest (IPCEIs) framework for supporting cross-border projects across Europe, especially in areas such as climate change and green energy.
It can be tempting to think that the biggest problem facing startups today are ones of finance, but while finding investors to support an endeavor is undoubtedly important, so too is easing access to the market so that startups can become self-sufficient faster.
As we gain a greater insight into the challenges startups face we’re getting a more nuanced ecosystem to support them and help them get to market at scale.
