Countries around the world are striving to develop the startups of tomorrow that will drive their economies forward and allow them to compete on the international stage.  Achieving it is easier said than done, however, especially in Europe where The Economist nicely captured the difficulties the continent has in turning the high-quality raw materials for innovation into world-beating startups.

A new report from Scale Up Europe outlines 21 steps that entrepreneurs themselves think would be useful in their mission to conquer the world.

Scale-Up Europe was launched in December 2020 by French President Emmanuel Macron before an official launch in March 2021. The recommendations emerged from a series of consultations with entrepreneurs to understand the key challenges they face and how those challenges can be resolved.

“Scale-Up Europe is a call to join forces around startups: to reinforce Europe’s sovereignty, develop the prosperity of our economies and societies, and achieve the objectives of social cohesion and climate transition that are at the heart of the European project,” the authors say. “We, founders and startups, corporations, investment funds, industry groupings, and other innovation ecosystem stakeholders, are joining forces as a community and stepping up to respond to the opportunities and challenges that await our continent.”

Supporting scaleups

The recommendations are divided between investment, talent, deeptech, and industry collaboration.  For instance, they argue that a better ecosystem needs to be created for the listing of tech companies on Europe’s various stock markets, while also urging authorities to create a tech worker status for talent with a fast-track European tech visa for non-Europeans.

While the recommendations themselves are by no means bad, it’s hard to escape the feeling that they miss the bigger picture. The sectors that European firms have traditionally dominated are no longer the sectors of the future, with America and increasingly China coming to dominate the digital industries that are the fulcrum of the global economy. As the Economist states, of the 142 firms around the world valued at over $100 billion, 43 were set up within the last 50 years, but just one of those was founded in Europe.

INSEAD’s global innovation index provides an annual reminder of the exceptional raw materials for innovation present in Europe, whether it’s world-leading universities or robust legal frameworks.

One clear advantage for both Chinese and American digital startups is the huge domestic market they have to build within.  Despite the worthy efforts of the EU to create a single market across the continent, this remains a clear barrier to scale.

The single market was created at a time when most trade was in goods, and reform has not matched the shift towards a service-based economy in much of the developed world.  It’s no surprise that 21 of the 25 biggest firms in the EU trade in goods rather than services.  The picture used to be similar in the United States a few decades ago, but their domestic market has been sufficiently supportive to allow a transition so complete that now 17 of the biggest 25 American firms are tech-driven service firms, with many of these considerably younger than European giants like Unilever and Royal Dutch Shell who were founded at the start of the 20th century.

Despite the EU startup monitor revealing that around 85% of startups want to trade outside of their home country, few were doing so at the time of writing, with challenges over rules and regulations commonly cited.  Indeed, American firms do roughly twice as much trade outside of their ‘home state’ as European firms do outside their home market.

Scaling challenges

Entrepreneur James Liang highlights the tremendous benefits a large domestic market can bring in his latest book The Demographics of Innovation.  He argues that demographics have a huge part to play in innovation, and outlines three core ways they impact a country’s creative output:

• The scale factor – Economies of scale are well known in business, but Liang argues that scale is also vital for innovation.  Not only do countries with high populations have more researchers etc., but crucially, they have a large domestic market for budding innovators to sell to.
• The agglomeration factor – This can be seen with the emergence of innovation hubs, such as Silicon Valley, in recent decades.  Liang argues that a large population is not enough if that population is not fairly well concentrated.  Cities and hubs benefit from the concentration of talent and resources in one place.
• The age factor – The age of the population is also important.  Liang suggests that 72% of the greatest inventions in history were made by inventors in their 30s and 40s.  This is because they have had time to gain an education but are not sufficiently embedded into the status quo to see no other way of working.

It’s notable that the majority of users and revenue for the big Chinese firms come from the domestic market, whilst even western giants such as Amazon only generate around 30% of their revenue from overseas markets.  Worthy though the recommendations from Scaleup Europe are, therefore, it’s hard to see how progress will be made until these issues are addressed.