By Tímea Bárocz, Operations Manager of Startup Hungary

In today’s fast-paced digital era, innovation isn’t just advantageous; it’s essential for societal progression. The European Union, a vibrant tapestry of innovation and entrepreneurship, now stands at a pivotal juncture. However, a prevailing misconception within the EU is its perceived sluggishness in embracing digital transformation, often leading to an over-regulated environment. This tendency, while aimed at overseeing major international tech giants, inadvertently creates a challenging landscape for homegrown startups.

The regulatory framework, although intended to create a level playing field, often becomes a double-edged sword. On one hand, it addresses the dominance of large tech corporations, ensuring competitive fairness. On the other, this regulatory zeal can sometimes stifle the very innovation it seeks to protect and nurture. While it tries to keep the competition fair, it can also hold back the innovation it wants to support. The strict rules can unintentionally create obstacles for European startups, complicating their inception and growth.

This complex regulatory environment underscores the need for a more nuanced approach – one that balances oversight with the encouragement of entrepreneurial spirit.

The proposed solution? The assignment of a Commissioner for Digital Entrepreneurship – a role that would not only symbolize but actively propel the EU’s dedication to nurturing the digital ambitions of startups and scale-ups across the continent.

Why focus on startups?

Startups are the hotbeds of innovation, where ideas and technology converge to shape the future. In the EU, where economic resurgence and sustainability are paramount, startups are leading the charge. They are the creators of jobs, the drivers of the economy, and the pioneers of a sustainable future. Yet, they often navigate a complex policy labyrinth, struggling to find their voice in the halls of power.

This labyrinth is not just metaphorical but manifests in the tangible challenges they face. EU funding is often entangled in layers of bureaucracy that slow them down. Startups, whose edge over larger, well-established companies lies in their ability to move quickly, find this speed and agility compromised. Burdened by the administrative processes imposed by intermediaries, startups risk losing their focus, shifting from market-driven strategies to ones preoccupied with navigating bureaucratic criteria.

The need for focus becomes evident when looking at recent data: according to Atomico’s State of European Tech report, around $45bn was invested in European startups by the end of 2023. This figure is significant as Europe is the only region where startup investment has risen from 2020 levels, seeing an 18% increase. In contrast, the US and other regions have witnessed a decline in startup funding. This trend highlights the growing importance and resilience of European startups in the global landscape.

However, challenges remain prevalent. Over the past year, securing funding and customers have been the most significant hurdles for startups, with 38% citing capital raising and 37% identifying customer acquisition as their primary challenges. Furthermore, while layoffs in European tech have peaked in the early months of 2023, the underreporting of such incidents suggests a more complex employment landscape.

On a more positive note, Europe is increasingly becoming a fertile ground for new entrepreneurs and tech talent. The number of new first-time founders in Europe surpasses that in the US. Europe is attracting more tech workers from the US than it is losing, contributing to a rapidly growing tech talent pool that has gone from 1 million employees to over 2 million in the past five years.

The role of a Commissioner for Digital Entrepreneurship

This call is grounded in several key needs:

1. Centralized Leadership: This role promises a single point of contact for startups, simplifying their interaction with the EU’s digital policy landscape. It’s about offering coherent and accessible support to these emerging entities.
2. Harmonized Policies: Among the key responsibilities of the Commissioner would be to champion the standardization of corporate structures and term sheets across the EU. While acknowledging the diversity of member states, there’s a critical need for a unified, investor-friendly corporate framework that’s universally recognized and trusted by global investors. Such a framework, modeled on successful international examples, like the US corporate structure, would be instrumental in retaining intellectual property and capital gains within Europe, boosting the continent’s economic sovereignty.
3. Enhancing Global Competitiveness: To maintain a competitive edge globally, the EU must innovate its policies continually. A dedicated Commissioner would ensure the EU’s digital strategies are forward-thinking and competitive.
4. Amplifying Startup Voices: A Commissioner ensures that the voices of startups are heard in policy discussions, shaping a future that aligns with their needs and visions. This includes navigating the complex regulatory environment, often seen as a labyrinth by many startups, as mentioned before, hindering their agility and focus. The Commissioner would have a huge role in empowering startups to preserve their critical edge in speed and innovation.

The creation of a Commissioner for Digital Entrepreneurship is a definitive step forward, one that Startup Hungary fully stands behind.

It also adds to the urgency that there’s a pressing issue facing the European startup ecosystem: the ‘unicorn drain’. Many successful startups, or unicorns, find themselves compelled to relocate to the United States. This trend is largely driven by two factors. Firstly, as these scaleups grow and seek larger investments, they often encounter a funding gap in Europe. Consequently, they turn to American venture capitalists, who sometimes condition their investment on the relocation of the company’s headquarters to the US. Secondly, these US investors often prefer to exit their investments through a listing in the US, further encouraging the shift of European unicorns across the Atlantic. Despite the growing VC capital and talent in Europe, changing the mindset of founders who are influenced by these factors remains a challenge, according to the analysis by Sifted.

There is a large number of EU nationals in key positions in US startups and most of them are not coming back. The networks of these areas create a virtuous cycle.While there are some very limited examples of similar hubs in Europe (e.g. around Skype’s founders, or the growth in the number of Finnish startups after Nokia’s failure), they seem almost accidental and compare poorly with US hubs.

As we approach the 2024 EU Elections, it’s crucial to focus on the agents of change in our economy – the startups. They are key to driving economic recovery, job creation, and sustainable development. The EU must not only preserve but actively support its entrepreneurial spirit. Making the EU a catalyst for digital innovation and entrepreneurship should be a shared top priority. The creation of a Commissioner for Digital Entrepreneurship is a vital step in this direction, ensuring Europe remains a hub of innovation and stays on top in the digital age.

References:

Atomico. (2023). The State of European Tech. Retrieved from https://stateofeuropeantech.com/.

Selin Bucak (2022). Unicorn drain: Europe is still losing its most valuable startups to the US. Sifted. Retrieved from https://sifted.eu/articles/european-unicorns-relocating-us

🇭🇺 Startup Hungary, a Member of Allied For Startups, is an independent organisation led by entrepreneurs, with the mission to supercharge the startup ecosystem by fostering the emergence and success of high-growth potential tech enterprises in Hungary. Established by experienced entrepreneurs and bolstered by prominent figures within the startup community, it champions Hungary’s capacity as an ultimate regional hub.