Andreas Klinger’s 18-month struggle to find money for a new company helps explain why Europe doesn’t produce more start-ups
. Klinger pursued investors for his Internet-based fashion company across a continent, from the beer gardens of Munich to plush hotels in Moscow. “It was a crazy circus. We had to produce our business plan in several languages, accompanied by 15-sheet spreadsheets containing thousands of cells.”
In June after moving his office six times, Klinger and his partners finally secured several hundred thousand euros in seed funding for their Vienna-based start-up Garmz from the Austrian government and angel investors in Switzerland, Russia and Austria. But Klinger says Garmz, which develops new fashion designs based on the input of large numbers of people viewing the designs over the Internet, now must move to London in order to raise the next round of financing needed for production.
For nearly a decade, Europe has been striving to become more hospitable to entrepreneurs and small companies – the key drivers of new jobs, growth and global competitiveness. Governments from Paris to Stockholm have launched programmes to channel seed capital to start-ups and sponsor competitions to reward innovation. But despite these efforts, Europe still lacks a critical mass of high-growth entrepreneurs driving new ideas to market.
Why can’t Europe create more fast-growth companies? It’s an old question – but under the current pressure to revive the economy and create more jobs, it’s one that is getting lots more political attention than in the past. Indeed, nurturing high-tech SMEs is a central theme in the European Commission’s new Innovation Union strategy: “Remaining barriers for entrepreneurs to bring "ideas to market" must be removed,” according to the Commission’s 6 October policy manifesto. It proposed a series of measures – from new financial tools to educational reform – to re-energise the entrepreneurial sector in Europe.
Get the incentives and the culture right, and thousands of fast-growing start-ups will flourish, investors say. Ignore them, and Europe’s economy will stagnate despite a myriad of programmes to fund new companies. “You need world-class universities and entrepreneurs – and the right tax incentives,” says Hermann Hauser, serial entrepreneur, business angel and co-founder of Amadeus Capital Partners in Cambridge. “That’s where policies can help.”
Getting the right culture starts with education. European high schools often fail to develop the skills, attitudes and economic savvy needed to create well prepared risk-takers – the potential Bill Gates or Steve Jobs of Europe, entrepreneurs and investors say. “Changing education should be an absolute priority,” says serial entrepreneur Denis Payre, who co-founded Business Objects, a French software company in 1990, and Kiala, a European retail service company in 2000.
The rare references to industry in French schoolbooks often are negative, says Payre, who in May launched a Foundation for Responsible Growth at the Institut de France, to examine the country’s ambivalent attitude towards capitalism. “There is no proper information on how the economy works in French schools. We need to tell children they live in one of the wealthiest countries in the world thanks to innovation and entrepreneurs – and tell the stories of the people and the companies that built this wealth. Transmitting these values is critical.”
Governments could help by creating new curricula to expose students to the role of entrepreneurs in society at a much younger age – even in elementary school – and nurture the appropriate skills. The Organisation for Economic Co-operation and Development (OECD) underscored the need to develop the foundations for a more entrepreneurial culture in its May 2010 Innovation Strategy, which recommended primary and secondary schools focus more on “fostering creativity, critical thinking, communications and teamwork” – as well as “the skills and attitudes needed for creative enterprise”.
It’s no quick fix – educating a new generation of potential entrepreneurs will take 15 years. But Europe’s universities can start immediately developing programmes that encourage multidisciplinary talent, which fosters innovation. Finland is pioneering that trend by merging three of its leading universities in economics, technology and art and design. The new university, called Aalto University, aims to churn out a new generation of researchers, creators and entrepreneurs that understand each other’s worlds.
Class B citizens
Governments could also drive new thinking by advertising, akin to the anti-smoking campaign of the 1980s. “The fastest way to start changing ideas is a massive Europe-wide EU marketing campaign to promote entrepreneurship,” says Mark Tluszcz, managing partner at Mangrove Capital Partners in Luxembourg.
Europe’s weak entrepreneurial culture also undermines collaboration between industry and research universities, which drives innovation. European companies need to engage much more closely with entrepreneurs and the universities where breakthrough technologies germinate. “Silicon Valley is very successful at turning engineers into entrepreneurs because companies work very well with academia,” says Robin Klein, a partner in the London office of Index Ventures. “HP and Stanford University are joined at the hip. We need more of that in Europe.”
Major innovations that break with existing technology are often commercialised by start-ups, because they diverge from or threaten the core business of existing companies. Klein of Index Ventures says Europe needs to establish a department of entrepreneurship in every university, to work closely with people with a successful business track record. “The great thing is people can acquire success pretty young and go back again and create other companies. Over 15 to 20 years, they might have set up four or five companies and funded 20 companies,” Klein says.
The biggest policy challenge is convincing a country’s most talented individuals to become entrepreneurs. Social systems offer no safety net for those who take initiative to launch new companies and create new jobs. If they fail, they have no unemployment insurance, no pension, and no financial security. Governments need to focus on incentives to take the risk of launching a new company that will create jobs and benefit society – such as tax breaks, eligibility for mutualised unemployment insurance and pensions. “In France, people who become an entrepreneur are treated worse than people who take no risk and stay in big companies or work for the government. You are a Class B citizen,” says Payre. “That has to change.”
The right incentives
At least some policy makers are hearing that message. European Parliament member Paul Ruebig, member of the Committee on Industry Research and Energy, argues for lower taxes on profits and salaries in support of young companies, counterbalanced by higher taxes on consumption. “There are not enough incentives for people to become entrepreneurs,” he says.
Some European countries have begun to tinker with tax incentives. France offers a tax break to wealthy individuals who channel up to €50,000 into start-ups, allowing them to deduct 75 per cent of the investment from the wealth tax. Britain offers income tax and capital gains tax relief to investors through Venture Capital Trusts, which are managed funds that must invest in small companies to qualify for the tax breaks.
But venture capitalists say existing programmes fall short. Bandel Carrano, managing partner at California-based Oak Investment, says governments could galvanise a huge wave of private investment in young companies by eliminating all taxes on investments in new companies which are held for ten years. “Tax policy around long-term investments needs to change,” if Europe wants growth companies, says Carrano.
US investors still pour far more money into start-ups than their European counterparts. During the second quarter of 2010, venture investors invested $7.7 billion into US-based companies in 744 deals compared with just €1.1 billion into 289 deals for European companies, according to Dow Jones VentureSource.
If Europe is serious about building entrepreneurs – and keeping them on home soil – it needs to put the right financial incentives in place and get to work changing attitudes.
Written by David Pringle | ScienceBusiness
David Pringle is a London based freelance writer, editor and commentator specializing in technology, media and telecoms. He is a former European correspondent for the Wall Street Journal.
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