June 13, 2016
New ventures valued over $1 billion are called Unicorns. The cumulative Unicorn valuation in the U.S. since 2014 is $323.6 billion; the same figure in Europe is only $35.9 billion. That’s a valuation of $1.01 per capita for the USA and only $0.05 for Europe, a difference of 21x. What’s going on?
The European Union (EU) is the second largest economy in the world , home to 36 of the top 100 universities in the world , and the birthplace of 51% of all scientific Nobel prize holders ; so why, since 2014, has Europe produced 17 new companies valued at over $1 billion while the United States has produced 88 over the same time period?
New ventures valued over $1 billion are called Unicorns. The cumulative Unicorn valuation in the U.S. since 2014 is $323.6 billion; the same figure in Europe is only $35.9 billion . That’s a valuation of $1.01 per capita for the USA and only $0.05 for Europe, a difference of 21x. What’s going on? These numbers almost seem absurd; how can such a substantial disparity even be possible? Are Europeans just really bad at starting successful companies? Is there something in the water over in America?
Clearly Europe has a lot of room to improve. The questions are: where are the problems, how do we improve, and what role does regional development play?
The consulting firm McKinsey has identified five key factors that largely determine a city’s success as a start-up and innovation hub: talent, structure, capital, networks, and public image . All of these are often cited as weaknesses in European innovation hubs, especially the lack of sufficient mid-stage capital relative to U.S. investment . Despite the challenges, several regions in Europe are starting to emerge as superstars in innovation such as : London, Paris, Munich, Cambridge, Leuven, and Berlin.
Berlin in particular has been identified as a region with high potential for growth. Berlin is one of the largest and most diverse science regions in Europe with 4 universities, 4 colleges, 7 universities of applied sciences, 26 private universities, 22 technology parks and incubators, and 70 research institutions . Roughly 44,000 companies are created each year in Berlin, and two-thirds of the capital invested in Germany in 2015 went to Berlin [6,7]. The region combines this with a positive public image for entrepreneurship and low business costs. However, the region needs improvement in fostering networks among companies, developing private and public infrastructure to support new ventures, and increasing the interest of local talent to enter the entrepreneurial scene.
To address these factors, Berlin and Brandenburg joined forces to promote innovation clusters in the region, launching a joint innovation strategy called “InnoBB”; this was supported by an EU investment of €33.7 million .
The innovation strategy focused on five clusters identified as high-growth sectors in the region :
- Energy technology
- Transport systems
- ICT and new media
- Optical technology
The strategy focused on developing:
- A critical mass of innovative companies for each cluster in spatial proximity for knowledge sharing, talent mobility, and infrastructure
- Cross-border cooperative strategies
- Technology transfer and partnerships between science and industry
- A focus on identifying innovative strengths to orient for above-average growth
- Infrastructure to support entrepreneurship and encourage a start-up mentality
The investment has been successful; as an example, the number of jobs subject to social insurance contributions grew by more than 10% between 2008 and 2012 in ICT and new media. This was higher than previous innovation hot-spots such as München and greater than the average German growth. It wasn’t until two years ago that the first venture capital (VC) firm came to Berlin, but now the the city is being taken seriously as a start-up city and innovation cluster and the talent and private funding is starting to flood in :
Berlin was overhyped by the media several years ago when it was pitted as the next Silicon Valley,” [Ciarán O’Leary] says. “It’s important to compare apples to apples. The Berlin ecosystem is a quarter of the age of other European ecosystems. It wasn’t until two years that there was a VC fund in Berlin. What we saw three or four years ago were the first baby steps of Berlin.
Is this type of intervention necessary however? Is the EU doing more harm than good, trying to promote regional winners, or meddling in the free market? Indeed, a common refrain is that Europe has too much state and not enough free market, as summarized by Professor Mariana Mazzucato* :
Why are all the innovative companies like Apple, Amazon, Google and Facebook coming out of the US and not Europe? The answer you will often hear is: Europe has lots of culture but there is too much state and not enough market. As a result, it is not entrepreneurial enough
Mazzucato’s work has shown however that most of the revolutionary technologies that have enabled the current information-era boom in devices and software were originally government funded. Looking at the iPhone, the internet, GPS, touch-screen display, and voice-recognition software all had their roots in government projects .
The EU is making substantial progress in funding innovative and high-impact research that will lead to the innovative technologies of tomorrow through schemes such as the Marie Skłodowska-Curie Actions; this must be complemented by regional investment to support the entrepreneurial infrastructure necessary to turn this innovative research into growing companies, create lasting innovation hubs, and a workforce with an entrepreneurial mindset. EU regional investment is an essential component of fostering these viable long-term innovation ecosystems and regional innovation clusters; I look forward to the future growth this type of funding enables.
Featured photo by Linus W (CC Attribution-NonCommercial 2.0 License)
*Professor at the University of Sussex and a member of the World Economic Forum’s Council on the Economics of InnovationMathew Lowry