Source: The Wall Street Journal
Why doesn’t Europe have its own Apple?
European leaders are relying on up-and-coming entrepreneurs to stimulate job creation and economic growth they desperately need to solve the debt crisis and cool social tensions, but industry watchers say rules, red tape and financial conditions are stifling the emergence of top-notch, high-growth businesses.
The European Union’s leaders have launched programs and tax breaks to tackle these problems, but some industry experts say they fall short:
too often they focus broadly across traditional Mom-and-Pop shops and fail to hone in on young, high-growth businesses that hold the key to job creation.
“If you’re looking for breaking new innovation and fast employment growth, which is high on the agenda now, it’s these young firms that are particularly promising,” said Andrew Wyckoff , director of the Organization for Economic Co-operation and Development’s industry directorate. There should be “a difference in policy between young firms and small firms.”
However, EU jobs commissioner Laszlo Andor said in an interview last month that the EU’s focus is on small businesses as a whole for job creation.
“[Technology start-ups] are relatively new and supplementary to the fundamental objectives of the EU level employment policies and activity, which are about investing in skills and improving the quality of labor supply and providing lifelong learning,” said Mr. Andor.
That’s forced people like Anthony Williams, a fellow at The Lisbon Council think tank in Brussels who has launched an online children’s clothing company with his wife, to target the U.S. and Canada for sales.
“We would love to participate in the EU. The legal and regulatory uncertainties and complexities are simply overwhelming,” said Mr. Williams.
For instance, there are different laws on children’s apparel standards across all 27 member states.
Then, there is the issue of avenues of sale.
There has been a revolution in the ability to distribute and manufacture cheaply through Internet platforms. But in Europe, Amazon has different domains across the bloc, each with different rules, counteracting the cost benefit from these new technologies for small businesses.
Businesses wishing to carry out cross-border transactions must pay an average of EUR10,000 for each additional export market, the EU estimates.
Adapting their websites will cost a further EUR3,000 on average, EU Justice Commissioner Viviane Reding said Thursday, as she announced plans to propose a single contract law across the EU.
As a result, 75% of European traders do not sell across a border inside the EU. This amounts to a loss of EUR26 billion in intra-EU trade every year, she said.
In Europe, the hurdles for reaching economies of scale, are just too high for young businesses that don’t want to stay small, say entrepreneurs, and this is why young companies tap large foreign markets to grow.
The size of that loss to Europe’s economic growth and job market is made clearer by data released in a report by The Lisbon Council this week: Europe has a higher rate of self-employment than the US.
In Europe, there were 30.6 million self-employed in 2000, compared with 14.6 million in the U.S.
Moreover, if a fifth of Europe’s freelancers hired one employee, almost five million new jobs would be created, says Lisbon Council executive director Ann Mettler.
So, the problem is not solely due to a risk-averse culture in Europe, said Ms. Mettler. The problem is policy.
Some governments, such as France, have gone a step farther, introducing tax breaks and technology start-up targeted programs. But development is uneven across the economic bloc.
Still, the EU is moving slowly on the critical issues, such as a common patent. Spain and Italy are considering legal action against the proposal, because it would cut a requirement to translate patents into their own languages, keeping only English, French and German.
“The growth prospects for European companies are significantly worse. They grow and shrink much slower. There isn’t enough competition to get them out of the market. They are protected by governments,” said Ms. Mettler.
The EU has high levels of protection for employees that make it costly for firms to hire and fire when downsizing is necessary. And if an entrepreneur fails, they are punished with a credit rating downgrade in Germany, undercutting opportunities to find financing for a new project. That makes it very difficult for Europe to develop a class of serial entrepreneurs, the backbone of the U.S. high-growth start-up boom.
“The term du jour in the U.S. right now is pivot. It’s the ability of a company to come up with an idea, and when it doesn’t work in the marketplace…you can change course quickly,” said Mark Blafkin, executive director of the Association for Competitive Technology’s Innovators Network.
In one example of a typical challenge for businesses, Mr. Blafkin said one of ACT’s members developed a technology used by a large beef producer in Europe to track the health of cattle housed across the continent and unify that data at the firm’s headquarters. This made it easier to manage their stock.
“The problem became that in Luxembourg, they were worried that privacy laws extended to every single living thing, not just humans. So they had to spend a lot of time thinking how to build a product around that issue,” said Mr. Blafkin.
Access to capital has also become a rising challenge. Besides the EU’s relatively smaller venture-capital and angel-investor industry, now regulators are taking steps to limit riskier investments by institutional groups and banks after the financial crisis, straining the amount available for high-risk start-up funds. Indeed, banks in Europe are still recovering, and may face requirements to raise or accept from governments more capital to hold on their balance sheets.
Meanwhile, state-aid programs for start-ups are difficult to access. “It is very rare that a start-up tries to have direct access to EU funding, and if they try to do so, it takes months, highly complex hurdles, and they have to pay specialized companies to do that on their behalf,” said Gregoire Sentilhes, chairman of the Group of 20 Young Entrepreneur Summit.
“Too many financial institutions in the EU are not highly interested in investing in venture capital and growth equity funds,” he said. On top of that, it is harder today for small companies to go public in Europe because smaller stock exchanges have been shut down. Instead, they opt for the Nasdaq in the U.S., or tap markets in Singapore or China, and are later acquired by foreign major corporations, says Mr. Sentilhes.
The alternative is start-up funding platforms online, such as Kickstarter or Y Combinator. But when a company reaches a certain level, they are often advised to go West.
“The majority of investment for high growth entrepreneurs is still in the U.S.,” said Sharon Vosmek, chief executive of Astia, which offers programs for high-growth start-ups led by women.
“The legal structures that promote venture capital and angel investment in the U.S. are a step ahead of what we’re seeing in Europe and the U.K. They are more advantageous to these investors.”
Ms. Vosmek says the EU should create laws that promote investment in early stage companies.
To be sure, Europe has come far over the past 10 years. Techcrunch called the past months the Summer of Love for European start-ups. There was a raft of events, including start-up parties in London and Berlin with hundreds of participants, as well as contests across Europe.
However, those are companies usually still in the idea stage.
“One thing Europe is as good, if not better in, is the invention side and the basic research side. Where the problems usually crop up are more in the implementation and commercialization of those ideas,” said Mr. Blafkin