European startups finally get going

European startups at last are starting to flourish. That is the message that the Tech Scaleup Europe 2018 report carried out by the Mind the Bridge foundation for the European Commission wants to underscore. The clearest indication of a historic leap by Europe is the amount of capital attracted by European startups in 2017: over €18.8 billion.

A comparison with the average in the period 2014-16 of €11.7 billion a year helps to gauge the extent of this growth. On a year-on-year basis, growth is spectacular at 36 percent. As Alberto Onetti, the chairman of Mind the Bridge, says, 2017 appears to put European technological entrepreneurship ecosystem “in another league”. This new league is led by fintech startups, which took up 20 percent of the financing, three times the amount of 2016.

Spain's startup ecosystem

According to the report, Spain’s performance was a mixed bag. Since the European Commission started to monitor the sector, Spain has ranked sixth in the ranking of European countries that attract the most finance at €2.83 billion. But if you look at its performance in 2017, Spain is at the bottom of the European table. Its startup sector only grew 17 percent, compared with the European average of 36 percent. It continues to lead southern Europe, the least dynamic region in the innovative sector, but countries such as Italy are now faring better in terms of growth.

Switzerland led the way in 2017 doubling the size of its ecosystem and taking top spot in ICOs (initial coin offering), or unregulated financing rounds of cryptocurrencies (bitcoin, ether, etc). Another clear winner in the startup ecosystem is Estonia, which leads the way in the number of scaleups, that is, startups that have managed to raise the minimum amount of capital for them to be considered growth companies. In just a year, the number of scaleups in the Baltic country rose 60 percent, almost double the European average.

But it’s not all good news. Despite the figures for 2017, Onetti points out in his foreword to the report that they are negligible compared with the size of the big innovative ecosystems in the world. This growth is insufficient to bridge the gap with other ecosystems, which continues to be enormous, Onetti says. This is particularly the case with the United States, which has four times more scaleups than Europe and obtains eight times the financing. In other words, the United States is better equipped to produce more tech giants and keep them fed with capital.

Dependance on private capital

Europe’s problem in part stems from its almost total dependence on private capital, which is responsible for 85 percent of the investment in the sector. So far, only 12 percent of the money comes from IPOs. On top of this, the country that most contributes to these IPOs is the U.S (25 percent), which continues to attract the best European startups looking to take the leap and list in indexes such as Nasdaq. Another standout feature of the report are ICOs, garnering a noteworthy 3 percent of the total. The hotbed of this financing is the so-called Swiss ‘crypto-valley’, which takes up half of the ICOs.

And what does is mean not to have listings of any note? It means the ecosystem risks running aground because of over-reliance on the private sector. This poses a problem, because IPOs offer not just an increase in capital but exit opportunities for investment funds. Without exits, the venture capital engine could stall. According to the report, the average age of companies going to the market is too high at 8.7 years, which means they have to survive during this period without the lifeline of an IPO.

In short, European startups are growing more than ever, but “more than ever” is not enough. Spain’s performance in 2017 was bad. It remains to find out why the sector has slowed.