We often hear that Europe has an “innovation problem” – that when compared to the US, parts of Asia and even smaller countries like Israel, the old continent is exactly that: a bit past it. I don’t agree. Europe is home to some of the biggest and most exciting potential innovations. The problem is it struggles to turn this knowledge and these ideas into anything of real economic value.
Bridging that gap between research and the economy, which Europe struggles to do, is normally a job carried out by venture capitalists. In the US and Asia, they have helped transform great ideas into even better companies, from Facebook to Alibaba to Tesla. They’ve even created entire hubs, like healthcare in Israel and Boston, and IT in Silicon Valley.
Of course, a closer look at the European start-up scene seems to suggest all that is changing – Berlin, London, Stockholm, Lisbon, Barcelona and Zurich all seem to be thriving. But a closer look reveals that although the conversion of innovation into companies – entrepreneurship – is growing, too few of these start-ups are then able to make the transition into mature, global, or even regional leaders in their field. So why can’t we build global companies in Europe? I believe there are four causes:
1. A risk-averse continent
Starting something new requires an appetite for risk. And taking risks involves accepting the fact that you might fail. A new company will most likely be unprofitable; it might even have no sales to begin with – in some sectors it might never have sales. But this doesn’t mean it has no value. To create real and high economic value, true innovation is required. True innovation is disruptive, so you might need to first build your market, educate it and then, at a later time, capture the profits. This means getting out there with no parachute and trying again and again. Each time you fail, you learn, and at each attempt you get better at it and you fail less.
But in Europe there is a strong risk-adverse mentality. Embedded in this is a strong suspicion of innovation. As unimaginable as it seems, one of the first question any European investors will ask is: “If this is so good, why hasn’t any American investor taken it up?” The reason for this type of attitude is they don’t feel qualified to really gauge a technology’s potential, so they are always looking for some external validation. By the time they realize how good it is, the investment opportunity has already been taken up by a US investor.
2. No understanding of intellectual property
Intellectual property (IP) is a key element in securing economic value. IP gives you the right to pursue copycats during a limited period so that you can recover the investment made in an innovation. IP rights must be claimed at the moment of invention, meaning at the moment when the economic return is difficult to ascertain.
In research institutions, technology offices are in charge of selecting the inventions to protect, the mechanism of protection and the IP specialist to do it. For technology offices to be able to make such important decisions, they need the right talent and adequate funding levels. A life sciences expert knows nothing about computers and vice versa, and neither know much about IP. The proper combination of skills is crucial for a technology office to be able to adequately protect, develop and out-license a technology. And yet, in Europe, it is surprising how often one hears something along the lines of “IP has no value; in fact, universities should pay investors to take that cost out of their hands”.
Such perceptions are down to a lack of understanding of the importance of IP in Europe, and creating that understanding is the responsibility of strong technology offices within the research environment.
3. Europe’s virtual borders
In Europe, we have free circulation of people and goods within the Schengen space, but this does not mean that you can in fact sell freely across this space. If you are in Boston, you can sell in Chicago, Miami, Salt Lake city, or even in Toronto. But if you start a company in Lisbon and are selling in Portugal, the barriers to get to Berlin are incredible.
Frist you have the language – there are 24 official languages in Europe, which means you need to prepare your product to be sold in all these languages. You also have 27 constitutions, and the myriad of laws and regulations that are country-specific, which creates a regulatory nightmare for a small company; in some cases you even have loopholes that are used by copycats to ignore EU and IP regulations. Europe even has multiple electrical plug systems, so if you sell electrical products, who need multiple versions across Europe. Only when Europe has a real unified market will European companies be able to scale up sales before leaving their home.
4. Where are all the venture capitalists?
If you’re an entrepreneur and have overcome these three obstacles, well done! But now you’ll no doubt need some funding. And that’s where a venture capitalist might come in handy. This special type of investor is someone who understands technology enough to be able to foresee its market potential and, more importantly, willing to take the risk of being wrong. And it’s about more than the money they bring to the venture: they also come with experience and a network, all key elements if they are to take the company or product they are investing in to the next level.
In Europe, the majority of venture capital firms are in fact private equity companies. Partners are traditionally from the banking sector and have no start-up experience. These companies invest in quantity, not quality, making it a lose-lose situation for both the investor and the entrepreneur.
A new generation of venture capital firms, with partners that understand entrepreneurship and that have experience in specific sectors, is needed in Europe.
Four simple solutions
Companies, regions and investors outside Europe have noticed what is going on here, and they’re making the most of the opportunities we’re refusing to seize. The best innovations from the continent are being snapped up by investors outside of Europe, taking all that value elsewhere. And it’s time we did something about that.
1. Boost funding for early-stage venture capital funds
Ones way of doing this would be by redirecting a fixed percentage of social security funds, expanding the European Investment Fund’s mandate and also the EU structural funds. These funds would be restricted to venture capital management firms only – no private equity firms – with the right technology background. A life sciences venture capital firm would not get funding to invest in marketplace companies. This specialization requirement would drive the quality of the investments along with the quantity.
2. Educate a new generation of entrepreneurs and investors
All education curricula across Europe should include modules on innovation, risk, entrepreneurship and intrapreneurship as early as possible and throughout all levels. Classic books on entrepreneurship should be included in the required reading list. This is fundamental to creating an environment that fosters our appetite for risk.
3. Increase incentives
Europe must adjust incentive schemes for researchers so that they appreciate the value of IP and the importance of creating spin-offs. We also need to adequately finance and staff technology offices so that through IP, they can help turn a potential innovation into something of true value.
4. Promote one united Europe
We must integrate and homogenize of policies across the EU so that a registered business within any member state automatically complies with the requirements to market a product within the EU zone. Enforce this policy with the implementation of EU watchdogs for each sector to ensure that no regional protection schemes survive
These four simple steps could unlock Europe’s innovation potential and the time to act is now. The beginning of the EU’s Horizon 2020 framework programme is the ideal, and perhaps last, opportunity to do that, and help the continent capture the associated economic value.
Author: David Braga Malta, Founder and President, Cell2B, Portugal, Global Shaper
Image: A woman holds a BionicANT developed by German FESTO company, at the world’s largest industrial technology fair, the Hannover Messe in Hanover, April 12, 2015. REUTERS/Wolfgang Rattay