The Next Silicon Valley

Europe needs to do more to invest in innovation ecosystem to stem loss of talent and IP to the U.S.

by Nitin Dahad

Earlier this year, we published an article entitled, “Europe is starting to feel more like Silicon Valley”, an observation that is emerging as a result of good company supply and good money supply, according to the article. Well this sentiment continues to grow, as the latest report from Go4Venture says, “Europe is now awash with capital as investors realize that Europe is a good match for deep tech, and the continent’s diversity creates vibrant innovation.”

The research and syndication firm’s European Tech Scaleup Index Report, Q2, 2017, says the second quarter of 2017 has seen the highest volume and value of European tech financing, with the total amount invested in Europe exceeding €2 billion. Innovation financing is now the remit of every investor with corporate investors and generalist investors becoming more prominent.

It adds there are plenty of good European tech companies, growing more quickly, to get to a bigger exit. While the number of European unicorns is only a fraction (1/10th) of the US and a European exit is probably one third as big on average, that’s primarily because the European mentality, trained by years of investment scarcity, remains too often obsessed with capital efficiency rather than size of the outcome.

It seems the ecosystem in Europe is becoming more mature too, with recognition of the importance of this by policymakers. Writing for the World Economic Forum, Drasko Draskovic, an innovation ecosystem specialist, says, “Public sector leadership in Europe is highly aware of the need to foster innovation-driven entrepreneurship and a large number of relevant priorities are already on the policy agenda. Interventions are being made to tailor education to the needs of entrepreneurial careers, to improve access to finance and to enhance the availability of and access to relevant talent.”

He continues to add that environments encouraging strong innovation are crucial components of national development. As we have said on in The Next Silicon Valley many times, innovation, especially in information, communications and technology (ICT), is a driver of economic competitiveness and growth in modern economies. Draskovic emphasizes that innovation ecosystems can play a critical role in advancing sustainable development goals (SDGs). Such a dynamic business environment requires a coherent regulatory setting that guides, facilitates and promotes innovation activities.

He adds, “The right environment can provide both an inspiration for innovation and a source of competitive advantage. The development of strong innovation ecosystems is seen as a central policy area for productivity, comparative advantage, economic growth and enterprise value in a knowledge-based economy. Achieving “innovation readiness” often requires organizations, leaders and networks to change. Building the capacities of individual stakeholders in the innovation ecosystem helps to create that change.”

Draskovic also talks about the need for introduction of new digital technologies, particularly with governments doing more to deliver services to citizens more effectively, and the requirement for digital transformation roadmaps that can then guide innovation agencies and funds.

He says that while the Global Innovation Index 2017 shows eight out of the top 10 countries being in Europe, data from the European Commission seems to paint a different picture. It suggests that the European Union is lagging behind the United States and Asia in innovation and entrepreneurship. Europe was home to just 16 unicorns in January 2017, compared to 91 in the US and 44 in Asia. While 17 of the world’s 50 most valuable companies in 2006 were from the EU, today only six are.

Draskovic adds that there is an ongoing loss of technological know-how and intellectual property from Europe to the United States. “American companies account for nearly half of all buyouts of European startups. This may not seem very important in a globalized world, but it is. Whole new areas of emerging technology are at risk of being plucked out of Europe and developed under US control instead. Concrete measures could prevent these departures. Many young people in Europe (some data shows nearly half of those between 18 and 24) hope to start their own business. If Europe wants to keep them, it must develop innovation hubs, harmonize taxation and ease access to capital.”

Finally, he says, “US venture capital firms must start to promote innovation in Europe. The continent has many strengths compared to Silicon Valley. It has highly-skilled people and lower wages, for example. Major institutions like the European Investment Bank and the European Commission should confidently back young entrepreneurs, be far less risk averse and shed their hostility to rapidly earned wealth. Europe needs to grow its number of smart locations and innovation ecosystems if it wants to keep the best entrepreneurs in Europe. Scandinavian countries like Sweden or Denmark could lead the way through the early encouragement of entrepreneurial culture.”

[Image: European Innovation Partnership on Smart Cities and Communities]

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