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From Scale to Purpose? The EU and European startups

With the global race for tech dominance and digital sovereignty set to intensify, we look at what the EU is doing to strengthen its fledgling but ambitious startup sector. We find that despite bold and proactive new steps, the creation of European unicorns will probably require bigger thinking than the EU can currently muster. Europe’s true strength, however, could lie in channeling the forces of technology strategically to help solve the social and environmental challenges that lie ahead.

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As China rises and the US wavers, the European political debate is awash with terms such as “strategic autonomy”, “digital sovereignty” and “European innovation”. And ever since European tech companies seem to be catching up with their US competitors, European political leaders have begun to express new ambitions for homegrown tech sectors, in line with Europe’s trend of geopolitical self-assertion with respect to the US and China.

Against this backdrop, European startups suddenly find themselves part of a new global battle conflating economic interests, new technology and political ambitions. Yet a closer look at the European startup ecosystem reveals a paradox. While the process of European economic integration offers the prospect of a single market that should be able to compete globally, and while Europe boasts a long tradition of successful research and innovation, the European startup industry appears underdeveloped compared to its global competitors.

Our policy brief examines the needs of European startups as expressed by their industry associations, which are increasingly directed at European rather than just national policy-makers. We also look at the policies the EU has in place, and analyze new initiatives that kicked off recently – of which the revamped European Innovation Council (EIC), a new vehicle for direct EU-investments in promising tech startups, stands out as a breakthrough in European innovation policy.

We also look at the limits of these measures. Most strikingly, an analysis of Europe’s Venture Capital (VC) market shows up sharply an almost unsurmountable funding gap. Radical measures, such as a European Sovereign Wealth Fund, appear politically unfeasible; that said, an alternative measure, such as a pan-European investment platform, could be in the making. 

On balance, we argue that Europe would do well to adopt its own unique approach to fostering innovation, namely by harnessing its creative powers to develop solutions to social and ecological challenges. European public funds strategically channeled into the biotech-sector to create a COVID-19 vaccine are the most obvious example of such a “purpose-driven” approach to fostering innovation. We conclude that while the instruments for such a paradigm-shift are in place, more will be required for the EU to make the best, not just the most, of innovation made in Europe.