3 Ways to Save Innovation in Europe
Key steps the governments should take to boost entrepreneurship in post-corona years.
The benefits of entrepreneurship and start-ups on local economies are undisputed when it comes to employment rates, new industries creation and social impact.
In OECD countries young firms account for a fifth of total employment, hire three times more employees than other economic sectors, represent more than half of all new jobs created, increase regional productivity, and decrease the future unemployment rates which are currently skyrocketing.
While combating COVID-19 outbreak, we’ve also seen that start-ups play a critical social role thanks to their flexibility and fast adaptation of new technologies.
It was the entrepreneurs who brought new solutions to the table when helping medical and health services with shortages or shifting people towards fully digital work (example from Slovakia: hackvirus).
European governments already understand the role of these biggest job creators and they are starting to offer one-off financial support (e.g. Germany announcing 2 billion euros and UK 1.4 billion euros start-up aid packages). It will be important to follow up with long term sustainable programmes.
Below opinions were written from the perspective of emerging European economies (CEE) where the start-up infrastructure is still underdeveloped compared to the West.
1. Market liquidity is the king
“History doesn’t repeat itself, but it often rhymes.”
Even without the pandemic, emerging Europe was experiencing a low number of exits and minor activation of early-stage capital. Based on past economic cycles we can expect these trends and the investor risk averseness to accelerate now further.
Angels and VCs are already backing out of commitment deals. According to The World Economic Forum, 20% of start-ups that had a term sheet before the pandemic have since had it pulled and 53% are experiencing investment process slowdowns.
While most of the immediate government support is aimed at debt financing market, we need to acknowledge that this is inaccessible to aspiring and early-stage entrepreneurs due to lack of any collateral asset ownership.
Thus, the liquidity focus should be on alternative finance, such as business angels.
- Educate investors: with appetite for higher risk investment assets declining, it will be critical to engage the high net worth individuals and business angels in the innovation industry, build their trust in local entrepreneurs and stress the benefits of having start-ups in their portfolio. The role of the government should be to support networking events, tools and information for investors to invest more and smarter into the local ecosystem. An example of such initiative is Startup Estonia financed from the European Regional Development Fund.
- Incentivise reinvestment: Instead of keeping educated investors activated there is a tendency to let them go enjoy life with their gains at some beach in South East Asia or Caribbean’s. The investor risk associated with reinvestment outweighs the capital gain tax costs when taking the capital out of the system. The QSBS incentives for reinvestment in the US bring tax exemption on first angel investments, tax deference when rolling over gains into new star-up investments, and ordinary income tax write off in case of start-up investment losses.
- Follow the smart money: Instead of government direct investment while risking mismanagement or corruption, many countries started to double down co-investment with professional entities that do all the hard work for them (e.g. Portugal 200 million euros co-investment fund).
2. Vertically integrated national programmes
Catchphrases tend to be overused in planning (e.g. start-up ‘valley of death’ after MVP launch). This can be dangerous when national strategies become radically skewed, stressing one particular phenomenon. Instead, countries should think more like businesses and create a lock-in effect in their ecosystem.
The aim should be to assure smooth transition for entrepreneurs between all business phases locally without forcing them to look abroad for solutions. In case of any start-up cycle gaps, countries might end up nurturing early phases and not harvesting any local benefits later.
- Create links in the value chain: Many veteran entrepreneurs focus their effort in helping start-ups with their expertise areas, such as idea incubation, company design, launch acceleration, networking or financing for expansion capital needs. Government role should be the facilitator creating strong partnerships between such established players with a proven track record. Examples of such initiatives include Design Terminal providing an end-to-end partner platform in Hungary, financed by the Ministry of Human Capacities.
- Empower local hands-on experts: While consultancy, education and information are crucial to help first-time entrepreneurs with their barriers to entry, it is less correlated with the direct success of start-ups. On the other hand, domain experts in software development, creative process or other business areas can significantly cut down the resource needs of start-ups. Within the Poland Startup Platform, Polish Agency for Enterprise Development refinances start-up assistance from local experts helping with product based on a developed and verified business model. Another example is Portugal Start-up Voucher which grants 75 new projects 700 euro per month to cover their expenses and access to pre-approved specialised incubation, agency and mentorship services.
3. New networking era
Don’t let entrepreneurs work alone. Organised networking can be the breakthrough point for many first-time founders and aspiring entrepreneurs as they have a natural tendency to not share ideas openly from fear of them being stolen.
Furthermore, conferences and events have always been crucial for international connections, accessing help from fellow founders, market insights from investors and strengthening local partnerships. With pandemic changing the social interactions and event landscape, this market gap is waiting to be filled.
- Conferencing: Every week we hear about major trade shows and established tech events being closed for foreseeable future either due to pandemic risks or due to their business model issues. The calendars of investors and other major players are open for new networking opportunities. These opportunities lie in hyper-localised events allowing for short-distance flexibility, or new emerging models such as virtual conferencing and focused webinars. It is safe to bet that new major event brands will emerge from this situation, not necessarily centralised in western world hubs.
- Digital work: Entrepreneurs are used to working digitally with peers, so let them. The positive spill-overs from talent attracting other talent do not necessarily need to happen physically these days. Furthermore, labour relocation programmes might become even more difficult with currently increasing trends in national border and immigration controls. Business e-residency programs allow for international co-founders to be active in one country without a physical presence. This has been successfully implemented in Estonia and is about to be launched in Portugal and Lithuania.
Time to act now
Many start-ups will inevitably disappear over the coming months due to cash flow problems. While the one-off government injections will save some, we need to make sure that this economic segment, entrepreneurial spirit and existing know-how will not gradually bleed out.
There are many successful national programmes to replicate, but we shouldn’t be too obsessed with identifying the perfect one to follow, as none of them was designed for the new post-COVID paradigms.
The trick will be to start with a sustainable platform building blocks now, rather than playing a catch-up game when the times are better.
The opportunities after last 2008 economic recession created new unicorn start-ups like Uber, WhatsApp, or Airbnb. Let’s make sure that we have our new local success stories to talk about in 10 years.
Originally published on medium.