Crossing the Atlantic in search of profits: European startups head to the US

You’d be surprised: Europe has a much faster year-over-year growth rate of new startups compared to the U.S. But many of them end up relocating to the U.S.

Sweden’s Spotify, founded in 2006, introduced music streaming in Europe before moving most of its operations to the U.S. Stripe, founded by two Irish brothers, has become a major global payments company with its headquarters in the U.S. Portugal’s Sword Health entered the U.S. market in 2020 and reached a unicorn valuation of $1 billion the following year.

This is a worrying trend for Europe, where startups are exploding, US companies are 40% more likely to secure venture capital funding five years after founding, and much of Europe’s best talent is flocking across the Atlantic to scale.

Fragmentation is a major problem. Across the EU, a patchwork of rules and regulations plague the much-praised single market. Tax and stock option structures vary from country to country, for example. So do the rules for how founders and investors can cash out. Most European startups struggle to navigate the red tape of doing business across borders.

Cross-border financing remains problematic: Plans for the EU to create a single market for capital, called the Capital Markets Union, began in 2014 but have yet to fully materialize. In contrast, the United States is a large, unified domestic market where start-ups can scale up.

Europe’s real problem isn’t seed funding: European startups are set to raise $13.7 billion in the first quarter of 2024, up 5% year-on-year. The continent’s share of global venture capital will reach 17% in 2023. But 60% of European venture capital was raised in just three EU member states and the UK.

The biggest challenge lies in raising the second stage of funding needed to turn smaller companies into full-fledged unicorns. The United States boasts a large pool of venture capital targeting later-stage startups.

The U.S. is also more attractive to founders and investors in terms of liquidation than Europe, which benefits from a long-established IPO market and a large pool of potential acquirers. In contrast, regulatory differences and differences in corporate laws across Europe slow down divestitures.

Going forward, investors are pouring money into artificial intelligence, which accounted for 11 European mega-rounds of over $100 million. French startup Mistral AI raised €600 million this month, challenging ChatGPT owner OpenAI, which had already raised €400 million.

European leaders are aware of the challenges for startups. In a recent joint op-ed, French President Emmanuel Macron and German Chancellor Olaf Scholz acknowledged the urgent need for reform. “Too much of Europe’s savings is invested abroad, rather than in Europe’s most promising startups and scaleups,” they wrote. “We need to get serious about a truly integrated European financial market.”

A report written by former Italian Prime Minister Enrico Letta, called “More than Markets,” makes similar proposals, and another report by former Italian Prime Minister Mario Draghi, due for publication in the coming weeks, is also expected to focus on strengthening the EU’s competitiveness.

The recent European Parliament elections and the upcoming appointment of a new European Commissioner are opportunities. There are growing calls to provide alternative investment sources for start-ups through pension funds. Stock option policies need to be modernised and streamlined. An EU passporting scheme could improve start-ups’ access to talent and address work visa issues. A Commissioner for Digital Entrepreneurship should be appointed.

The EU is at a crossroads: the choices it makes over the next few years will determine whether it succeeds and whether it can reverse the trend towards “transatlanticism”.

Padraig Nolan is the Chief Executive Officer of ETPPA, the EU’s leading Fintech Association, and is also an Advisory Board member of the Lisbon-based Europe Startup Nations Alliance. Padraig holds a Bachelor’s degree in Law and Economics (University of Galway) and a Master’s degree in European Law (University of Utrecht).

Bandwidth is CEPA’s online journal dedicated to promoting transatlantic cooperation on technology policy. All opinions are those of the authors and do not necessarily represent the position or views of the institutions they represent or of the Centre for European Policy Analysis.