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Why Unicorns are a Rarity in Europe. The Top 5 Barriers to the Old World Venture Capital Industry

Igor Ryabenkiy's column

When investors talk about the markets, they usually speak in broad terms about the U.S., Israeli, European, and other segments. Of course, each is a significant part of the overall picture, but the European venture capital market is different: it is plagued by certain problems that prevent the region from realizing all of its colossal potential. Let’s take a look at each of these issues.

A focus on domestic markets

Europe is home to many successful startups, some of which are even unicorns. But from what I’ve seen, most of these startups and unicorns focus on their own cultures and regions, without adopting plans to conquer the world.

The problem stems partially from language barriers and significant cultural differences that perpetuate market fragmentation, even though every country is part of the European Union. But even more important than cultural differences are the features of EU regulation and bureaucracy that could, in fact, be remedied.

Civil law

Civil law is an ancient and wonderful tool that has largely enabled Europe to become what it is today. Although this legislation is still well suited to the traditional market and the corporate world, it is completely unfit for the development of dynamic startups that operate in accordance with the new market realities. European civil law simply does not include many of the legal instruments that are prevalent in the startup market. And even when this or that European tool is similar, its practical application requires enormous effort.

Bureaucracy

An enormous number of investors and founders in the EU face major bureaucratic hurdles. Not only are EU regulations both restrictive and complex, but the rules can differ significantly between countries. Some countries require potential investors to first register as a tax resident and file declarations, etc. before they can invest in a domestic startup. This effectively filters out a great many potential investors right from the start. The EU has long discussed ideas for special legislation tailored to startups. Countries such as Estonia and the Netherlands have made major strides in this direction but because no uniform rules have put in place, the overall investment market remains unattractive.

Focus on stability and low tolerance for risk

Modern high-tech entrepreneurship is synonymous with risk. This is a particular culture and mindset that accepts the high probability of failure in exchange for the prospect of incredible results. European rules, however, are designed more to ensure stability and social guarantees. Extensive social safety nets place a heavy burden on startups that must first manage to turn a profit before they can grow deep pockets and contribute to social programs. But high taxes and institutional pressure discourage people from working in risky industries; they opt for social guarantees instead. And, of course, this applies to both employees and entrepreneurs. The nature of the legislation and investment environment instill in them a low tolerance for risk. For example, it is illegal in some countries to long hold a senior position if your company had previously gone bankrupt. Considering that 90% of startups end in failure, the probability that anyone in those countries would choose a risky undertaking is, I think, even lower than 10%.

Institutional rigidity

In addition to the lack of regulatory standardization, a similar problem is the unwillingness to update technological processes apace with the new reality. For example, the complicated method of notarial registration and the lack of a developed electronic document management system so badly hamstring startups that they cannot focus on developing their products. These issues become especially annoying when they break up the team. This is largely why the headquarters of successful European startups quickly move to other countries or register offshore.

To their credit, many European politicians and members of the business community are trying to solve these problems. They will undoubtedly succeed, but just how quickly they do so depends on how soon the true potential of the EU’s human capital becomes evident. It might just be the IT industry that ultimately enables the European economy to grow globally.
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