Europe has the potential to produce its own tech giants, rivaling the likes of Google, Amazon, and Facebook. Despite a thriving start-up ecosystem, many European firms struggle to scale due to financial constraints. J. Scott Marcus outlines the clear and straightforward measures needed to transform the EU into a breeding ground for large-scale digital champions.
The Current Landscape
Contrary to popular belief, the EU outperforms the US in creating high-tech start-ups. However, these promising companies often falter due to a lack of adequate financing. The solution is evident: more robust financial support. Each year, the EU generates more high-tech start-ups than the US, but many relocate across the Atlantic in search of better financial opportunities.
Europe's Investment Challenges
One core issue is the timidity of European investors. Europeans tend to favor safer investments, with 31% of household savings in currency or deposits compared to 12% in the US. This cautious approach leaves less room for investing in stocks and bonds. Consequently, the EU has twice as much money in its banks relative to GDP as the US but only half as much in capital markets.
European institutions have tried to address this by injecting funds into start-ups, but these efforts are insufficient. EU firms receive about 80% of their finance from bank loans, an unsuitable method for funding risky start-ups lacking tangible assets. The situation is more dire for venture capital, where the US boasts 20 times the venture capital available in the EU.
Lessons from the US
Understanding how the US developed Silicon Valley offers valuable insights. A pivotal moment came in 1974 with the enactment of ERISA, which allowed pension funds to invest in riskier ventures, leading to a surge in venture capital. This regulatory change was instrumental in the rise of Silicon Valley.
The EU's Potential
The EU is not short of promising firms. In fact, the union generates more start-ups annually than the US, with venture capital investments yielding 6% higher returns. EU pension funds and insurance sectors hold vast assets—€4 trillion and €9 trillion respectively—yet their investments in venture capital are minimal.
Clear and Straightforward Measures
To unlock the EU's potential, several measures are essential:
Encourage Pension Fund Investments: A twenty-fold increase in pension fund investments in venture capital could significantly boost annual contributions to the EU’s venture capital pool, benefiting both the digital sector and future pensioners.
Regulatory Reforms: Relaxing overly restrictive investment rules for pension funds would allow for a more diversified and balanced investment portfolio, aligning with long-term financial goals and reducing overall risk.
Promote Financial Literacy: Enhancing financial sophistication among European investors can foster a more robust investment culture, crucial for supporting high-risk, high-reward start-ups.
Supportive Policies: Implementing a concrete policy program to facilitate these changes is vital. This includes regulatory adjustments, incentives for venture capital investments, and support for tech innovation hubs.
The measures needed to create large-scale digital champions in Europe are clear and straightforward. By leveraging the substantial assets held by pension funds and the insurance sector, and implementing supportive policies, Europe can foster a thriving ecosystem for tech giants. This transformation will not only enhance the digital sector but also provide long-term benefits for pension funds and future pensioners. The main obstacles are European timidity and conservatism, which can be overcome with a well-structured policy framework and a proactive investment approach.
Source: Euronews
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