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News : Innovation Last Updated: Jun 30, 2014 - 9:03 AM

Europe Entrepreneurship: Micro firms up 370,000 in 2008-2013; No growth in other firm numbers
By Michael Hennigan, Finfacts founder and editor
Jun 27, 2014 - 4:13 AM

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Europe Entrepreneurship: While the number of micro companies (less than 10 employees) in the European Union increased by 370,000 (2%) between  2008 and 2013, the number of small, medium and large companies registered no net growth, showing that SMEs face difficulties in scaling up and making a significant difference to growth and employment across Europe according to a new report.

Politicians in Ireland and elsewhere like to present the growth in micro firms which may have no employees as evidence of growing entrepreneurship when it is more likely a reflection of poor job prospects.

The report, 'Fostering Innovation-Driven Entrepreneurship in Europe,' [pdf] was launched this week by the World Economic Forum to provide analysis on the challenges faced by Europe’s high-growth startups. The report also sets out an agenda to help them achieve the critical mass needed to reach maturity and compete internationally.

It adds: "Europe includes five of the top 10 most innovative countries in the world, as a region its innovation capabilities and overall competitiveness lag behind those of key competitor countries. Multiple data sources indicate that European conditions are far from ideal for entrepreneurs and fast-growing companies, and fragmentation hinders access to markets, sources of capital and supportive initiatives. As the global innovation frontier moves inexorably forward, Europe is in danger of falling further behind, putting at risk its outlook for productivity, growth, human capital development and job creation. "

The analysis, which was produced in collaboration with AT. Kearney, the US consultancy, comes from a survey of over 1,000 European entrepreneurs as well as interviews and workshops with policy-makers and other key decision-makers in Europe and China. The results indicated that the ecosystem for developing startups in Europe was substantially worse than in North America across all three phases of the entrepreneurial life cycle. These phases are part of a new model for understanding how stakeholders can better support serial entrepreneurs in Europe:

  • Stand up – Promoting the attitudes and skills required to mobilise Europeans with the desire and the ability to create scalable entrepreneurial ventures;
  • Start up – Gathering the resources to start up a business, with particular focus on access to capital for entrepreneurs across the European Union;
  • Scale up – Enabling ventures to scale, with particular focus on collaborations between entrepreneurs and large corporations that simultaneously improve the innovation capacity of both partners to create growth and jobs across the region.

The report suggests that problems facing Europe’s entrepreneurs are not because a lack of willingness on the part of policy-makers or actors in the private sector – 87% of survey respondents said that they are personally willing to support initiatives in their countries, while Forum interviews and workshops identified a large number of multi-nationals which are seeking to incorporate startups in their business activities. Many senior policy-makers at both the European and member state levels, including a number of heads of state and government, are highly motivated to improve conditions for innovative ventures.

Nevertheless, of the three life cycle phases, “scaling up” is seen as the most challenging for European startups, with almost 40% of respondents believing that conditions were unfavourable in their country. “Europe has a strong track record in establishing innovation-driven startups. However, its weakness lies in helping these businesses grow in and beyond fragmented European markets,” said
Philipp Rösler, managing director, head of Centre for Regional Strategies, World Economic Forum.

Rösler was vice-chancellor of Germany in Chancellor Merkel's last government.

It is estimated that only 50% of European startups survive the first five years and the reports says a key challenge, is overcoming and learning from failure is crucial for successful entrepreneurship. "Consider this: Employees of the Finnish start-up Rovio had developed 51 programmes, none of which was a commercial success.

After going through this, their 52nd programme, Angry Birds, finally delivered an overwhelming success and has charted 500m downloads."

The Guardian reported last April that Rovio Entertainment's growth stalled in 2013, according to financial results for the year that show the company's revenues grew by just 2.5% year-on-year.

Rovio reported revenues of €156m (£128.4m) for 2013 compared to 2012's €152.2m – which represented more than double the €75.6m that Angry Birds made in 2011.

Rovio's net profits also halved from €55.5m in 2012 to €26.9m in 2013, as the company invested in new games, its ToonsTV cartoons network, and its upcoming Angry Birds feature film.

The performance of Zynga, the US games maker, shows that it's a challenge to keep producing popular games.

The report says that the EU is home to 19.0m micro companies (those with less than 10 employees), constituting the preponderant majority of the 20.6m SMEs in Europe in 2013.

How many businesses are set up in a given period varies across Europe: in Spain and Italy, fewer businesses were started in 2013 than in 2008, while France, Sweden and the United Kingdom have experienced an increase.

However, Europe’s major innovation hubs are booming. Between 2008 and 2012, the number of startups in Berlin increased from 36,700 to 44,200 per year. Yet, venture capital fundraising in the early and expansion stages amounted to only €3.6bn in 2012, compared with €8.2bn in 2007 - - a drop of 56%.

From 1980 to 2012 and including the years of the financial crisis, venture funds reported an average internal rate of return of only 1.27%, with the top quartile earning 18.49%. However, while data is hard to come by, in recent years the European venture capital segment has seen a number of notable successes such as Supercell and Spotify. Many European venture capital experts say the sector is stronger than the long-term data indicate.

The report says the supply of venture capital has seen a sharp decline in recent years. Part of it is linked to higher levels of risk aversion following the financial crisis as investors struggle with an increased regulatory burden.

This drop in private investment has seen the role of government agencies in venture capital raised from institutional investors increase from pre-crisis activity of 14% in 2007 to 38% in 2013. A reliance on public funds in this way is not a good sign of the health of the venture market – government agencies’ financing volumes are typically limited - - in the case of the German Gruenderfonds, for example, to €500,000 for the first round and up to €1,500,000 for follow-up rounds - - which can create ceilings for subsequent financing, thereby exacerbating the challenge of accessing growth capital.

The report's conclusions:

  • European entrepreneurs are at a disadvantage to counterparts in North America in the entrepreneurial life cycle, but most significantly in the “scale-up” phase, a World Economic Forum report finds;
  • Fostering innovation-driven entrepreneurship can help Europe remain an innovation powerhouse, but only if measures are taken to improve support services and address market fragmentation

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