This month the European Commission published Mario Draghi's long-awaited EU Competitiveness Report. His most important insight? The EU must bridge the innovation gap to avoid an economic downturn. According to the report, only four of the world's top 50 technology companies are based in Europe.
In his address to the European Parliament, the former Italian Prime Minister said:
“The core problem in Europe is that no new companies with new technologies are emerging in our economy. In fact, there is no company in the EU with a market capitalization above 100 billion euros that was founded from scratch in the last fifty years. All six US companies valued at over €1 trillion were founded during this period.”
Therefore, many European entrepreneurs prefer to get funding from US venture capitalists and expand in the US market, Draghi added. “Between 2008 and 2021, almost 30% of ‘unicorns’ founded in Europe – startups valued at over $1 billion – moved their headquarters abroad.”
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How can Europe prevent these future major technological potentials from migrating to greener areas?
Perhaps the experience of the young Spanish technology center Valencia can provide insight into the background of this “soonicorn brain drain”.
Valencia's fast-growing startup ecosystem
Valencia, Spain's third largest city, has worked hard in recent years to transform itself into a technology and innovation hub.
Although the city has an average of 300 days of sunshine a year, it has long been overshadowed by its big brothers Madrid and Barcelona when it comes to technology – until now.
According to the Startup Observatory, the number of startups in Valencia increased by 16% during 2023. Meanwhile, startup ranking platform Seedtable shows that 139 of the city's startups have secured a total of $824 million in funding so far this year.
“This growth is due to a combination of a solid support environment, access to financing, qualified talent and favorable public policies, as well as Valencia’s ability to attract international talent and adapt to new technological trends,” says Nacho Mas, CEO of Startup Valencia.
In 2017, Startup Valencia was founded as a non-profit organization with the aim of making the city an internationally recognized technology center by supporting the growth of entrepreneurship, leveraging the scientific and technical talent of its universities and finding ways to scale digital projects.
Alongside these initiatives, it organizes an annual technology event, VDS, to bring together international VCs, speakers and entrepreneurs with the minds behind Valencia's fast-growing ecosystem.
VDS2024, now in its seventh year and taking place from October 23rd to 24th, will welcome more than 12,000 participants, more than 2,500 start-ups and more than 700 investors with assets of more than 200 billion euros in the futuristic City of Arts and sciences under the motto “Embracing Evolution”: Invest in the leaders of tomorrow.
But despite the great strides the city's tech leaders have made to create growth in a short period of time, Mas believes more changes need to be made at the policy level to support tech hub initiatives like hers.
In an interview with Business Insider in June, Mas argued that “there is a lack of a culture of innovation support in Spain,” citing several shortcomings he found in the country's recent startup law, including benefits and support for startups in later phases.
Spain's startup law
The Spanish startup law, which came into force on January 1, 2023, had been in the works since 2018. Some of the key elements of the final law are aimed at improving tax incentives and subsidies and making it easier to attract top talent. This includes:
- A reduced corporate tax rate of 15% (previously 25%) for the first four years, starting with the first profitable year and a deferral of tax payments for up to 12 months without interest, promoting liquidity in the initial phase.
- The tax exemption for stock options (used as employee compensation) will be increased from €12,000 to €50,000 per year, making it more attractive for startups to reward employees with equity.
- Easier access to public funding and innovation grants, particularly for research and development (R&D) projects, as well as improved tax deductions for R&D activities.
- New programs and tax incentives for foreign talent, including the digital nomad visa, remote work visa, entrepreneur visa and five-year income for non-residents.
The Startup Law also defines what the government considers a startup by setting an age limit of less than five years from its inception (extended to seven years for companies in sectors such as biotechnology, energy and industry).
This is an area where Mas believes the law has not had a significant impact. He believes that while early-stage startups are supported, late-stage startups that have the potential to make it big suddenly find themselves without support after the five-year period.
“A more flexible and longer tax policy would not only allow startups to grow, but also to become important drivers of sustainable economic development in Spain,” explains Mas. “An expansion of tax incentives based on the size and age of startups would greatly benefit the Spanish innovation ecosystem, promoting scalability, talent retention and international competitiveness.” In addition, Mas said, it would encourage greater investment in innovation, encouraging the creation of skilled jobs and reduces the risk of business failure.
In fact, in his report, Draghi highlighted the lack of late-stage capital and argued that more European funding should also be made available to promote and reward startups that have achieved the success they need to move to the next level to reach.
Mas has also found that established companies don't seek partnerships with startups often enough. Such partnerships could actually be mutually beneficial, with the former providing capital and commercialization expertise and the latter offering innovation and agility.
Patricia Pastor, founder and general partner of NextTier Ventures and chair of VDS, sees the difference in funding models and ecosystems helping European and US tech brands achieve international status. In a recent opinion piece, she notes that while early-stage capital is easier to come by in Europe, US startups need to prove their value to investors early on:
“As a European startup grows, it faces other challenges, such as finding growth-stage funding and attracting investors and talent from individual centers such as London. In the United States, these things may be further apart geographically, but they are in the same country.”
In their view, adopting a revenue-based funding model would help European startups prepare for expansion across the region by initially focusing on dominating local markets and then gradually moving into new markets across the bloc.
Draghi's report also puts forward the idea of an EU-wide legal statute (called the “Innovative European Company”) to support rapid growth in the European market. This status, the report says, would provide companies with a single digital identity, valid across the EU and recognized by all Member States, and access to harmonized legislation on company law and insolvency, as well as some key aspects of labor law and the enable taxation. It would also allow them to set up subsidiaries across the EU without setting up separately in each member state.
Attract talent
As Barcelona grapples with reports of a reaction from residents to the growing number of digital nomads who have moved there because of new visa options, Valencia is welcoming them with open arms.
“The situation in Valencia is not comparable to what is happening in Barcelona. Citizens are very clear about the wealth and diversity that digital nomads bring and the positive impact they have on the economy and society,” says Mas.
However, he is concerned about the ability of late-stage companies to retain and continue to attract the talent they need to grow. He believes extending the deferral period on stock options taxation to 10 years would help late-stage startups not only attract but also retain talent.
Startup Valencia has been working to facilitate the soft landing of digital nomads by offering advice on everything from taxes, immigration and banking to networking opportunities.
“In this sense, VDS plays a fundamental role, being one of the most important international technology events in Southern Europe and a platform that transforms Valencia into a global technology center.”
Join Nacho Mas, Patricia Pastor and other thought leaders from the European tech ecosystem as they gather at VDS2024 on October 23-24 to discuss the policies and initiatives that could help Europe close the innovation gap.
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