Two threats to the future of Europe

Europe is beset with short-term challenges, from the Euro to the refugee crisis to a lack of common values. Looking beyond these, there are also two key issues which threaten the future economic competitiveness and wealth of the continent: a lack of long-term funding for disruptive technology, and investment in comprehensive entrepreneurship education.

Europe played a leading role in the second industrial revolution, with the mass production of goods, and still competes in industries such as automotive, manufacturing, pharma and chemicals. The third industrial revolution - the computer revolution - seems to be already lost to America and Asia. European companies get disrupted in all industries, and it's happening more quickly than anyone expected.

In the next generation innovation cycle, the so-called Fourth Industrial Revolution, artificial intelligence, robots, software-triggered automation and bio- and nanotechnology will disrupt the current status quo and have a fundamental impact on our society. Diverse new markets will be created and old markets disrupted. Compared to the innovation speed in other economic regions of the world the chance for a European leadership position already seems week.

By the end of 2015, Microsoft, Apple and Google together had a higher stock value than the whole German DAX 30. In addition, the average founding year for German companies with a market capitalisation of over $10 billion dollars was 1878. If you compare the last 20 years (which correspond to the third industrial plus the digital revolution), there were only five companies founded with a market cap over a billion dollars, and 33,000 jobs created in Germany. This compares to over 400 companies and 2,600,000 new jobs created by these companies in the US.

According to Forbes, nine of the top 15 most innovative cities are located in Europe, but little of this inventiveness is converted into companies that create wealth and thousands of jobs. Disruptive ideas are still mostly executed and turned into products in the United States. Many creators of disruptive inventions move to Silicon Valley and other regions to scale up and get long term and/or high-risk funding.

This is somewhat ironic, given that it was the disruptive innovations of the second industrial revolution that created the markets of European’s current wealth. So how can Europe regain its economic power in new industry segments, and harness its groundbreaking ideas to compete in the Fourth Industrial Revolution?

There are two main factors stopping Europe from making the successful jump into the Fourth Industrial Revolution:

1) Insufficient financial support for disruptive innovation

Theoretically, funding is available from public grants and venture capital funds. However, through structural and systemic failures, the deep technological innovations that could create new markets hardly receive funding as the product risk is much higher and it is much more capital intensive to develop. Applying for public funding is extremely complex and an application for EU funding needs significant effort. Only bigger corporations with dedicated work force that form whole departments are able to handle these efforts.

In addition, venture capital funds aim for fast returns and safe investments, but high-end technologies contain many risks and require a period of 10-20 years until a new market fully develops. As Peter Thiel defined the problem: “Technology companies (…) often lose money for the first few years: it takes time to build valuable things, and that means delayed revenue. Most of a tech company’s value and cash flow will come at least 10 to 15 years in the future."

The average capital fund lifetime structure is about a seven year maximum investment period. A typical venture capital fund cannot invest in deep technological innovations; neither can EU funds. The latter focus on giving large amounts of money to large enterprises and scientific research centers, but seldom fund startups. Out of the Horizon 2020 €80bn budget, only 0.8% is focused on small and medium businesses. With little money on offer and high regulatory hurdles, the reality is that most start-ups do not see many chances in applying for public money instead of pitching to angel investors or VCs.

Bigger corporations would have the financial muscle to turn new inventions into products. Why are they not investing in disrupting technologies? The economist Clayton Christensen addressed this structural problem by dividing innovation and funding allocation problems into three parts:

1. Market-creating innovation: create a new market or market segment
2. Sustaining innovations: make good products better.
3. Efficiency innovations: allow reductions in the cost of production

Corporations mainly operate to improve current products and processes. Public Corporations need to report quarterly and serve their stakeholders and shareholders' interest in fast, secure returns. Innovation departments are often measured by patents and not by created products. Public funds primarily foster inventions and patent creation. In the current set-up, neither venture capital funds, nor public grants nor enterprises fundamentally invest in market-creating, innovation-focused start-ups.

The number of angel investments in Europe is growing, but the financial power of entrepreneurs is limited. Big financial efforts cannot be mastered without better support by governments.

Also, the new hyped corporate startup incubators across all industries will not change this. Latest after 1-3 years the top management needs results for the invested money but there are no results available from market (and job) creating innovations and the focus will shift again to efficiency innovations or new innovations which support the core business of the large enterprise.

2) Inadequate entrepreneurial education

The European society and its cultural values clearly lack an all-round understanding why entrepreneurs are essential for their economic future. Business education in Europe centers on its traditional large enterprises. Young talents receive a comprehensive training, how to work a big corporation and raise its productivity but are not educated in how to start and scale a new business.

European policies reflect and reinforce these cultural conceptions by answering why entrepreneurship in education is needed, with:

“Entrepreneurship in education is about developing a key competence, supporting economic and social well-being. In particular, these are the skills that employers say increases employability.” [1]

Entrepreneurial education should not be about increasing employability of an individual, but to encourage people to build something big and giving them the right tools to do so. This misconception is symptomatically for Europeans view on Entrepreneurship. In fact entrepreneurs want to disrupt the current and want to optimize the world for the better.

There is no entrepreneurial education in schools and universities that teaches students how to create and sell a product. Technology entrepreneurship means the collaboration of inventors and entrepreneurs in creating and selling a product in a new market and scaling a company to a global corporation, which should serve to multiple stakeholders from its employees, and investors to society. Only few business schools offer the possibility to learn directly from former entrepreneurs and benefit from their network, capital and mentoring. Compared to the leading entrepreneurship in Stanford or Berkeley where the whole curriculum trains the students to start, build and grow a company, this is by far underdeveloped and a missing keystone. If only elite business schools offer a small amount of entrepreneurship classes in Europe, the probability of creating global companies at a large scale is very low as only few graduates take the risk of starting at all. New online training classes widen the opportunity to access the information but this will be not enough to change the European society to foster entrepreneurship.

If Europe wants to play a role in the future, a shift in several dimensions must happen:

INVESTMENT POLICY & FUNDING

There is a need for a strategic political policy that supports startups, investors and entrepreneurs which offers financial support for the startup, tax benefits for the high risk investors and a social security net for the entrepreneur and the startup employees.

A Public funding structure with a focus on new market creating technologies is mandatory. Europe needs special funds for nano- and biotechnology as well as Big Data, AI and robotics in combination with entrepreneurial support. Today the funding focus is primarily on basic research and stops after the building of a startup. A huge gap has to be filled.

Business Angels activities should be supported by governmental actions such as tax exemptions for high-risk investments and easier access to public funding as well as collaboration platforms for syndicate investments to share their investment risk. To increase the total number of entrepreneurs and risk takers, governments should lower the barrier to start a company and provide funding opportunities for the first year without highly regulatory difficulties.
Large enterprises should support VC funds and angel networks financially instead of trying to incubate themselves in corporate environment that seldom allow market-creating innovations.

EDUCATION

Entrepreneurship lectures are key to foster people to start a business and should be adopted at all education levels: In High school lectures should show students the advantages of being self-employed and give them a basic understanding of how to build and sell a product. All Bachelor courses should teach students the possibilities of being self-employed. Especially in the humanities there are still too many programs that that are taught without any practical relevance. It could produce a push of startups since not only business people start companies but Gen Y in general is more interested in working “free” but lack of all skills. Master programs should include extensive trainings with entrepreneurs to create role models and a network of founders and investors.

SOCIETY

European society condemns failure, instead it should be perceived as part of the innovative process. Europe cannot rest on its laurels but has to catalyze change from the top of the EU and national states, down to regional government’s policy makers and education of its inhabitants.

Europe is missing its biggest opportunity, as it boosts of pioneering inventions, but fails in company building, productizing and scaling. If we continue like that, we gamble away our future companies, jobs, welfare standards, and force brain drain of scientists and entrepreneurs to other countries. There is no need to re- invent the wheel. The solutions, methods and best practices are all available. Europe needs to adopt and embrace them and work on a common value system and vision. A rising tide of public technology funding and entrepreneurship education lifts all boats. This facilitates Europe to shape the fourth industrial revolution.

[1] Also to mention that many companies in Silicon Valley were founded by first or second generation immigrants from Apple to Google or Tesla