Europe’s Startups Need to Think Big: Lessons from America

The idea that bigger is always better has permeated business for decades, and many strongly believe this is why the US has become the most powerful economy.

The idea that bigger is always better has permeated business for decades, and many strongly believe this is why the US has become the most powerful economy. When contrasted alongside Europe, a seemingly equal business contender, many comment that the region lags behind America due to its fragmentation and high bureaucracy. Some of this criticism is warranted, but research reveals that Europe has brought venture capital investors better returns than their American counterparts despite limited access to capital. By encouraging European startups to delay fundraising and rely on incubators to boost valuation, the region can experience rapid growth. This newfound strategy will improve startup success, attract investors globally, and demonstrate Europe’s power to go head-to-head with American businesses. 

The US and Europe are constantly pitted against each other for their cultural, economic, and environmental differences. Capitalists prefer America because of its massive market size and generally lax business regulations. Those serving niche audiences and aiming for social impact often choose Europe for their ventures. 

One of the biggest reasons Europe may receive less VC investment is its impractical funding strategy. Compared to American startups that survive on a shoestring budget until VC funding comes in, European counterparts are flush with cash from the beginning. Their ideas are worthy of the capital, but American startups are forced to prove how profitable their concept is. This inflates valuation long-term and ensures that a company can get off the ground before investors pour money into it.

As a European startup scales, it faces other challenges, like finding growth-stage funding and attracting investors and talent bottled up in clusters like London. In the US, these things may be further apart geographically, but they are in the same country. Europe can’t say the same, which is causing successful startups to leave the region for America when it’s time to expand further. 

Since at least 2019, Europe’s venture capitalists have been outperforming America’s on net annual returns. They are seen as more risk averse for their lengthy due diligence processes, but European investors are tapping into the region’s overlooked economic potential. By placing an emphasis on quality over quantity, they are surpassing American investors who have excessive amounts of capital. But why is the region’s startup ecosystem struggling to produce a steady stream of globally recognizable brands? 

Funding is a major hurdle for European startups, particularly growth-stage capital. Compared to the $271 billion American venture capitalists have, those in Europe have a measly $44 billion. This is surprising since the number of active startups is relatively close and several European countries have a comparable GDP to America. Many investors and founders see the region as a good place to start a business, but not a suitable habitat for fostering unicorns, and this line of thinking is holding Europe back. The best way to eliminate this issue is by embracing an American-style funding model and creating more incubators to support innovation. 

Although taking this approach will reduce how many startups emerge from Europe, delaying fundraising until traction has been demonstrated will ultimately help the company, investors, and the community. New tech hubs will be vital for providing resources and improving a company’s likelihood of success. Research shows that 31% of American startups that receive Seed funding progress. However, only 19% of European startups reach the same achievements. It’s safe to assume that this may be because US startups have already made sales whereas European ones haven’t fully proven their profitability. 

Adopting a revenue-first funding model will better prepare European startups for scaling across the region. After they have dominated the local market, they can slowly expand to other countries. Unlike the US, which may grant some companies instant access to millions of consumers, Europe’s demographics are more diverse. This potential bottleneck can actually empower a company to become stronger at entering new markets and eventually expand globally. 

Increasing investment from the Arabian Gulf, a boost in European VC deals, and a growing list of unicorns all prove Europe’s potential to compete with Silicon Valley. The region has always been a hub for commercial activity and innovation. However, transforming startup funding models and cultivating thriving tech hubs is essential for activating its power on the global stage.

While it’s tempting to compare and contrast America and Europe’s business climate, one isn’t greater than the other. Each startup has different goals that can be served by either market. It will take time for Europe to catch up with America even with a new funding model and tech hubs. However, this bottleneck in innovation will subside if a concerted effort is made. Revolutionizing European startup ecosystems will be the catalyst for taking groundbreaking inventions globally. It will also transform Europe’s business reputation and drastically improve economic development.

Patricia Pastor
Patricia Pastor
Patricia Pastor is the founder and general partner at NextTier Ventures, a venture capital firm specializing in investing in AI and B2B SaaS companies. Also Chairwoman at VDS, one of Southern Europe's most prominent international tech events and a platform transforming Valencia into a global tech hub.