Brussels’ new innovation plan likely won’t meet startups’ demands

The European Union is taking steps to make sure it doesn’t miss out on the next tech wave — but it may not be enough.

The European Commission on Tuesday will present a list of actions to help digital companies scale up their businesses. It’s part of the bloc’s push into so-called deep tech, an umbrella term for advanced technologies heavily rooted in science and research, including artificial intelligence, blockchain and quantum computing.

After Europe lost the battle over consumer tech, it doesn’t want to repeat the same mistakes — but to even begin to compete with the United States and China, it must address a variety of concerns.   

While 2021 was European startups’ biggest funding year to date, reports show the bloc still lags behind its geopolitical rivals on AI and blockchain spending. The number of information and communications technology specialists in the bloc is also still way off its 2030 targets, betraying gaps in recruitment efforts. The Commission’s new Innovation Agenda is expected to address both issues, according to multiple drafts seen by POLITICO. Also included in the agenda are nods to the innovation gap between Western and Eastern Europe, as well as national governments’ capacity to support startup growth, for which the agenda promises five “flagship” initiatives.

It remains to be seen whether the effort will impress the bloc’s startups — which already have spotty communication with EU-level institutions — given that a pot of money or a fully fledged rulebook is not on the table, while some key competencies belong to individual member countries.

Solving for stocks

Martin Mignot, partner at venture capital firm Index Ventures — which is an investor in Deliveroo, Adyen and other European scale-ups — has clear expectations from any EU plan: “[The role of governments is] making it attractive for companies to hire talent across Europe, that’s [No. 1] … make it easy to get financed, make it easy to exit and create value that you can reinvest into the tech ecosystem.”

Startups have one major trump card when it comes to attracting talent from more established companies: They can hand out equity in the form of stock options, which gives employees the chance to cash in when the company hits big. This asset, though, can turn into a headache as companies scale throughout Europe.

“The goal of the EU is to have a single market,” Mignot said. “Well, that’s clearly not the case in the market for talent.”

Startup entrepreneurs have for years complained about the unfavorable tax treatment of stock options in some EU member countries. The Commission’s hands are tied here, however, as taxation is a national competence. What it can do is urge members to harmonize their different plans. Mignot sees two options for squaring the taxation circle: an EU-wide plan, or “passporting,” where countries recognize each other’s taxation plans. 

While a stock-option action point is included in the agenda, according to a draft seen by POLITICO, it could prove underwhelming: The Commission merely commits to setting up a working group to “explore” how member countries can cut red tape around stocks.  

Promises, promises

Other common startup hiccups the Innovation Agenda seeks to assist with are access to funding and barriers to making an exit, such as going public on the stock exchange. 

Despite a bumper year for EU startup funding, lobby groups are eyeing some as-yet untouched sources of cash, which could help fill the gap in funding for advanced technologies. One untapped vein is Europe’s pension funds: “Pension funds, and insurance companies, they have a lot of money, and they have to participate more actively in this,” said, Sabrina Caroli, head of German digital association Bitkom’s EU office. “So we see a huge potential there that could be fully exploited in the future to help actually these startups to grow.”

The Commission gets the message and promises action — sort of: “The Commission will convene leaders of large institutional investors (pension, insurance and sovereign wealth funds) to explore opportunities and requirements for increasing investments into VC funds,” the draft agenda reads.

More concrete is the agenda’s language aimed at smoothing the road to a public stock listing, with the promise of an EU Listing Act, meant to “simplify” listing requirements, before the end of the year. 

Despite the promises of support, Brussels’ strained relationship with startups might make it difficult to achieve concrete progress. The bloc’s recent focus on Big Tech regulation has left startups feeling neglected in comparison when it comes to policies that help them scale up, according to an industry survey out on Monday.

Eighty-three percent of 172 customers of Irish fintech firm Stripe said that the EU’s policy process is designed to serve bigger, more established companies — while 61 percent said they felt “disengaged,” not voicing their concerns in Brussels as a result. When startups do speak up, they have a hard time figuring out who’s in charge: Internal Market Commissioner Thierry Breton or Innovation Commissioner Mariya Gabriel. 

Whoever ultimately takes ownership of the Innovation Agenda must think creatively to help startups in a range of areas, Mignot concludes — including recruiting talent: “I don’t see why the EU shouldn’t be aggressively attracting Russian engineers,” he quipped.