Legislation and regulations slow the growth of European startups

In 2021, one funding record after another was broken. And in 2020, the growth rate of European unicorns was 400%. Now, however, European startups face a more challenging economic environment. As a result, many of them are forced to make difficult decisions.

According to a recent survey of around 200 of Europe’s fastest growing startups and scaleups, only 20 percent of these companies believe that Europe will be the world leader in technology in the next five years. Less than half are optimistic about their near-term growth prospects.

At first glance, one would think that this is the result of the macroeconomic situation. But if you dig a little deeper, it turns out that laws and regulations are a major reason why startups are more pessimistic.

High requirements for start-up companies

For young companies without a large legal department, understanding some complex laws and regulations is overwhelming. This is especially the case if the relevant guidelines are developed for larger companies that have the means to meet the requirements more easily. Startups therefore suspect that large companies are higher on the politicians’ priority list.

A huge amount of money and time from European startups is now spent on developing legal infrastructure and processes instead of building innovative products and services. More than half of the surveyed startups indicate that the time they spend on compliance the biggest obstacle to their growth. One in three say they are considering establishing their business in another region. In the current economic climate, heavy regulation may even threaten their existence.

Fortunately, there are easy to implement solutions to this problem. Digitization of several public services, which is already happening on a large scale in the Baltic countries, would be a good first step to help startups manage their affairs faster and more efficiently.

Politicians can help improve this. Think, for example, of setting up central counters and streamlining and clarifying everything that is necessary to comply with laws and regulations. Policymakers can also design a test like the existing test for European SMEs for a cost-benefit analysis and post-implementation evaluation of new policies for Internet companies.

Regulatory options to boost innovation

The second issue that emerges from the study is more complex. The question of how to develop regulatory frameworks that promote technological innovation requires immediate attention.

As a technology company with roots in Europe, we have seen how smart regulation can provide infrastructure that businesses can build on. The companies we spoke to pointed to the positive contribution of PSD2. This EU payment legislation provided a clear and sector-specific legislative framework. It is therefore no coincidence that so many European fintech companies are among the best in the world.

We know that politicians want to use regulation to promote innovation. However, the fastest growing Internet companies in Europe tell us that they see little of this in practice. They share a deep-seated suspicion that policymakers do not sufficiently understand the reality of startups.

More interaction between startups and politicians is part of the solution

Building on existing initiatives such as the EU’s Start Up Village Forum, startups should be regularly surveyed to alert policy makers to their concerns, pain points and insights. Determining which sectors should be prioritized and how policies can follow in the footsteps of successful regulatory frameworks such as PSD2 can only be achieved through close consultation.

Scale Up Europe, the Startup Nation Standard and the development of a new European Innovation Agenda by the European Commission show that there is no shortage of initiatives aimed at helping startups. Realization and unification of these initiatives should be a top priority for policy makers. Especially in light of the worsening economic climate. A central contact point, such as a Commissioner for Digital Entrepreneurship, can play an essential role in this.

The European tech ecosystem still has a lot to offer: a wide range of talent, a host of top universities and a favorable geographical location are all mentioned by start-ups. When these are combined with useful, more efficient and flexible regulation, the bright prospects for the European technology sector are hard to deny.

About the author: Margreet Brenkman is Head of Northern Europe at Stripe.

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