European Startup Hubs

I’m about to travel to England for the first time. My previous international excursions have been to Mexico, Jamaica, and Bangladesh. In honor of my first trip to Europe, I decided to write a feature on European startup hubs and discuss some of the unique challenges and dynamics that startups face in Europe.

I’ve pulled a lot of information from the European Digital City Index. The index is a tool produced as part of the European Digital Forum with the aim of supporting digital entrepreneurs and fostering startup ecosystems across Europe. Aspiring entrepreneurs can use the index to compare the strengths and weaknesses of local ecosystems and plan their ventures accordingly. Policy makers can use the index as a way to benchmark cities and determine where they need to devote more resources.

The five cities below rank at the top of a list of sixty European startup hubs. Cities are ranked based on availability of funding, digital market size, labor costs, access to accelerators and training, infrastructure connectivity, and other factors.

1. London

You’d expect that the uncertainty surrounding Brexit would prevent London from claiming the number one spot on this list. But the reality is that London has lots of money. And startups need lots of money. The thriving financial sector in London creates a concentration of knowledge and capital, resulting in the strongest venture capital ecosystem in Europe. London is the most likely source of early stage funding for European startups. The city’s financial sector also serves as an established base that promotes the growth of fintech and crowdfunding startups like Seedrs, Funding Circle, Transferwise, Wonga, and DueDil.

London boasts low administrative barriers to new company formation and several world-leading universities that funnel talent into the startup ecosystem. City authorities have worked to make large amounts of data free and open to the public, cooperating with startups so that they can leverage the information for growth. Combined with London’s concentration of knowledge and capital, these factors have resulted in more unicorns (startups with a valuation over $1 billion) than any other city in Europe.

London’s greatest weakness as a startup hub is really just a result of its success: it is one of the most expensive cities in the world. The costs of housing, office space, and talent are extremely high. This makes securing early funding especially important for London startups.

2. Stockholm

Stockholm is like that annoying high school in your home town that’s smaller than every other high school but still sends more kids to Ivy League universities than the rest of the town combined. Stockholm has the highest number of unicorn startups per capita in the world after Silicon Valley. It has a higher percentage of the workforce in high-tech related jobs than any other European city–its 18% is almost double the European average.

Take a look at Stockholm’s resume: Spotify (music streaming service), Skype (software applications–acquired by Microsoft), Mojang (game developer, creator of Minecraft–acquired by Microsoft), Klarna (e-commerce payment solutions), King (game developer, creator of Candy Crush–acquired by Activision Blizzard), just to name a few. This type of name recognition is a magnet for talent and funding. Success compounds.

Stockholm is an expensive place (again, like that annoying high school) but it benefits from a government focused on promoting entrepreneurship. Public funding is available to startups through VINNOVA, Sweden’s innovation agency, helping to offset costs for startup founders.

3. Amsterdam

The Dutch capital is known for its willingness to invest in high profile initiatives. It has committed a large amount of government resources to projects like StartupAmsterdam, a public/private partnership with the sole goal of making Amsterdam the number one startup ecosystem in Europe. The project has more than 250 partners including venture capitalists, accelerators, incubators, universities, tech companies, multi-nationals, and startups.

Amsterdam’s infrastructure, English language skills, proximity to European markets, and generous tax regime have attracted larger international tech firms. In recent years, companies such as Tesla, Uber, Netflix, Atlassian, and Elastic have chosen the city as their base for European expansion. Although this can create stiff competition for startups, it can also be very beneficial because of the knowledge spillover that it creates. Top tech firms employ some of the best and brightest in the industry. Having all of these people in a concentrated location creates a rich intellectual and professional environment.

4. Helsinki

As a startup hub Helsinki isn’t necessarily the best at anything, but it’s very good at just about everything. The city ranks in the top ten among European cities for access to capital, entrepreneurial culture, knowledge spillover, mentoring & managerial assistance, and technical skills. Startups benefit from strong state support, highlighted by a benign innovation policy environment. Helsinki-based companies excel on a regular basis in listings of the most innovative startups in the world.

The presence of electronics giant Nokia helped to establish a strong ICT and software talent pool in the region. Aalto University and the state-run VVT are two large, multidisciplinary research institutions that have played an important role in connecting the deep technical base with design and business skills. The benefit of having these types of institutions nearby is made apparent by the industry-defining technologies such as SSH, Linux, and MySQL that have been developed in Helsinki.

5. Paris

Paris has lots of cheese, bread, and wine, which are the three things that startups need most after money. The only reason that the city isn’t higher on this list is because it also has lots of romance, and that generally isn’t good for startups.

The city’s support network for startups is one of the best in Europe, with over 250 co-working spaces and a growing number of accelerators and incubators. Communities such as France Digitale and publicly-funded La French Tech have fostered collaboration and raised the profile of French startups. Support also comes from government legislation, with Paris having an even more advantageous startup policy environment than San Francisco.

Paris also boasts incredible capital and knowledge density, ranking second behind London in availability of funding and ranking first in knowledge spillover. The city’s central location and easy connections to everywhere in Europe have helped to create a strong venture capital and intellectual network.

European startups face a number of unique challenges

Although many European cities are working hard to become attractive places to start startups, they face a number of challenges that are unique to the area. Perhaps the biggest hurdle that European startups face is complex regulation. Unlike young American companies, European ventures have to contend with dozens of different sets of laws, regulations, and tax codes in order to expand their geographic footprint. Startups often don’t have the operational infrastructure needed to comply with all of these different rules, and that can stifle their growth. If they can’t grow quickly, are they even startups?

Linguistic differences also pose a challenge. If you want to bring neighboring countries into your user base, you’ll need to rework your product in an entirely new language. The talent pool you’re drawing from might span multiple languages. These aren’t debilitating challenges; businesses deal with them all of the time. But as a young startup, they slow you down and distract you from your most important goal: making something people actually want.

European startups also have a harder time securing later stages of funding. This is at least partially related to the other challenges that they face. The legal, regulatory, linguistic, and tax differences divide what would otherwise be a unified market into smaller pockets. European startups can often scale quickly within their own pocket, but they are slowed after they reach a certain size. Later stage investors are often skeptical that startups will be able to continue to grow quickly and they are hesitant to commit to large funding rounds. These problems compound: the aforementioned barriers slow growth and increase costs, so startups need more money to establish the necessary compliance infrastructure; investors are hesitant to provide funding because growth is slowing and costs are increasing.

Many advocates of European startups have called for a Digital Single Market: a digital marketplace where individuals and businesses can seamlessly access and exercise online activities under conditions of fair competition, irrespective of their nationality or place of residence. A lot of work has already been done to make the Digital Single Market a reality, but there’s a long way to go. If the policy can be fully realized, Europe’s diverse, patchwork identity may become more of a strength than a weakness for startups.

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