I moved to Berlin in September 2015. My first experience was the university introduction event. The technical university of Berlin put great emphasis on their support to students who had founded a “startup”. Many alumni presented their “startup”, explaining how their idea changed the world. I had arrived in the heart of Europe’s startup hype.

Just some months before my arrival the former mayor and prime minister of the German capital, Michael Müller, had been awarded the title of “Startup-mayor”. The startup scene was booming. That year more than 2 billion in venture capital flooded Berlin and by the end of 2016 the sector had created more than 70 000 jobs in the city of 3.5 million. Nowadays, with a density of unicorns (startup enterprises with a valuation bigger than 1 billion dollars) per million inhabitants of 6.8, Berlin is leading among the big EU-capitals.

“Startup” seems to be the word of the current time. No wonder I came across it as soon as I arrived in Berlin. However, when it comes to giving a clear definition of such enterprises the answers slightly differ. 

A former LSE student, now in the economic department of the Berlin-based startup cargo.one, describes a startup as a recently founded enterprise with great scalability. “Scalability” refers basically to the ability to grow or “scale up”.

This economical perspective coincides with the Wikipedia definition claiming that “A startup or start-up is a company or project undertaken by an entrepreneur to seek, develop, and validate a scalable business model.”

In 2021 Europe definitely became a major global player with respect to startups, with a new record of $100B of capital invested and 98 new unicorns. Europe's strength when compared to other global players especially concerns new foundations. For newly founded startups the EU attracts more capital than the USA: In the “seeds” rounds (<4€ million) our continent made up 38% of global investments, compared to 36% for the US and 16% for Asia.

Startups finance their development through different types of funding. When the investor is a private actor, they are known as a Venture capitalist (VC). These are private equity funds (investment funds interested in companies) willing to take the risk to back startups. The funding schemes are categorised according to the amount of invested capital. For instance, “Megarounds plus” are the ones raising more than €250 million. By contrast the  “seeds” rounds amount to less than €4 million, representing the lowest threshold. It is in this startup pipeline that Europe is performing so well.

“A startup is a company with an innovative idea and a digital business model”, says Johannes Heereman to me in an interview. During his PhD in Decision Neuroscience, he built a recycled boat and became aware of the amount of material loss in the cutting and milling processes. His startup Normcut develops a software that optimises the geometry of the cutting process. Thus, they obtain standardised leftover material. The company then resells the standardised pieces. Normcut offers both software expertise and a marketplace service. 

Laura Esposito smiles and remains silent when I ask her how she would define a startup. “It is a company starting with a high risk of failure, but with the chance of a scientific breakthrough” she finally concludes. She started her deeptech startup Zenit just around six months ago.

Faenza is a 60,000-person city of Roman origins in the centre of Italy. Despite its smallness Faenza is known worldwide for its ceramic production. It is here that Zenit aims to connect ancient tradition to scientific breakthrough with its polycrystals meant for laser applications. Through the synthesis of nanometric powders Zenit creates a new material architecture that may be cheaper to produce and exhibits a higher energy efficiency than conventional monocrystals. 

No wonder Laura’s definition of a startup stresses the concept of “scientific breakthrough” as much as Johannes’ does a “digital business model.”

Though the definition of “startup” may slightly vary, new enterprises with great entrepreneurial risk and great opportunity to grow are spreading around our continent. The EU is now home to 230 unicorns, compared with only 55 just 5 years ago (2017). The estimated value of startups in the EU has increased in the same time window from €475 billion (10^9) to €1.6 trillion (10^12)  today. European startups such as Skype, Spotify, and Zalando are part of our everyday life.

Most importantly, this flow of money has created jobs. According to European Startups, a project created by Dealroom and Sifted, the annual growth of jobs related to startups is around 10%. More than 2 million jobs rely on these companies, which translates into 1% of European jobs.

The interaction with states in Europe

Startups are often related to the potential of a free market economy: big funds invest in brave entrepreneurs that in the free market can make use of their creativity for the good of all. In this picture, there is no room for state intervention.

This perspective is reflected by the view of many VCs. According to Atomico’s State of European Tech survey, 70% oppose direct state intervention. Pia Poppenreiter, former CEO of the Berlin-based company Ohlala, claimed that the German startup ecosystem just “does not need political action from the mayor”. She claims that a successful ecosystem requires “a removal of regulatory and bureaucratic hurdles for startups.”

In fact, such a narrative and such statements do not take account of the fundamental role that governmental institutions play in the European startup boom. 

A look at further statements by founders in Berlin underlines the dependency of their success upon politics. Philipp Rogge from Styla underlines how the success of the Berlin startup scene depends on the development of rents and the presence of professionals. The containment of rent costs is a priority of the Berlin government.

However, the role of the state doesn’t stop at indirect interventions. First, we note that the explosion of startup establishments has increased with government funding, which topped $4.2 billion in 2020. There are big differences between European regions, but overall state funding is fundamental everywhere. While in the Nordic countries government funding is around 19% of total investments, it is as high as 53% in Central and Eastern Europe. 

Last year, the European Commission (EC) announced plans to directly invest in startups. The EC wants not just to cooperate with VCs, but to become their competitor. Some investments will be linked to the possibility to take over 50% equity for areas of strategic interest. In this way, the EC aims to “ensure foreign investors do not have the last say in the future of strategically important companies.”  

Johannes tells me proudly over Zoom that Normcut was his second founding. At first, he could finance the work with his own resources that came in part from the sale of his first startup. He got a considerable amount of funding through convertible loans from friends and family, and a strategic investor. “It is the most common early-stage funding tool. Basically, the company gets the money and guarantees some shares by the next funding rounds. It is unbureaucratic and fast.” However, unsurprisingly Normcut also relies on public assistance. The BMBF (the German Ministry for Education and Research) fuels the project with €50 000, and Johannes is currently waiting for feedback from many other purpose-driven grants that he has applied for from German or European institutions such as the European Innovation Council and Sprint.

The role of politics and the EU goes beyond mere funding. A large amount of information quoted in this article for instance is provided by the European Startups project. This database is supported by the European institutions with the aim of facilitating conversation in European Tech and thereby enhancing the startup economy. This strategy is also embodied by the EC’s Startup Scale Up initiative, a portfolio of policy actions and EU-funded projects that address topics such as data exchange, implementation of best practices in member states, and the closure of investment gaps in targeted regions.

It is with great passion that Laura explains how Zenit is turning the patent of the polycrystals technology into a business: “We are now in the proof-of-concept phase, for which we raised €250 000 both from a strategic partner and the VC LIFFT.” The idea for Zenit dates back more than a decade. The non-trivial scientific achievement was possible thanks to years of research carried out by Laura and her colleagues along with many PhD students at the National Research Council (CNR), the biggest public research institution in Italy. It was in the framework of a public institution that the patent was developed.

In fact, what at first glance was a company financed by private capital turns out to be interlinked with public institutions. Laura underlines that Zenit was born as a spin-off of the CNR. “It is important to stress that our startup can use the facilities of the CNR. Furthermore, for the first three years of our work, I can dedicate 30% of my time as an employee of the CNR to Zenit.”

The company reflects the deep dependence of the startup ecosystem on high-quality public research. Indeed, a look at some data reinforces this correlation. It is telling that Cambridge heads the ranking of cities with the most startups per capita: A small city, but with an ideal academic humus.

Similarly, BioNTech was founded 2008 as a spin-off of the University in Mainz. Now the European startup is known for the development of the first Covid-19 vaccine with a new RNA technology. For the first 10 years of its existence the biomedical company received €9.4 billion from EU funding schemes. The first private investors entered with Series A funding only in 2018.

Purpose driven

When at the end of the interview I ask Johannes how he contextualises public interventions in the startup ecosystem he reflects shortly and says “Purpose-driven.”

The word purpose in this context refers to a company with a business model aimed at improving social or environmental conditions. Such enterprises are becoming more and more common in Europe. For instance, 11% of European public and private funding in 2021 was raised by startups with a product that contributes to the United Nations’ environmental Sustainable Development Goals.

My personal interest for startups arose not only because more and more friends ended up working in them, but mainly because I wanted to understand how much these companies really have an impact on our European societies and which role politics could and should have in this field.

Concluding our chat, Johannes further developed his thought: “The problem of private VCs is that they are never only purpose driven. The fact is that with venture capital you have no guarantee that your focus in the long term will be the problem that you originally wanted to solve.” He stops one moment and continues, “Look at the story of Air B&B. The idea was to respond to the high rental prices and housing shortage in San Francisco by accessing the unused supply of empty apartments. In the meantime, Air B&B globally has exacerbated the problem of housing prices and opportunities in cities.”

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