The U.S. has the perception as the heart of global entrepreneurship, but Europe might soon take the crown. Here’s why.
Given the refugee crisis, the potential Brexit, terrorism, and the recent economic crises in Greece and elsewhere, it can be easy to overlook the European Union as a viable region. In recent years, however, I have begun to believe that while the U.S. has been the dominant force in modern entrepreneurship, the future looks less promising for the U.S. than most think.
This point of view certainly does not support the prevailing narrative that the U.S. is the dominant country in the world to start and finance a company. The EU tends to be more bureaucratic, has a culture less tolerant of failure, has much less access to venture capital than the U.S., and has the added complication of having to cross dozens of countries and language barriers to serve a similar sized market as U.S. entrepreneurs. But the EU is well positioned to not only compete but even potentially lead the democratized and urbanized entrepreneurial revolution in the decades to come.
The forces of urbanization, collaboration, and democratization are converging. People are flooding into cities, bringing many challenges and innovation opportunities to cities, collaborative business models and the sharing economy are taking off in cities, and the democratization of innovation and technology are putting the tools of innovation and entrepreneurship in the hands of more citizens than ever before.
These trends are reshaping the geography of innovation. And as these changes transform our cities, I believe Europe will replace North America as the startup hub of the world.
Furthermore, European cities tend to do much better on traditional metrics that matter to expatriates. Mercer has been conducting quality and cost of living research comparisons of global cities for many years. Mercer utilizes 39 indicators from 10 factors including economy, education, health care, housing, and natural environment to compare hundreds of cities around the globe. Their2016 survey of the quality of life in global cities is telling. Seven of the first 10 spots in this year’s survey belonged to European cities. You may be surprised to learn that the highest rated U.S. city on the Mercer ranking—San Francisco—was 28th.
2. EUROPEAN SMART CITIES
Smart cities are embracing co-creation with local citizens and startups to leverage technology to improve the quality of life in cities. This offers a new canvas for aspiring entrepreneurs and makes these cities more attractive to the creative class. European cities tend to be way ahead of North American cities in the smart cities arena. This is surprising because the U.S. has a long history of technology leadership, and many of the multinationals and startups in the smart cities marketplace are headquartered in the U.S. But even the U.S. government has been way late to the party. Last year, for the first time, President Obama made a push toward smart cities with a commitment of $160 million to support their adoption in the U.S. In contrast, the European Union has been pushing the smart cities agenda for about a decade. For example, just one of the funding mechanisms for smart cities in Europe has $18 billion committed toward sustainable urban development between 2014 and 2020.
3. MORE RAPID ADOPTION OF SOFT INFRASTRUCTURE FOR ENTREPRENEURSHIP
The U.S. still tends to be the pioneer in launching entrepreneurship-related vehicles. Take Fab Labs as an example. An initiative of MIT, Fab Labs aim to “provide access to the tools, the knowledge, and the financial means to educate, innovate, and invent using technology and digital fabrication to allow anyone to make (almost) anything, and thereby creating opportunities to improve lives and livelihoods around the world.” Fab Labs are maker spaces available to the community, which contain 3-D printers, lasers, and other tools to tinker and develop local products. Despite being founded by a premier U.S.-based academic institution, there are 115 Fab Labs in the U.S. and nearly 300 in Europe. Similarly, coworking spaces have blossomed in European cities. Barcelona alone has more than 300 such spaces. The U.S. city closest in population size to Barcelona is Philadelphia, which, according to my research, has only a dozen or so coworking facilities.
4. BETTER SAFETY NETS AND LESS INEQUALITY
The U.S. continues to have a culture that accepts failure better than Europe. But failure in Europe is actually a much simpler proposition, due to much better safety nets. Aspiring entrepreneurs know that in most European countries, failure doesn’t mean that you lose access to health care and education. And there is also more opportunity: Income inequality varies significantly between the U.S. and Europe. The GINI Index is the most widely accepted measure of income inequality (the lower number the better). The GINI Index, Europe-wide, was 30.9 in 2014 and has been approximately the same for the past 10 years. In contrast, the GINI Index in the U.S. is 41, and income inequality in the U.S. has been rising over the past decade.
5. THE U.S. HAS ALREADY LOST ITS LEADERSHIP IN KEY BENCHMARKS OF INNOVATION
Data suggest a consistent trend toward Europe and away from North America.The Global Innovation Index, for example, is an annual ranking of innovation at the country level conducted by Cornell University and INSEAD business school. The 2015 Index, which leverages 79 indicators of a country’s innovative capability and actual innovation results, shows eight European countries in the top 10. Furthermore, the first four countries in the ranking are European, with the U.S. coming in fifth place. (Credit to the U.S.: It did move up one position from the 2014 ranking.) One of the most robust rankings of innovation at the city level, the Innovation Cities Index, shows similar results. Leveraging 162 indicators of urban innovation, the top 20 rankings consist of eight European cities and five U.S. cities. By several objective measures of regional, national, and local innovation, the EU already has a lead.
6. THE EU MAY NEVER LEAD IN VENTURE CAPITAL INVESTMENT. DOES IT MATTER?
In my opinion, venture capital is way less important to entrepreneurship than it use to be. As I argue in my book, tools of innovation and entrepreneurship are increasingly being democratized. The explosion in cloud computing and software as a service tool, open-source software and hardware have enabled makers and entrepreneurs across a broader spectrum to experiment and leverage lean startup principles to innovate cheaply. Add crowdlending, crowdfunding, and the growth in angel networks to this list and you start to wonder if we overhype the importance of access to venture capital for most entrepreneurs. Sure, the 300 startups every year that obtain venture capital in the U.S. are likely better positioned to scale to global domination, but as Steve Case argued in his recent book, there will likely be fewer and fewer fast-growth unicorn startups in the future anyway. Recent research by the Kauffman Foundation confirms the exaggerated hype on venture capital. Some key insights from their study: Less than 5% of startup funding comes from venture capitalists; only 6.5% of fast-growth startups obtained venture capital financing.
7. EASIER TO BE AN ENTREPRENEURIAL IMMIGRANT IN EUROPE
The EU is struggling to deal with the massive wave of refugee immigrants. But the region has also been making it easier for entrepreneurial immigrants to obtain visas while the U.S. has gotten worse. Many of the U.S. highest-profile entrepreneurial success stories have immigrant founders or founders who were children of immigrants. As this recent ranking of country-level immigrant entrepreneur programs suggests, the EU is well ahead of the U.S. on this important topic. If the creative class is highly mobile, then countries (and their cities) that facilitate their immigration will have significant advantages in attracting and recruiting entrepreneurs in the future.