Just how different are the European and Mena ecosystems?

Image courtesy of Slush

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“Shove your startup idea where the sun doesn’t shine” read the sign that greeted visitors to Slush, Europe’s largest startup event. By that, they must have meant Helsinki in November, when daylight lasts less than seven hours.    

Finland’s rather sleepy capital played host to more than 25,000 people from around the world, including 4000 startups and 2000 investors last week for Slush, a student-led event that started back in 2008 as a matchmaking platform for Europe’s startup community.

The event is unlike any that takes place in the Middle East and at times, it felt more like a nightclub than a conference, where global investors, European Union (EU) leaders and entrepreneurs came face to face to discuss topics like regulation, the gender gap in equity and investing in deep tech.

The conversations were more sophisticated than we in the Middle East and North Africa (Mena) region are accustomed to at such events, but somewhat surprisingly, Europe suffers similar challenges including the following:

Lack of Funding

Venure capital (VC) investment in Europe has been growing, but it still lags behind the US and Asia. So far this year, European startups have raised $34.3 billion, up 40 per cent from 2018. The largest investment deal came from UK-based companies Deliveroo which raised $575 million in May, and health-tech startup Babylon which raised $550 million. In comparison, tech startups in the US raised $117 billion while Asian startups raised $63 billion this year. Meanwhile Mena startups have yet to surpass the $1 billion mark for VC investments.

“There’s still a lack of access to finance specifically in the growth phrase,” said Helen Kopman, deputy head of digital innovation and blockchain at the European Commission. “We do have a problem with very, very good startups, when they come to a certain growth stage, they go to the US or Asia, it is easier to get access to capital or skills there.”

To increase access to capital, the EU is launching a €100 billion fund to be deployed over seven years, of which €10 billion will be allocated to deep tech startups.

Fragmented Market

While the European Union (EU) is an effective single trade market, the different languages, cultures and local regulatory environments have created a fragmented market that can present difficulties for startups looking to scale. There are differences in infrastructure, gross domestic income (GDP) per capita and capacity according to Kopman. Many startups instead focus solely on their own countries and immediate neighbours and fail to scale beyond them, while others carry ambitions of heading straight to Silicon Valley or China.

While the EU is far less fragmented than the Middle East, we would do well to follow the EU closely. Our part of the world, despite sharing a common language, is incredibly fragmented even in the GCC, where there is no common single market. Saudi Arabia and the UAE have taken steps to enable easier flow of goods between them, but such initiatives are lacking and for startups looking to expand across the region, they need to essentially found a new business in each new jurisdiction.

The vast geographies of both regions, has resulted in entrepreneurship hubs that have emerged across several cities that operate independently to one another.

“When you’re in the early stage, centralisation is helpful, all the investors are in one place, they talk to each other, all the money goes where the centre is,” said Rolf Schromgens, managing director and chief executive officer at Germany-based travel comparison site Trivago. “But centralisation in later stages might become a problem because resources get scarce. If you’re decentralised, it is way easier to tap into different talent pools. Nowadays we’re going more and more into a situation where a decentralised set up is more powerful. You have many centres in Europe, you have reached the critical mass where ecosystems have evolved, people exchange ideas.”

The key takeaway from the discussions was that decentralisation is fine, fragmentation is not.

“You can portray Europe in two ways – it is fragmented, or you can say it is diverse in culture,” said Jean-Eric Paquet, director general of research and innovation at the European Commission.

Having several hubs that each excel within certain sectors or niches and establish open dialogue and collaboration with others in the region can help and develop the wider Middle East entrepreneurship ecosystem, rather than compete over the same talent and businesses. Kopman said the EU has plans to link ecosystems from three to four different countries and encourage them to work together on cross-border projects.

Access to Talent

While there is freedom of movement across the EU which has a population exceeding 500 million, startups in Europe complain of a lack of access to talent. Founders still wish to recruit from beyond their own borders in particular engineers from places like India, Egypt and China.

Having a diverse workforce was highlighted by several speakers as an essential aspect for startups looking to scale. About 80 per cent of Trivago’s workforce sits outside of Germany and CEO Schromgens told audiences that “cultural diversity is a major asset for companies”.

"We have a company based in Germany able to tap into all talent in the European Union, it’s way easier to internationalise. The success story of Trivago is due to the fact we have EU people who are able to work across the European Union without difficulty…[but] we need better immigration laws for people outside of the EU,” he said. 

The UAE, with 200 different nationalities, can offer this level of diversity within its own borders, but like most other countries, it also suffers from a lack of talent. Loosening immigration and visa requirements for startups to allow them to employ developers and technicians from other parts of the world can benefit the ecosystem greatly.

Copycats and Innovation

Too often the Middle East is accused of a lack of innovation, with the majority of startups replicating ideas or business models seen elsewhere. Europe also bemoans copycats, where startups are accused of copying US or Chinese businesses and then attempt to localise them for their own markets. There were several scooter companies, software-as-a-service (SaaS) for marketing startups and mental health apps, all with business models that exist elsewhere in the world.

Yet the key buzzwords at Slush were innovation and sustainability. “Unicorn” was scarcely mentioned, as emphasis was placed on enabling innovations that can improve the lives of people and the planet rather than investors and profit. And innovations were visible, particularly in the deep tech and health tech space. Where Europe excels is in research and development (R&D) with a substantial presence from startups that had begun life in university labs including GlucoModicum which showcased a non-invasive blood glucose monitoring smartwatch and spexel.ai, which uses artificial intelligence (AI) algorithms to enable smartphone cameras to capture the detailed spectrum of light to determine how big an agricultural crop is expected to be or the ripeness of fruit. But such startups were few and the “copycats” dominated.

“We still have a way to go, we need more success cases. Being an entrepreneur in Germany is not something people are striving for. The worst thing you can do in Germany is to fail and not be perfect. Perfection in engineering is important, but it comes with a downside which is we struggle with taking risks and we have to learn with taking risks and that failure is good, it is part of innovation,” said Schromgens.

Overall, it seems that the European and Mena ecosystems face similar issues, but the former is farther along the path of finding a solution. With greater collaboration between Mena’s startup stakeholders, free trade and more investment, we too have the ability to improve our startup ecosystem(s).

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