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The demands of startups are unlikely to be met by Brussels' new innovation plan

The European Union is making efforts to ensure that it does not miss the next tech wave, but those efforts might not be sufficient.

The European Commission will outline a series of initiatives on Tuesday to aid digital companies in growing their operations. It is a component of the bloc's push into "deep tech," a catch-all term for cutting-edge technologies with a strong scientific and research foundation, such as artificial intelligence, blockchain, and quantum computing.

Europe does not want to make the same mistakes again after losing the consumer tech war, but in order to even start competing with the US and China, it needs to address a number of issues.

While 2021 was the largest funding year for European startups to date, reports indicate the region still lags behind its geopolitical rivals in terms of blockchain and AI spending. The bloc's recruitment efforts have fallen far short as evidenced by the fact that the number of information and communications technology specialists in the bloc is still far below its 2030 goals. Both issues are anticipated to be covered by the Commission's new Innovation Agenda, according to multiple drafts. The agenda also makes mention of the innovation divide between Western and Eastern Europe and the ability of national governments to support startup growth, for which it promises five "flagship" initiatives.

Given that a pot of money or a fully developed rulebook is not on the table, and some key competencies belong to individual member countries, it is unclear whether the effort will impress the bloc's startups, who already have spotty communication with EU-level institutions.

Martin Mignot, a partner at venture capital firm Index Ventures, which has invested in European scale-ups Deliveroo, Adyen, and others, has specific demands for any EU plan: "[The role of governments is] making it attractive for companies to hire talent across Europe, that's [No. 1] ... make it easy to get financed, make it easy to exit and create value that you can reinvest into the tech ecosystem."

Startups have a major advantage over more established businesses when it comes to luring top talent away from them: they can offer equity in the form of stock options, giving employees the chance to profit if the business succeeds. On the other hand, as businesses expand across Europe, this asset may become a problem.

"The goal of the EU is to have a single market,"  according to Mignot.

Startup business owners have long complained about some EU member states' unfavorable tax treatment of stock options. However, because taxation is a matter of national jurisdiction, the Commission is powerless in this situation. It can only encourage members to coordinate their various plans. In order to square the taxation circle, Mignot sees two options: an EU-wide plan or "passporting," in which nations recognize one another's taxation policies.

A draft of the agenda indicates that there is a stock-option action point, but it may not be very impressive because the Commission only agrees to form a working group to "explore" how member nations can reduce red tape surrounding stocks.

The Innovation Agenda also aims to help with obstacles to exiting a startup, like going public on the stock exchange, and access to funding.

Despite a record-breaking year for EU startup funding, lobby groups are looking into some untapped money sources that might help close the funding gap for cutting-edge technologies. Pension funds in Europe are one untapped resource. According to Sabrina Caroli, head of the EU office for the German digital association Bitkom, "Pension funds, and insurance companies, they have a lot of money, and they have to participate more actively in this.  So we see a huge potential there that could be fully exploited in the future to help actually these startups to grow." she says.

The Commission recognizes the issue and makes some sort of action-related commitments: According to the draft agenda, "The Commission will convene leaders of large institutional investors (pension, insurance and sovereign wealth funds) to explore opportunities and requirements for increasing investments into VC funds."

More specific language in the agenda promises an EU Listing Act, intended to "simplify" listing requirements, by the end of the year, easing the way for a public stock listing.

Despite the assurances of support, it might be challenging to make significant progress given Brussels' tense relationship with startups. According to an industry survey released on Monday, the bloc's recent focus on Big Tech regulation has left startups feeling neglected in comparison when it comes to policies that help them scale up.

183 customers of the Irish fintech company Stripe said that the EU's policymaking process is intended to benefit larger, more established businesses. 61 percent of those surveyed said they felt "disengaged" and chose not to voice their concerns in Brussels as a result. Startups have trouble determining who is in charge when they do speak up: Internal Market Commissioner Thierry Breton or Innovation Commissioner Mariya Gabriel.

Mignot concludes that whoever ends up in charge of the Innovation Agenda will need to think creatively to support startups in a variety of ways, including hiring talent: "I don't see why the EU shouldn't be aggressively attracting Russian engineers," he joked.



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