State finance

Analysis of basic characteristics of European startups

As mentioned, startups are important economic drivers that generate wealth by introducing new goods or services to the market and employing a large number of people. When it comes to analyze startup companies and their effects on economy, firstly we look through the key facts on European startups: Startups can be found in all sectors and mainly (99.3%) offer online solutions; The average founder is male (82.8%), has a university degree (84.8%) and is currently 38 years old; Most founders operate in teams (on average 2.7 founders per startup); Innovative businesses are creating a large number of jobs (7.5 on average in the next 12 months), and these jobs are being filled by a global workforce; Startups are continuously growing and looking to (further)internationalize their operations (88.1 percent) B2B operation accounts for the majority of startup sales (71.7 percent).
However, Europe lags behind the rest of the world in terms of new venture growth. The rate of early-stage entrepreneurial activity (TEA) in Europe is only 7.8% of the adult population; this value is considerably higher in North America (13.3%), Asia and Oceania (13.1%) according to the Global Entrepreneurship Monitor 2016 (Kelley, Singer, & Herrington 2016). To keep up with the global market, Europe must foster innovative startups that positively contribute to European economies by creating products, services and jobs.
Based on the concept introduced in the 2015, startups are defined by three characteristics:
- startups are younger than 10 years;
- startups feature (highly) innovative technologies and/or business models;
- startups have (strive for) significant employee and/or sales growth;
When the first of the three characteristics mentioned above, as well as one or both of the other characteristics, are met, a venture qualifies for inclusion. This concept clearly distinguishes startups from traditional companies and small to medium-sized enterprises (SMEs) that do not promote new products/services or business models and operate solely to protect the founders' livelihoods without a long-term growth plan (e.g. a hairdressing business). In comparison to those firms, the European Monitor views startups as "gazelle firms" that are developing new businesses with the aim of creating wealth.¹³
According to the analysis of 18 countries in detail, including Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Hungary, Ireland, Israel, Italy, the Netherlands, Poland, Portugal, Slovenia, Spain, Switzerland and the United Kingdom, taking the data from both the first ESM and the current ESM into consideration, three out of four startups are founded independently. (Figure 1.)

Figure 1. Percentage of the types of business foundations.¹⁴
According to the latest researches, in order to gain insight on how startups are founded, the respondents were asked to indicate how they formed their startups. The results show that 73.3% were founded as independent ventures. One out of ten startups was founded as either a spin-off of a university (9.7%) or an existing company (9.6%). The lowest percentages of independent startups can be found in Poland (53.6%) and Spain (53.7%), and the highest is found in Ireland (81.2%). (Figure 2.) Switzerland has the highest share of university spin-offs (18.1%), and Hungary has the highest share of spin-offs from existing companies (18.2%). The relatively high share of “other” in Spain (36.8%) is also noticeable.

Figure 2. Change in startup developmental stages. ¹⁵
Startup stages: As demonstrated in Figure 2, in surveys the founders were asked to match their startup with its corresponding developmental stage. Of the startups run by the respondents, 22.1% are still in the seed stage, meaning that the founders are in the process of idea generation and have not yet generated any revenue. Most startups are in the startup stage (50.7%); they are on the verge of offering a marketable product/service and of generating first revenues and/or customer value. The second strongest category, once again, is the growth stage, which is represented by 23.7%.
Now, we look at the source choices of founders. At any point of growth, the founders' financial resources are essential, and they are typically supplemented by a different mix of other sources of funding, depending on the stage. For people who have great ideas but lack the financial resources to start and operate a company, the reliance on one's own financial resources may be a barrier to entry. (Figure 3.)


Figure 3. Most used financing sources depending on the stage. ¹⁶
As a result of studies in the EU countries, most of the founders plan to expand internationally within the next 12 months. Specifically, 76% plan to expand within the EU and 37% outside of it (with 26% planning to expand both within as well as outside of the EU). Only 11% of the surveyed startups do not plan to expand internationally in the next 12 months. Across all levels of growth, there is no discernible change in the desire to grow globally. This is especially true for internationalization within the EU, while startups in later stages of growth have a greater desire to expand outside of the EU. Although many startups want to expand internationally, they face numerous challenges, the most common of which are “finding the right partners,” “lack of financial support,” and “legislative/regulatory barriers.” (Figure 4.)



Figure 4. Obstacles of internationalization of startups.¹⁷
Among the EU countries German infrastructure of funding startup firms has several differences. And it is actually bank-based system where banks are dominant and these financial intermediaries develop long term relationships with the German firms. The German financial infrastructure differs from that of other countries in that it avoids liquidity restrictions.
The German financial system has two distinct institutional characteristics. To begin with, German businesses are almost entirely reliant on banks for their financing needs. Second, in addition to providing liquidity to businesses, banks are well-represented on their supervisory boards. Because of Germany's financial infrastructure, which allows for the distribution of priced resources to small businesses, startup companies face few liquidity constraints. There is an active support by the government in the small firm industry, especially the business startups.
Government policies played an important role in motivating entrepreneurs seeking innovation. According to their research 54.29% of the financial needs are met by external finance, with banks and equity having the highest values of 16.84% and 23.13% respectively. With other sources like Leasing 0.74%, Supplier credit 0.94% and Development bank 8.52%.¹⁸ Findings are indeed surprising with a Bank-based financial system like Germany, firms prefer equity over banks as the sources of finance.

4.