Founder's Insight

Shaping the Future of European Research and Innovation, and Building the Next EU-Based Unicorns

By Ahmad Bilal, Founder, Atlantis Innovation · September 24, 2024 · Originally published on LinkedIn

This article outlines recommendations for FP10, integrating insights from recent reports, the successes of existing EU-funded unicorns, and expert analyses.

The upcoming research framework (the successor to Horizon Europe) represents a pivotal opportunity to enhance Europe's position as a global leader in innovation and technology. Building on the strengths and lessons learned from Horizon Europe, it's essential to implement strategic improvements to create a more dynamic ecosystem that can foster the growth of organisations in a competitive world.

€1bn → €6bn
ETCI first-year investment and capital mobilised for Europe's tech ecosystem
$656bn
US R&D spend in 2022, roughly double the EU's €311bn
$100bn vs €50bn
Venture capital raised by US vs European startups in 2022
70,000+
Startups launched with support of US SBIR/STTR programmes

1. Bridge the Late-Stage Funding Gap

One of the significant challenges for European startups is accessing sufficient funding during the scale-up phase. While Horizon Europe has provided considerable support for early-stage innovation, there's a clear need for more investment to help startups transition into mature, high-growth companies.

Recommendation: FP10 should introduce a dedicated funding stream focused on late-stage investments, similar to private venture capital, to support high-growth companies. The European Tech Champions Initiative (ETCI) serves as a successful example, having invested close to €1 billion in its first year to mobilise up to €6 billion for Europe's tech ecosystem (European Investment Fund). This type of initiative should be expanded, with increased budgets to ensure more startups can access late-stage funding.

2. Streamline Access to Funding and Reduce Bureaucracy

Many startups find the application and reporting processes for Horizon Europe overly complex and time-consuming. This administrative burden discourages participation, particularly among smaller startups that lack the resources to navigate these processes.

Recommendation: FP10 should introduce simplified application procedures, with a fast-track process for high-potential startups. This could include shorter application forms, fewer reporting requirements, and the use of better digital platforms for streamlined communication.

3. Foster Collaboration and Innovation Ecosystems

Europe's innovation ecosystem is often fragmented, with limited collaboration between academia, industry, and startups. This fragmentation hinders the ability to translate cutting-edge research into commercial products.

Recommendation: FP10 should prioritise the creation of multi-stakeholder partnerships, encouraging collaboration between universities, research institutions, large corporations, and startups. Funding should be directed toward the development of innovation clusters and hubs, where ideas can be rapidly developed, tested, and brought to market. The European Innovation Council (EIC) should be further expanded, with an increased budget and broader mandate to foster cross-sector collaboration. The Fast Track to Innovation initiative (Horizon 2020) can be brought back to support SMEs, with some overhaul of the previous programme.

4. Enhance Talent Development and Retention

Europe faces a talent gap in key areas such as artificial intelligence, deep tech, and green technology. Retaining and attracting skilled workers is crucial for building a robust innovation ecosystem.

Recommendation: FP10 should invest in comprehensive training, education, and mobility programmes for researchers, engineers, and entrepreneurs. This could include scholarships, training grants, and opportunities for cross-border collaboration. Additionally, promoting entrepreneurship education at all levels will cultivate a culture of innovation and risk-taking, essential for scaling startups into unicorns. EIT and Marie Curie programmes can support these objectives, but they need to be overhauled too, made more accessible and less complicated for startups, and should not be limited to exchanges and mobility within universities.

5. Expand International Collaboration and Market Access

While Horizon Europe has primarily focused on internal EU collaboration, FP10 should place greater emphasis on global partnerships. European startups need access to larger markets and international expertise to scale effectively.

Recommendation: FP10 should encourage collaborations with non-EU countries, providing funding and support for projects that engage in international research and development. This will help European startups access global markets and tap into diverse knowledge pools. Dedicated funding instruments can be designed for collaboration with the USA.

6. Strengthen Technology Transfer and Commercialisation

One of Europe's challenges has been the "valley of death" between research and commercialisation. Many innovative ideas and technologies never reach the market because of a lack of support during this critical phase.

Recommendation: FP10 should create funding mechanisms specifically aimed at technology transfer and commercialisation. This would include mentorship programmes, access to market intelligence, and funding for startups that are ready to bring their innovations to market. Successful examples like UiPath, a robotic process automation (RPA) startup that became a unicorn with support from European funds, demonstrate the potential for success when commercialisation is effectively supported (European Investment Bank).

7. Build a Unified and Accessible Innovation Market

Fragmented regulations and market access barriers make it difficult for startups to scale across multiple European countries. Addressing this issue is essential for enabling the growth of unicorns. Multiple reports and insights have suggested that regulations are becoming overwhelming and can hinder the creation or even progress of innovative ventures to scale.

Recommendation: FP10 should work towards revising regulations, harmonising regulations, data standards, and intellectual property laws across the EU, creating a more unified Single Market for innovation. This will make it easier for startups to scale and compete on a global stage.

8. Generic Grant Instruments

To fund the next generation of software-based, AI-based and fintech initiatives: most of the unicorns created in Europe or globally belong to these categories, where there are no direct grant options, considering most EU grants focus only on deep-tech and science fields.

Recommendation: In FP10, generic open funding instruments such as EIC Open can be expanded and channelled to fund such initiatives.

Learning from Existing EU Unicorns

A few of the unicorns that have emerged in recent years with the help of EU funding, illustrating the potential of well-supported innovation ecosystems:

Sweden · Fintech

Klarna

A fintech company specialising in "buy now, pay later" services that benefited from early-stage funding and later-stage investments facilitated by EU-supported programmes.

Romania · RPA

UiPath

A robotic process automation company that started as a small-scale startup and leveraged funding from the European Investment Bank (EIB) to scale globally.

Germany · Digital Banking

N26

A digital banking platform that received support through the European Investment Fund (EIF) and now serves millions of customers across Europe.

These successes highlight the importance and potential of consistent funding, supportive regulatory environments, and collaboration between public and private sectors in fostering unicorn growth.

The Draghi Report's Perspective

The Draghi Report emphasises that Europe needs a strategic approach to address its competitiveness challenges. It rightly advocates for increased investments in innovation, technology transfer, and the digital economy while calling for stronger public-private partnerships. FP10 should adopt these recommendations, ensuring that funding mechanisms are flexible, agile, and responsive to the rapidly evolving needs of startups and scale-ups.

What Changes Can Be Made in Existing Funding Programmes?

To boost Europe's leadership in innovation and technology, it's essential to build on and enhance existing EU funding instruments, focusing on these key actions:

  • Horizon Europe (pillars 1, 2, 3): increase funding for late-stage startups and scale-ups and simplify application processes to make it more accessible, especially for SMEs.
  • European Innovation Council (EIC): expand its equity investment capabilities and adopt a more agile funding mechanism to support high-potential startups quickly.
  • European Investment Fund (EIF): increase its role in late-stage financing and collaborate closely with private venture capital to co-invest in scale-ups.
  • European Regional Development Fund (ERDF): promote regional innovation hubs and improve technology transfer to support startups in less-developed regions.
  • European Institute of Innovation and Technology (EIT): strengthen collaboration with larger corporations, extend its reach to underrepresented European regions, and create synergy with the EIC to avoid overlaps.
  • Digital Europe Programme: focus on digital skills training and accelerating AI and data infrastructure projects.

New funding proposals for FP10 can include creating a dedicated "European Scale-Up Fund" for late-stage investments, a "Pan-European Venture Capital Fund-of-Funds" to attract more private investment, and an "Innovation Adoption Fund" to help SMEs adopt advanced technologies.

These recommendations can help the EU create a more unified, well-funded, and dynamic innovation ecosystem, ensuring Europe can rival the USA and China in technology leadership.

What Can Europe Learn from the USA?

1. Increase R&D Spending

R&D investment, 2022 (% of GDP)

USA
3.1% of GDP · $656bn+
EU
2.1% of GDP · ~€311bn
Europe's R&D spending is only about half that of the USA in absolute terms. Source: World Bank Open Data.
Recommendation: Europe should aim to increase its R&D spending to at least 3% of GDP, as proposed by the EU's Lisbon Strategy, to compete effectively in fields like AI, biotech, and clean energy. This increase could inject an additional €150 billion annually into European research and innovation, helping it catch up with the US.

2. Strengthen Public-Private Partnerships

DARPA model: the US Defense Advanced Research Projects Agency (DARPA) has an annual budget of about $4 billion and has been instrumental in pioneering technologies like the internet, GPS, and early AI research. DARPA's funding has led to technological breakthroughs with commercial applications, driving US competitiveness.

SBIR and STTR programmes: the Small Business Innovation Research (SBIR) programme awards over $3 billion annually to small businesses engaged in federal R&D, while the Small Business Technology Transfer (STTR) programme supports collaboration between research institutions and private companies. These programmes have played a role in launching over 70,000 startups since inception.

Recommendation: Europe should emulate these models, expanding programmes like Horizon Europe's European Innovation Council (EIC) and creating a European DARPA-like agency, focusing on high-risk, high-reward projects to accelerate technological breakthroughs.

3. Encourage Venture Capital Investment

Venture capital raised by startups, 2022

USA
$100bn+
EU
~€50bn
The USA has a more mature and risk-tolerant VC ecosystem, which helps startups scale rapidly. Source: Statistics Times.
Recommendation: To bridge this gap, Europe should implement policies such as tax incentives for VC investments, co-investment programmes with private funds, and the creation of a Pan-European Venture Capital Fund-of-Funds to attract more private capital into the startup ecosystem.

4. Enhance Technology Transfer

Technology Transfer Offices (TTOs): US universities generate over $2.5 billion annually in licensing revenue, with institutions like MIT and Stanford serving as leaders in transferring research to industry. In contrast, European universities lag in commercialising research outputs.

Recommendation: Establish more effective TTOs within European universities and research institutions, provide training, and offer incentives to researchers for patenting and commercialising their innovations. This approach could significantly boost Europe's ability to translate research into market-ready products.

5. Attract and Retain Talent

Skilled-worker visas issued annually

USA
~85,000 H-1B visas
EU
<40,000 Blue Cards
The US H-1B programme contributes significantly to its innovation ecosystem, especially in tech. Source: World Bank Open Data.
Recommendation: Europe should simplify visa processes, increase the number of Blue Cards, and introduce incentives such as tax breaks or fast-track residency to attract and retain global talent, particularly in STEM fields.

By adopting these approaches and investing an additional €200-300 billion annually across these areas, Europe can significantly enhance its innovation ecosystem, improve its competitiveness, and move closer to achieving GDP growth rates comparable to the USA.

Conclusion

FP10 presents a unique opportunity to build on the successes of Horizon Europe and address the gaps that have hindered the growth of European startups. By focusing on late-stage funding, simplifying processes, fostering collaboration, and supporting talent development, the EU can create an environment where more unicorns can emerge, thrive, and compete on the global stage. This will be crucial for ensuring Europe's long-term competitiveness and leadership in the innovation landscape.

The next phase of European research and innovation policy must be ambitious, dynamic, and responsive, ensuring that the continent remains a fertile ground for the next generation of world-changing startups.