Don’t go chasing unicorns, Mr Moedas

The EU Research Commissioner is hunting unicorns.

In a speech given in Berlin in March, Carlos Moedas called for more Ubers, more Spotifys and more Rovios in Europe.

There are about 150-plus unicorns, as billion-dollar start-ups have been dubbed, and most are in the US.

Europe has around 40 unicorns but it could have more, if fledgling companies get more funding and advice on how to scale-up, the Commission suggests.

This is where the European Innovation Council (EIC) proposal comes in.

My request for the EIC would be to the drop the unicorn goal and focus on a bottom-up strategy that would help the base of the start-up community in Europe.

Personally, I find the use of the number of unicorn sized start-ups as a metric for the success of an ecosystem not entirely adequate. Their contribution towards the development of a start-up culture tends to be a bit exaggerated.

First, the value of unicorns is estimated on their potential future earnings, in a highly speculative investment game. Many of the companies have not yet transitioned into a stable form and have yet to prove that they will be of long term benefit to the start-up economy.

Second, while growing up and scaling, these unicorns do not retain the attributes that make for a start-up company. They gradually convert from an entity that is focused on a highly ambitious and scalable business problem, to a well-oiled, if monolithic, business machine.

While having a significantly smaller footprint in the media and start-up lore, I suspect there is a long tail of smaller start-ups that qualify for the high growth potential category.

However, these companies never end up as unicorns because they acquired before reaching this stature.

By challenging the status quo and disrupting business models, these small to medium-sized enterprises bring important pulses of innovation into established sectors. They attract and retain the majority of entrepreneurial start-up talent and have a strong pressure to succeed in monetising their innovation.

The existence of functioning start-up networks is imperative for the continuing formation and growth of such companies.

Following the sale of a start-up, their founders often come back to the ecosystem as angel investors or serial entrepreneurs, forming the core of local ecosystems. It is from there that new ventures start and where a young entrepreneur can get valuable, genuine advice.

Funding the entrepreneurial culture

The EIC should contribute to an investment culture that gives entrepreneurs fast access to sufficient seed capital at favourable terms.

There are many models that can be taken as a benchmark. For example, it takes a half a day to make an application to the US accelerator Y Combinator, and a couple of emails to clarify questions regarding the business model.

The airplane tickets to San Francisco are paid for, as is the hotel. After a 10 minute interview, the decision on an investment of $120,000 for approximately 7 per cent equity or convertible loan notes, is made on the same day.

The terms are simple, friendly and give companies many options for future investment rounds.

Compare this dynamic and adaptable investment culture to the tedious process of applying for funding from the Horizon 2020 research programme.

The paperwork is a significant hindrance to a successful application for EU grant money, as evidenced by the large number of consulting companies specialising in H2020 applications.

Bureaucracy kills innovation and favours those who know how to navigate around obstacles and have the best connections in the administration. I would hope the EIC can give financial incentives to investment vehicles that come with friendly terms for start-ups.

In the global competition for talent and ideas, the EIC needs to create a viable alternative to the dynamic start-up ecosystem of the US, and to Asian initiatives, such as the programme to support entrepreneurship in China.

In order to be successful, it is imperative that the Commission works closely with existing ecosystems and experienced entrepreneurs, rather than creating another large bureaucratic apparatus.

Radical ideas

Start-up culture cannot be imposed from the top, and needs protected space to grow. It is born in hackerspaces, such as La Paillasse and The Chaos Computer Club, and in universities, and gives birth to radical ideas that are the foundations of tech start-ups.

When it comes to networking and network density, there are only a few large conferences in Europe, such as Pioneers 500 and Hello Tomorrow, that understand what is best for start-ups. 

Too often, conference organisers exploit start-ups with high participation fees and the promise of publicity and investment.  The results are very mediocre in terms of impact.

My hope is that the EIC will identify and provide financial support to start-up communities that have a track record in community building and a friendlier approach to innovators.

Piotr Jakubowiczi is a co-founder and chief operating officer of Sothic Bioscience, a synthetic biology start-up based in Cork, Ireland. Other ideas on the EIC proposal can be read here