MEPs call for start-ups to be treated differently from SMEs

17 Oct 2023 | News

Current EU legislation does not distinguish innovative start-ups from the massed ranks of SMEs. A specific definition - and a specific strategy - is needed to back start-ups and help them to grow 

MEP Tsvetelina Penkova. Photo: Mathieu Cugnot / European Union

MEPs are calling for the creation of a comprehensive start-up and scale-up strategy based on a new definition of this type of company that takes account of the particular problems they face.

Current legislation relating to access to EU support programmes puts start-ups in the same bucket as SMEs, which are defined in terms of the number of staff and their turnover. That broad-brush definition makes it harder for start-ups to secure funding and to grow, according to a draft report presented to Parliament’s industry, research and energy (ITRE) committee on 12 October.

The report calls on the Commission to propose harmonised definitions of start-ups and scale-ups that reflects how they differ from SMEs and to re-evaluate the effect on start-ups of legislation such as the SME Relief Package put forward by the Commission in September.

“Start-ups are the driving force of innovation, and are worth around €2 trillion in Europe,” rapporteur Tsvetelina Penkova told Science|Business. “They have to be properly defined as an active player in the economy.”

The SME Relief Package aims to provide short-term relief, boost long-term SME competitiveness and resilience, and foster a fair and SME-friendly business environment. It includes a proposal for a late payment regulation and for a directive on tax simplification for SMEs.

SMEs were also a priority of the EU’s COVID-19 recovery programme, with efforts to make life easier by reducing administrative overheads and improving access public and private funding. From 2021-2027 the Commission expects more than €200 billion to be made available to SMEs under its various funding programmes.

But in the context of the basket of measures supporting the EU’s 24 million SMEs, start-ups were an afterthought, said Penkova. Start-ups continue to face a number of challenges, including limited access to funding, regulatory burdens, difficulties attracting and retaining talent, and trouble accessing markets. Penkova believes the introduction of the unitary patent in June, which means companies no longer have to register their innovations separately in each member state, is a positive step, but more needs to be done.

“European investors tend to be more conservative than their American counterparts, and would need some regulatory protection to invest in certain sectors,” said the Bulgarian MEP, who previously worked in the financial sector.

“I strongly believe if we manage to create a broad, harmonised definition that distinguishes start-ups from SMEs, it will make access to private capital much easier.”

Receptive environment

The report calls for enhanced funding mechanisms to give start-ups greater access to public procurement, grants, loans and venture capital, and to “explore the possibility of establishing a dedicated European start-up and scale-up fund”.

It also wants moves to make the environment as a whole more receptive, by establishing entrepreneur-friendly tax regimes, simplifying administrative procedures, fostering collaboration between start-ups and established companies, and promoting digital skills and entrepreneurship.

In addition, there should be bigger fiscal incentives for start-ups and scale-ups involved in the green and digital transitions, and measures promote the adoption of technology by start-ups as part of the SME relief package.

There are European Commission initiatives that are specifically targeted at start-ups, including Startup Europe, which aims to strengthen networking opportunities for deep tech companies, and the European Innovation Council’s €10 billion budget to help start-ups and SMEs scale up and bring their innovations to market.

Hassle factor

Penkova’s report is an accurate reflection of the needs of European start-ups, but more detail is needed, said Agata Hidalgo, European affairs manager at France Digitale, an association which represents 1,800 start-ups and scale-ups.

Defining start-ups is an essential first step, but the European Company status - under which a business can operate in different European countries using a single set of rules - should be simplified to allow start-ups and not just large companies, to have a legal entity at European level, she said.

“Every time a company, especially a start-up, wants to open up to a new market, it must go to all the hassle of setting up an entity, aligning to local company, labour and fiscal laws,” said Hidalgo.

Specific proposals to address the talent gap are also missing and this is always highlighted by France Digitale members as one of their key challenges, Hidalgo added.

And while the report calls for greater access to public procurement, the association would like to see targets, such as 20% of public procurement reserved for start-ups and SMEs.

“Our members struggle to access public offers because they are too large, so they have to create a partnership with an established corporation, or they are excluded because the criteria do not fit the way they work,” Hidalgo said.

“It’s a pity because, especially when it comes to the digital and green transition, start-ups are usually the cutting-edge providers.”

She also believes private procurement should not be neglected, with a push needed to encourage established companies to purchase from start-ups.

ITRE is due to vote on the report on 28 November, which could allow a plenary vote before the end of the year. Penkova says communication with the Commission has been positive, and she expects the issue to be carried forward should MEPs decide to adopt the motion for a resolution.

The upcoming European elections in 2024 could throw a spanner in the works. Hidalgo does not expect any proposals from this Commission, but she said the report has put several important issues on the agenda, and she hopes the next Commission will pick them up.

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