Only 3-4% of European VC-backed start-ups relocate abroad, study shows

Between 3.3% and 4.3% of European start-ups backed by venture capital firms (VCs) relocate abroad, according to new data from the European Commission's Joint Research Centre (JRC).

Almost three quarters of relocating start-ups head to the US, usually to entrepreneurship hubs in the San Francisco Bay Area, Greater Boston and the New York metropolitan area, with another 7% settling in the UK.

This perspective on relocation was welcomed by Michiel Scheffer, president of the European Innovation Council (EIC), the main EU funder of innovative start-ups. There are “a lot of urban legends” about start-ups leaving Europe, he told Science|Business. “There is a feeling that everyone moves to the US, but no, it’s a small fraction.”

The figures come from an ongoing research project studying the magnitude, drivers and impact of start-up relocation, in which the JRC analysed almost 17,000 VC-backed start-ups and compared them to European start-ups that did not receive VC funding.

In the latter group, the relocation rate was between 0.3% and 0.5%, suggesting investors play a role in convincing start-ups to move their headquarters. US-based VCs often require start-ups they support to relocate to the US, where they are familiar with the regulations and can make use of their networks, and where there are better exit opportunities. VCs are also likely to back firms with higher growth potential, which may influence the decision to relocate.

According to Scheffer, it’s also important to remember that in both the US and Europe, around 50% of start-ups don’t survive the first five years. “The simple fact of companies leaving to the US does not mean they are all successful in the US.”

Nonetheless, relocation is an issue that needs urgently to be addressed, for instance by implementing the EU-wide corporate regime, removing barriers to the single market and creating an ecosystem of larger funds that invest across EU borders, he said.

Regional variation

While the confirmed relocations of European VC-backed start-ups stands at 3.3%, the rates vary significantly between countries. Companies from smaller EU countries with less mature innovation and investment ecosystems are generally more likely to move abroad.

The highest rate of relocation is from Romania, at 14.9%, followed by Bulgaria on 8.8% and Lithuania on 7.7%. Italy and Spain recorded the lowest rates, at 1.9%.

“Start-ups in Baltic countries, while being located in innovative hotspots, inevitably need to expand to foreign markets, which often might also imply a move of their headquarters,” the JRC writes.

Countries that do well in EIC funding competitions, such as France, Germany and the Netherlands, also have lower levels of relocation, Scheffer notes. “It really matters that regions and countries do their best in developing their ecosystems,” he said. “If the conditions are not as good, relocation is more likely.”

The EIC has already introduced targeted support for the Widening group of countries with less advanced innovation systems through its Pre-Accelerator programme. It’s also important for start-ups in those countries to connect with more developed ecosystems, Scheffer said.

The nature of the company is also a factor. Sectors such as IT services and life sciences show higher rates of relocation compared to manufacturing or deep-tech start-ups, which require costly infrastructure and equipment.

Costs and benefits

The relocation of European start-ups is frequently framed as a major hurdle to Europe’s economic competitiveness, but the JRC paper suggests the impact of relocation is not always detrimental.

While a start-up transferring most of its activities abroad is likely to have a negative impact on local ecosystems, only 3% of relocating companies cease operations in their home country. The vast majority relocate partially, meaning they move their headquarters overseas but retain a certain level of operations in the original country.

Related articles

• Insider’s View: how a transatlantic spin-out chose Stockholm over Chicago
• EU start-ups cite access to markets and funding as main reasons for relocating

In some cases, a US-based VC fund requires a start-up to establish a new entity in Delaware that becomes its parent company, without any transfer of employees or infrastructure to the US. This “may have positive effects on the remaining operations in the local start-up’s home country,” the authors note.

For high-potential start-ups from small EU countries, looking for foreign markets may be a necessity. For some companies, relocation may allow them to expand their operations in their home countries, whereas they would otherwise have gone bankrupt, due to a lack of access to labour or financing, the report continues.

Policy recommendations

The authors recommend that policymakers support start-ups in expanding to foreign markets while aiming to retain high-value activities such as R&D in Europe.

“The important question is not whether a start-up has migrated, moving its headquarter abroad, but how much of the added value (i.e. jobs, turnover, expertise, etc.) and pertinent knowledge remains in Europe,” they note.

They also suggest several policies that could reduce the need for companies to relocate. These include improving access to start-up financing, particularly for large-scale deals; strengthening entrepreneurial ecosystems; and deepening the single market.

The Commission is currently in the process of launching the Scaleup Europe Fund, which will make larger investments in scale-ups than existing European instruments.

Europe should also look to provide more exit options, including through mergers and acquisitions by large European firms. More competitive acquisition markets are likely to have a positive impact, particularly for science-based start-ups, the report suggests. The EIC Corporate Partnership Programme is already strengthening links between larger firms and innovative start-ups, it notes. 

Meanwhile, the EIC Board wants to promote more research in this area by connecting with people doing PhDs and providing access to the vast database of companies that have received or applied for EIC funding.

The JRC analysis follows another study, published earlier this year by the European Investment Bank and the Commission, which found that access to the markets and funding needed to scale-up are the primary factors pushing European start-ups and scale-ups to relocate.

Previous reports have shown that Europe’s most successful start-ups are disproportionately likely to move abroad. Between 2008 and 2021, nearly 30% of European unicorns, which are start-ups valued at over $1 billion, relocated their headquarters.