Drawbacks of working in the EU for startups. Join the dots within EU Data Regulations and Software Outsourcing

The situation with the growth of startups in the EU is rather different from the situation in the US. If the average number of applications to form new businesses in the USA grows each month, European companies don’t have such efficient results. The European Investment Bank estimates that about 75% of all European late-stage high-tech companies are acquired by non-European firms, according to TechEU report

What challenges have arisen, what should be in priority, and how it impacts the regulatory framework? Icon.Partners, a leading international law firm specializing in legal startup counseling, and BandaPixels, an international all-in-one software solutions provider, discovered together to make Tech businesses in the EU empowered for success!

For now, let’s discover the work context of European Union operations in the Tech sphere:

• EU employees` productivity level is lower than US ones

As the OECD informs, labour productivity (GDP per hour worked) in the EU is approximately 70-75% of the US level. In 2023, the average labour productivity in the EU was $75.5 per hour, compared to $99.8 in the US. If we consider the last decades,  average annual growth of labour productivity in the EU was about 1%, compared to 1.5% in the US. The same situation within the market valuation, as well: since 2005, growth in the market of US-listed companies has more than tripled, while that of European companies has increased by only 60%. This significant difference can be explained by the much greater innovation efforts of companies in the USA, where R&D expenditures as a share of sales are more than double those in Europe.

• Disintegrated economy

The EU consists of 27 member states, each with its own market peculiarities and regulatory requirements, which we`ll discover later. This feature creates challenges for startups in multicultural settings and within consumer approaches to create a single product or service for the entire EU. Startups often have to adapt their products and marketing strategies for each country individually, which increases costs and slows rapid growth.

• Traditional financial solutions are prevailing in the EU

Historically, the European economy has relied more on bank financing than on capital markets. Banks tend to be more conservative in their investment decisions and less prepared for financing risky ventures. That means less availability of venture capital for startups in Europe compared to the US. As founders, Icon.Partners clients, share that startups often find it difficult to maintain successful rounds of early stages funding, which can hinder innovative potential.

• European culture of investing

In addition to the previous point, the European mentality focuses more on keeping money in bank accounts rather than investing in stocks or other financial instruments. It could be connected with a conservative financial culture and lower risk appetite. As well, such a tendency is explained by regulatory requirements in the EU that create additional barriers to investing in capital markets. As a result, less capital is open for investment in startups and innovative projects through capital markets

• More strict data regulation policies

As far as it goes, General Data Protection Regulation (GDPR) sets strict rules for the collection and processing of personal data. This creates additional costs for startups to ensure data privacy compliance. Restrictions on the use of data make the process of developing products, especially related to machine learning and AI, quite nurturing. Also, one of the biggest risks for startups is the risk of getting high fines for GDPR violations, which deter them from investment and new ideas execution.

• (No) unity of market and compliance

Despite the former idea of a single market within the EU, startups face different sets of rules in each EU jurisdiction. Different tax systems, labour laws and regulatory framework burden running business across the EU. The cost of compliance with various national сlaims can be significant for early-stage companies, which leads to limiting their operations to one or a few countries, rather than taking advantage of the entire European market.

BandaPixels`s vivid experience highlights such examples of EU market peculiarities to take into account for Tech businesses:

• Fragmentation of regulatory environment

According to a 2022 report by the European Commission, regulatory fragmentation costs businesses operating across EU borders up to €160 billion annually. Each member state maintains its own set of rules, particularly regarding taxation and business transactions, leading to significant disparities. For example, the corporate tax rate can vary from 9% in Hungary to 34% in France. This lack of uniformity creates barriers for startups’ growth and compliance, as in trying to make the process smooth businesses spend an average of 3-5% of their annual turnover on regulatory compliance.

• New outlook on GDPR

The average cost of GDPR compliance for a small to medium-sized enterprise (SME) is estimated to be around €85,000 in the first year, according to a study by the International Association of Privacy Professionals (IAPP). For larger companies, this can exceed even €1 million. While large corporations have the resources to manage these regulations, hire in-house lawyers, startups often struggle with substantial costs. Additionally, non-compliance can lead to hefty fines, with penalties reaching up to €20 million or 4% of annual global turnover, whichever is higher. Consequently, many European start-ups are considering relocating to jurisdictions with less stringent data laws and a more flexible environment as in the United States

• Venture capital access

In 2023, European startups raised around €55 billion in venture capital, a significant amount but still dwarfed by the $330 billion raised by U.S. startups in the same period. As we discovered, European banks are often risk-averse, and reluctant to finance businesses without a proven track record, preferring to invest in established companies or sectors. This cautious approach is reflected in the fact that venture capital accounts for only about 0.03% of the EU’s GDP, compared to 0.36% in the U.S. Not fair game on VC funding at all.

• Proofs of multicultural settings impact

Survey, conducted in 2021, found that 60% of European startups identified adapting to local markets as a significant barrier to scaling. Each country has its own consumer preferences, languages and business customs, meaning that a one-size-fits-all approach is often not feasible. Adapting products to each local market increases operations framework and costs by as much as 30% compared to operating in a more homogeneous market like the USA.

How to deal with such drawbacks?

We can’t change the system as rapidly as we desire, so the exchange of practices and expansion to the US market can help to gain needed case practices and strategies enhancement.

Why do startups choose the US?

• Unified market

The US offers a single, enormous market with a population of over 330 million consumers. Unlike the EU, the US has a single language and a more homogeneous consumer culture, making scaling much simpler. This allows startups to grow faster and achieve economies of scale.

• Developed venture capital ecosystem

The US, especially Silicon Valley, has the world’s most developed and famous venture capital ecosystem. It means more access to funding at all stages of a startup’s development – from seed investments to late-stage rounds. US investors are often willing to invest large amounts to take on greater risks.

The US, especially Silicon Valley, has the world’s most developed and famous venture capital ecosystem. It means more access to funding at all stages of a startup’s development – from seed investments to late-stage rounds. US investors are often willing to invest large amounts to take on greater risks.

• Flexible labor laws

It’s easier to hire and fire employees in the US, allowing startups to adapt more quickly to market changes. Less rigid restrictions on working hours and wages give startups more flexibility in managing human resources and costs, focusing on innovations.

• Mild data laws

While there are data protection laws in the US, they are generally less stringent than the EU’s GDPR. This allows for more freedom to innovate, especially in the areas of AI, machine learning, and data analytics. There are lower risks of large fines for violating data processing rules.

• Simplified tax system

Although tax rates may vary between states, the overall tax system in the US is simpler than in the EU with its 27 different tax systems. There are tax incentives for startups and innovative companies.

• Entrepreneurial culture

The US has a strong entrepreneurial culture that encourages risk-taking and innovation. Failures are seen as part of the learning process, not a final defeat. This creates an environment that is psychologically supportive for startup founders, you need it!

• Easier IPO Process

It is easier to take a company public through an IPO in the US. The US stock markets are more liquid and have a higher capitalization, which can lead to a higher company valuation.

More flexible regulatory framework

In many industries, regulatory requirements in the US are less stringent than in the EU. This can speed up the launch of new products to market and reduce compliance costs.

These factors combined create an environment that many European startup founders consider more conducive to the rapid growth and success of their companies, however what’s in common – prioritizing legal and strategic implications

• Labor laws

US labor laws are more flexible, allowing for easier hiring and firing, but also potentially leading to less worker protection.

• Intellectual property

The US has strong intellectual property protection laws, which can be beneficial for startups looking to protect their innovations.

• Agile approach

More independent efficient processes and economies of scale allow for a more agile and adaptable approach, tailored to the specific needs of startups.

• Startup-centric mindset

The less external pressure exists, the more time to focus and conduct research to understand the unique challenges and opportunities faced by startups, providing a supportive and collaborative environment.

• Blockchain solutions

As the market becomes more vast, security practices should be in priority. Ensuring that startups’ blockchain solutions are reliable will optimize the workflow and integrate various ecosystem designs.

Note: These factors combine to create an environment that many European startup founders consider more favourable to the rapid growth and success of their companies.

Would you like to focus on a specific aspect of starting a business in the US? For instance, we could dive into the process of counseling and identifying problems in your startup`s workflow in the particular industry.

To be effective and start rapid growth in whatever market in the EU or US you wish, remember that what`s in focus that leads the whole development. Harmonize the business environment with security and regulatory framework, update your policies, standards and internal practices, prepare for funding opportunities – it’s a long but experienced path.

We believe in you, shine with us!

Yours,

BandaPixels x Icon.Partners