atrin Suder, Lea Thiel and Julian Kirchherr from McKinsey & Company explain which initiatives cities need to undertake in order to increase funding opportunities for startups.
In the world of startups, the rule of thumb is that American startups raise twice as much capital in each round of financing as European ones.
For many years, European policy-makers believed there was not much one could do about this discrepancy. After all, capital follows ideas, the thinking went. If there was only more gifted entrepreneurs in Berlin, London or Paris, more funding would be available.
But does this conventional wisdom really hold true? This was one of the questions we attempted to answer in the past seven months.
To do so, a team of consultants conducted an in-depth case study on Berlin's startup ecosystem (jointly published by McKinsey & Company and the Senate of Berlin this October) which included more than 100 structured interviews with entrepreneurs, venture capitalists, corporations, policy-makers and academics from all around the world. We attempted to understand what really constitutes a vibrant startup ecosystem – and what role capital availability plays in such a system. This new study constitutes a follow-up of "Berlin 2020- Fostering Competitiveness and Innovation", our 2010 report on Berlin outlining strategic approaches to regional development for Germany's capital.
The key capital policy insights in our new study:
Capital is a startup ecosystem's most decisive asset. No young company will be scaled if only insufficient funding is available. Thus, capital availability highly correlates with a city's reputation as a startup hub.
Interestingly, there may be a lack of funding in a city despite many great business ideas, though. The root causes, also evidenced by the interviews we conducted:
First, the risk aversion of venture capitalists (VCs) is highly variable. Indeed, many studies and surveys profile investors in countries such as Austria, Denmark and Italy as "hesitators" sticking to business models with a proof of concepts, whereas American VCs with a "lower aversion to risk" are much more likely to invest in dicey business ideas.
Second, the horizon and awareness of VCs is limited. Indeed, VCs –limited in their resources – tend to only track the deal flow in cities already known as startup hubs; they may not investigate startup activities in emerging hubs because they do not expect any promising companies here.
VCs complained for many years that legal hurdles in Europe would also impede VC investments. However, a range of studies and investigations evidence that this alleged root cause does not hold true. First, investors truly interested in a startup are likely to overcome legal disadvantages. In addition, Europe continuously harmonizes its VC legislation and makes it more business-friendly. The latest European VC legislation was only implemented this July.