EU Push to Create Its Own Silicon Valley Finds Doubters

Europe needs to sort out its fragmented telecoms market and regulatory imbalances if it is to spur a new generation of technology start-ups and create its own version of America's Silicon Valley.

The European Union has set aside 80 billion euros ($109 billion) to fund cutting edge research and innovation over the next six years, underscoring its ambition in these fields.

And last week it launched the Startup Europe Partnership (SEP), a platform designed to match hot start-ups with funding from bigger companies, including telecoms giants such as Orange and Telefonica.

For Neelie Kroes, Europe's commissioner for telecoms and digital affairs, it is an essential step to boost competition and ensure Europe is not left behind in the global tech race.

"If Europe wants to challenge Silicon Valley as a place that generates digital business, our start-ups need to learn how to 'scale'," Kroes said as she launched the SEP website.

"They need to get better at growing: breaking through national and language barriers so they mature into global champions that last."

But Europe faces huge challenges to emulate the success of Silicon Valley, a region south of San Francisco set up in the 1960s that has produced some of the most iconic firms of the past four decades, including Apple, Cisco and Google.

Among these are the EU's fragmented telecoms sector, with competing providers in almost every country, and a technology infrastructure that is far from integrated.

What's more, the regulatory landscape varies from state to state and the rollout of new technology such as 4G has been slow, several tech entrepreneurs attending the SEP launch noted.

"The United States and South Korea in terms of data usage are far, far ahead of Europe, due to our technological infrastructure and also the non-existence of the single market in telecoms," said Kaya Taner, chief executive of Applift, a marketing platform for mobile games.

More challanges
Another area of concern is the EU's strict data protection laws, which are set to be beefed up even further. Because they are implemented by separate national authorities and personal data is often defined differently across countries, small businesses may struggle to comply with multiple regimes.

As Mark Silverstein, head of product, tech, intellectual property and policy at music streaming service Spotify, said: "consistency in regulation makes life a lot easier."

That is a common complaint from some EU leaders too, including Jyrki Katainen, the prime minister of Finland, a country that has enjoyed a boom in start-ups, including the ubiquitous "Angry Birds" game created by Rovio.

Complying with 28 different regulatory regimes - one for each EU country - imposes hefty fixed costs on start-ups which may eat up a significant part of their budgets, a study by the Conference Board business research association has found.

Despite the obstacles, Kroes is determined national barriers can be broken down and that jobs and investment will rapidly be created by harmonising rules across the continent.

To that effect she has put forward a legislative package for an overhaul of the European telecoms sector which was passed by the European Parliament in April and is now waiting for approval from member states.

Key provisions included in the package are making the sale of mobile licences more uniform across Europe, phasing out mobile phone roaming fees by 2016, and barring telecoms operators from prioritising some Internet traffic over others.

The European Commission estimates the app economy in Europe alone could add an extra 1 million jobs and contribute 63 billion euros to the continent's economy by 2018, up from the 17.5 billion euros in 2013.

And yet, challenges remain. A study by SEP of European start-ups that have received more than $1 million in funding noted that many of them tended to transfer their headquarters from Europe to the United States, hardly a positive sign.

Market fragmentation is not only a problem in terms of the costs associated with additional red tape, but also because it makes access to finance much harder. Start-ups complain that support schemes are complicated and have onerous reporting requirements, thereby limiting their ability to expand.

Indeed, the lack of adequate financing was cited as the top obstacle to innovation for businesses in a survey for the EU executive released on Tuesday.

What is more, providers of early "seed" capital often urge European entrepreneurs to move to the United States where access to further funding is easier and the returns greater, making a successful "exit" from the original investment more likely.

"There are not the number of exits you see in the United States," said Boris Veldhuijzen van Zanten, founder of The Next Web, an online technology publication, referring to every investor's desire to make a return on the initial investment.

"Why would you invest if there are no exits?"

© Thomson Reuters 2014