Not Yet Up to Scratch

Jel Chovet and Clelia Uhart, founders of Internet start-up Paeony, didn't need to read this month's European Commission report on entrepreneurship in the E.U. to know that all is not well with Europe's new economy. They left France to set up shop in Britain because the U.K. stacks up better when it comes to taxes, administrative burdens and company valuations, says Paeony chairman Chovet. But people with technical, design and production skills are hard to find in the U.K., whereas France has a large pool of such talent. So Paeony, which inserts advertising into online games, split itself in two, with its headquarters in London and its design and production team in Paris.

Paeony's experience is far from unique. Not one of the E.U.'s 15 member states has yet created an ideal environment for Internet start-ups and other small and medium-sized businesses and a summary of the commission's study, "Better, But Not Yet the Best," explains why.

The report found government-created barriers to be among the biggest stumbling blocks for start-ups in Germany, France and Italy. Red tape is only part of the problem. Britain one of Europe's hottest markets for Internet companies turns out to be one of the toughest places to raise seed capital, as is Sweden, another technology hot spot. Meanwhile well-wired Finland, home to mobile phone giant Nokia, has yet to see a significant number of innovative start-ups. "Although no member state is bad at everything," says Erkki Liikanen, the E.U.'s enterprise and information society Commissioner, "every member state is bad at something."

Such inconsistencies mean that "the competitiveness gap between Europe and its main rivals seems to be widening," the report warns. It notes that countries placing heavy administrative burdens on start-ups, such as Italy, Belgium and Austria, create fewer new jobs. Europe has not only a higher unemployment rate than the U.S. but also poorer productivity, a factor the study links in part to underinvestment in new technology. The five-part, 345-page survey concludes that Europe's main problem is a lack of dynamism. "Too much time is lost before necessary changes and reorientations are introduced and then fully exploited," the report states. "This is true for industry, where the speed of change is higher in both the U.S. and Japan, but it is also true for governments and administrations." The report says the entrepreneurial spirit in the E.U., "generally weak" to begin with, is often undermined by public policies. Among them:

Creditors have overlong claims on assets, curbing the ability of bankrupt entrepreneurs to start again. While the limit is under a year in the U.S., where failure is often a badge of honor, it is 12 years in Ireland, 10 in Sweden and six in four other countries.

It takes too long to register a new company about 24 weeks in Germany, for instance, and 15 weeks in Spain.

Access to seed capital and other early financing is limited. Europe has a shortage of "angels," private investors who fund projects too small for banks.

In addition to changes in public policy, the report calls for the establishment of strong stock markets for listing new companies. Such markets are growing fast in Europe, but they remain fragmented. Partly as a result, Europe had only 140 initial public offerings in 1999, with the average deal valued at $6.8 million, while the U.S. had 544 ipos averaging $87.2 million each.

Not all the news is bad. The commission reports that requests in Greece for discharge from bankruptcy move as quickly as in the U.S., and Greece and Ireland are close to U.S. levels of taxation on stock options. But organizations like Growth Plus, a group of Europe's most successful entrepreneurs, think governments should do more such as easing immigration laws so that people with I.T. skills from outside the Union can work in Europe.

"European governments must understand that you need to create wealth before you can distribute it," says Julie Meyer, British co-founder of First Tuesday, a monthly global networking group for start-ups. "They should get out of the way." Entrepreneurs know it, the E.U. report echoes it how long before governments finally catch on?