Escaping the Startup Trap: Can Policymakers Help Small Companies Grow to Major Employers?

Starting a new business is hard. Scaling it up to a significant size is harder. Europeans have long fretted about their lack of ‘unicorns’— privately held startups with a valuation of more than $1 billion. More generally, there is a sense that European startups either fail to grow or are bought out by larger companies before they go public or create a significant number of new jobs.

A January 2019 analysis by CB Insights showed only 33 European unicorn companies, compared to 83 in China and 150 in the United States. For example, SoundCloud, an online audio platform, was founded in 2007 in Stockholm and later moved to Berlin. By 2016, it was valued around $700 million, and at one point sought a $1 billion valuation to be sold. However, by 2017, the company was on the verge of bankruptcy, abruptly fired 40 percent of its staff, and closed two offices. By August 2017, the company was valued at just $150 million. Or consider restaurant delivery firm Take Eat Easy, founded in Brussels in 2012. After a year, the company expanded to Paris and raised two rounds of venture capital funding in 2015. Take Eat Easy scaled from 10 to 160 employees and from 2 to 20 cities. But in 2016 Take Eat Easy shut down, citing revenue not yet covering fixed costs and an inability to raise a third round of funding.

Even in the relatively successful United States, it seems that new companies are scaling-up less frequently than they used to. The Progressive Policy Institute analyzed Census Bureau data on business dynamics over time, focusing on “young” businesses—aged 6-10 years after being founded. We found that in 2014, 0.05% of young businesses were major employers, defined as having 1,000 or more workers. That’s half the 1994 rate, when 0.1% of young businesses were major employers.

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