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10 TRENDS

SHAPING INNOVATION
IN THE DIGITAL AGE
From here To there
Incremental innovation Disruptive innovation

R&D and Data, design, soſtware


patents and business models

Size of workforce Scale of networks


and assets and customer pools

Physical infrastructure Digital infrastructure

Western-centric The rise


innovation of Asia

Standardisation Customisation

Finite choices and Seemingly infinite choices, yet


effective anti-trust tools concentration limits competition

Services and products are ‘Beta’ and ‘pivot’ are the


perfected before launched new business model

Innovation in labs Democratisation


and garages of innovation

Focus on early-stage Focus on scale-up


start-up funding growth capital

Source: European Political Strategy Centre

1
TREND 1
FROM INCREMENTAL
TO DISRUPTIVE
A new 'incumbency' is born, challenging legacy business

• One of the defining characteristics of the digital age • In fact, many of the most successful recent
is the tremendous speed with which innovation is innovations were developed not by the powerhouses
advancing. of the 20th century, but by a new generation of
• In the post-war industrial age, innovation typically data-driven tech firms that are creating or
took place in incremental steps: Dedicated research taking over the markets of the future.
teams, typically in long-established companies, would • Many have grown exponentially in size and reach,
develop new products and services in a comparatively moving quickly into the top ten of the global
leisurely fashion – at least if one considers today’s corporate elite. In 2006, there was just one tech
frenetic pace of innovation. The innovation itself company among the world’s ten largest firms in
often consisted of an improvement or enhancement terms of market capitalisation. Today there are
to an existing product or service. seven and the top five are all digital. None are
• Today, while incremental innovation is still valid, European.
disruptive innovation – a phenomenon first • While it is the B2C (business to consumer) markets
described in the 1990s – has become the new that have today most noticeably been disrupted, this
norm of success. New players are entering existing trend is now moving squarely into B2B (business to
markets more easily and gaining rapid dominance, business) and also non-discretionary services, like
challenging incumbents thanks to genuinely different health, education and transport.
innovative products or services. 

Tech firms are the new powerhouses


Market valuation in billion US dollars
Energy Financials Health care Industrials IT
End 2006 0 200 400 600 2018 1Q 0 200 400 600 800 1000
Exxon Mobil Apple
General Electric Alphabet
Gazprom Microsoſt
Microsoſt Amazon
Citigroup Tencent
Bank of America Berkshire Hathaway
Royal Dutch Shell Alibaba Group
BP Facebook
PetroChina JPMorgan Chase
HSBC Johnson & Johnson
Source: Bloomberg, ycharts

2
EUROPE’S INNOVATION DILEMMA The result is a growing divide between frontier
and non-frontier firms, which translates into lower
Firms on the global innovation and productivity levels of growth and employment, as well as wage
frontier are typically younger, more global and discrepancies. Those who drive the technological
digitally savvy. Their business models are built frontier – or, at the very least, keep up with change
around the ability to leverage new technologies to – are at a natural advantage. Those who fall behind
reach into peoples’ lives, and better respond to their find it increasingly difficult to catch up because
needs. technology advances at such a fast pace. In the
2000s, productivity in firms at the global technological
Many older companies struggle to do this frontier rose on average 7 to 10 times faster than in
because they are constrained by their own non-frontier companies. This also explains much of
legacy ecosystems1 – whether it’s their internal Europe’s productivity gap with the US.4
processes for resource allocation; existing value
chains; customer relation channels; technological
infrastructure or investment strategies – all are set A growing gap between frontier and
up to support existing business models; and they
often conflict with the ability to embrace and excel at
non-frontier firms
Index: 2001=100
disruptive innovation.
Frontier firms Non-frontier firms
150
This challenge is sometimes referred to as the 140
‘innovators dilemma’2 and it is all too common in 130
Europe, where a slower take-up of new technologies 120
and business models has hindered the diffusion 110
100
of innovation and led to a swelling population of
90
‘zombie firms’ that trap valuable resources like
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
investment and talent, preventing them from
flowing to more productive and innovative firms.3 Source: Organisation for Economic Co-operation and Development

EU home to rising number of 'zombie' firms


Firms Employment Capital Stock
25%
20%
15%
10%
5%
0
2007
2010
2013

2007
2010
2013

2007
2010
2013

2007
2010
2013

2007
2010
2013

2007
2010
2013

2007
2010
2013

2007
2010
2013

2007
2010
2013

2007
2010
2013

BEL ESP FIN FRA GBR ITA JPN KOR SWE SVN
Source: Organisation for Economic Co-operation and Development

3
TREND 2
THE INNOVATION
TOOLBOX IS
CHANGING
Knowledge-Based Capital is the key ingredient

• Traditional levers of innovation, such as patents, • Data, in particular, is emerging as the key
number of researchers or R&D spending, continue to resource for – and enabler of – innovation
be important but have been complimented by other because it is necessary for the customisation of
drivers. products and services that is increasingly expected
• Often referred to as Knowledge-Based Capital, by users. Data analytics allow organisations to
intangible assets have become the key quickly grasp patterns in user preferences or
ingredients of modern-day corporate problems in the supply chain, thereby enabling
success: design, software, data, business model more informed decision-making and, if necessary,
and organisational innovation, firm-specific skills, targeted interventions that improve performance and
branding and marketing, to name but a few. productivity. 
Copyright and links to entrepreneurial universities • Data is not like a typical resource; the more you have,
that facilitate knowledge transfer are also recognised the more it will generate. This 'data generativity'
as significant. is what makes it so difficult for companies that have
not invested in data to catch up with those that have
made it central to their business models.
Intangible investments have overtaken
tangibles
Share of GDP, US+EU11, whole economy Global explosion of data fuels new
Tangible share Intangible share innovation paradigm
14% Worldwide data storage in exabytes

45 000
13% 40 000
35 000
12% 30 000
25 000
20 000
11% 15 000
10 000
10% 5 000
1995

2000

2005

2010

2015

0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020

Note: The aggregated EU11 includes: Austria, Czech Republic,


Germany, Denmark, Finland, Italy, Netherlands, Portugal, Slovenia, Source: Internation Data Corporation Digital Universe Study
Sweden and the United Kingdom.
Source: Haskel, Westlake (2018). 'Productivity and secular stagnation
in the intangible economy' https://voxeu.org/article/productivity-and-
secular-stagnation-intangible-economy

4
• Data is also the main resource for Artificial challenges established rules for advancement,
Intelligence (AI), which is arguably the next especially in the public sector, where age or years
innovation frontier, as machines will increasingly in the job are often the determining factor for
match or even exceed human intelligence. promotions. 
• While scientists are still central to innovation, • Partly as a response to the difficulty of changing the
so are other talent profiles, be they technologists, established order, some organisations now resort
liberal arts graduates (‘fuzzies’), or business and to ‘intrapreneurship’, involving teams of in-house
marketing professionals. staff with entrepreneurial mindsets that are kept
• Evidence suggests that diversity, in terms of gender, within the boundaries of the organisation but are
ethnicity and age, contribute to better innovation purposefully set up outside of existing structures to
performance.5 Against this backdrop, the dominance allow for maximum creativity, experimentation and
of middle-aged, white males in many established business model innovation. Sometimes referred to
organisations is perceived as a hindrance to new as ‘skunkworks’, these groups enjoy a high degree
ways of working and doing business. This also of autonomy and are purposefully freed from
bureaucracy, often with the goal of developing a new,
advanced project or line of business.
Diversity fuels innovation • Tapping into 'flexible' talent bases, using online
Nation of origin for immigrant founders of billion-dollar start-ups sourcing and freelancing services such as 'Upwork'
(as of January 2016) is also increasingly popular, helping companies to
Number of entrepreneurs access qualified talent and respond to in-house
shortages, often in niche areas such as blockchain,
India 14
Canada 8 machine learning, or data security.
UK 8
Israel 7
Germany 4
China 3
France 3
Ireland 2
Armenia
Azerbaijan
Argentina
Egypt
71%
Netherlands of US ‘unicorns’ have key
Iraq members of
1 management or
Norway product-development
Russia teams who are
Singapore immigrants
South Africa
South Korea
Uzbekistan
0 3 6 9 12 15
Note: The term 'unicorn' refers to start-ups valued at over one billion
US dollars
Source: Wadhwa, V., Boost visas for foreign entrepreneurs, Nature, 1
March 2017; http://www.nature.com/news/boost-visas-for-foreign-
entrepreneurs-1.21544

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TREND 3
THE NETWORK EFFECT
OR HOW SCALE
IS BEING REDEFINED
Today, market size and customer
access matter most

• In the digital economy, companies that are able to • Network effects are estimated to be responsible for
capture the highest number of users set the de facto 70% of the value created by tech companies since
‘standard’ for their sector. Thus, it is not surprising the birth of the Internet in 1994.6
that many of today’s most successful businesses – • Fragmented markets, regulatory divergence and
such as Google, Facebook or Amazon – were more linguistic barriers significantly slow down adoption
concerned with gaining users rather than developing and hinder network effects. This goes a long way to
commercially viable business models in the early explaining why Europe has not developed sizable
years of their existence. platforms of its own and why integrated and largely
• Put simply, the ‘network effect’ reflects the fact monolingual markets like the United States and China
that users are more likely to go to the platforms are in the lead.
where the rest of their social network can be found. • At the same time, companies that combine scales
As such, the value of a product or a service increases – across customers, investment, data, talent
for the user as the size of the user pool expands. This and markets – can substantially change the
has been an innovation game changer, and one innovation landscape.
of the reasons why many companies that are good
at inventing have nevertheless lost out. A holistic
‘innovation value chain’ today relies at least
as much on having users for a new product
or service as it does on having a new idea or
clever invention. 
• As such, today’s most innovative companies are no
longer necessarily the largest ones. Gone are the
days when the market value of a company largely
corresponded to the size of its workforce or of its
physical assets. Today, the size of the user pool
can be just as important – or even more so.
Companies like Uber, which enable their users to
harness the same service using the same platform
worldwide, are concrete examples of modern-day
business success stories without significant physical
assets. This 'scale without mass' is a genuinely new
phenomenon that has proven highly disruptive to
incumbent firms, as well as labour markets.

6
NETWORK EFFECTS AT THE HEART OF TECH GIANTS' BUSINESS STRATEGIES
In 2014, Facebook cashed out 17.5 billion
euro (22 billion US dollars) to acquire mobile Facebook’s acquisition of WhatsApp
messaging service WhatsApp – a company leaves it controlling 48% of online
offering pretty much the same functionalities as messaging apps
Facebook already had within its Messenger service. % of monthly active users, April 2018
At the time, WhatsApp employed just 55 staff
members and had been posting net losses worth WhatsApp
millions of euro over the three previous years.7 Facebook Messenger
WeChat
QQ Mobile
Just what was the appeal? In short: an incredibly
Skype
fast-growing audience, which, to cap it off, would
Viber
enable Facebook to expand its international presence Snapchat
and curtail a formidable competitor. Line
Telegram
While the price paid seemed grossly over-valued at
the time, WhatsApp has since more than tripled its Source: Statista
user base, today boasting more than 1.5 billion users,
easily outpacing Facebook’s own Messenger.

WhatsApp’s exponential popularity


Million users

1750
1500
1250
1000
750
500
250
0
Apr ‘13

Jun ’13

Aug ‘13

Oct ’13

Dec ‘13

Jan ’14

Feb ‘14

Apr ’14

Aug ‘14

Jan ’15

Apr ‘15

Sep ’15

Feb ‘16

Jan ’17

Jul ‘17

Dec ’17

Source: Statista

7
TREND 4 A NEW
INFRASTRUCTURE
FOR A NEW AGE
Connectivity is key as innovation shifts from physical to virtual

• Just as innovation in the industrial era was made • As digital technologies increasingly converge with
easier in countries with well-developed industrial physical ones, it is no longer just about connecting
infrastructures – power plants, water supply, well- businesses and people, but also about connecting
connected transport and communication networks – devices (IoT), enabling them to exchange data.
innovation in the digital era is reliant on top- • And since most dynamic innovations today occur
notch digital infrastructure: high-speed broadband, at the intersections of disciplines and sciences,
5G, super-computational power, large-scale cloud connectivity goes far beyond the Internet of
computing facilities, among others. Things but is the 'glue' that underpins the
• Connectivity already underpins nearly every sector of integration of entire sectors – think for instance
the economy and society – whether manufacturing, of retail and logistics, housing and insurance, or
transport, energy, financial, health and education, or the fashion industry and healthcare sector through
public administration. In a world where data is the key wearable devices.
resource, ubiquitous connectivity has become a pre-
condition for economic growth and innovation.

SWEDEN – WHERE EARLY INVESTMENTS IN WORLD-CLASS CONNECTIVITY


ENABLED THE CREATION OF EUROPE’S MOST PROLIFIC TECH HUB
Many of Europe’s largest tech companies were born in Sweden. The country is the second most prolific tech hub in the
world on a per capita basis, producing 6.3 billion-dollar companies per million people, compared to Silicon Valley’s 8.1.8

Early and substantial public investments in digital infrastructure are cited as one of the key reasons for this
outcome. Sweden's average internet speed today is the third highest in the world 9 and fourth in super-
fast broadband. More than 60% of the country has access to a speedy fibre-optic broadband that was funded by
the government in rural areas and largely subsidised elsewhere. As early as the 1990s, the government subsidised
household purchases of personal computers, enabling a rapid proliferation of IT skills and digital literacy. Spotify
founder and CEO Daniel Ek maintains that early availability of super-fast broadband in Stockholm – before it even
arrived in New York – gave him a key advantage in setting up his leading music streaming service.10 Stockholm’s
far-sighted policy resulted in one of the most vibrant digital ecosystems in the world, a hub for leading ICT
companies and tech-savvy entrepreneurs, and a pole of attraction for jobs requiring advanced digital skills.11

Sweden's super-fast broadband is a major innovation asset


Share of fast (>100 Mbps) broadband as a % of total broadband, December 2016
35
30
25
20
15
10
5
0
South Korea
Japan
Switzerland
Sweden
Hungary
Belgium
Portugal
Iceland
Estonia
Finland
Spain
Ireland
Canada
Denmark
France
United States
Netherlands
Latvia
United Kingdom
Czech Republic
Norway
Slovak Republic
Slovenia
Germany
New Zealand
Italy
Austria
Israel
Turkey
Poland
Greece
Mexico

Source: Organisation for Economic Co-operation and Development

8
TREND 5
CUSTOMISATION
IS THE NEW CURRENCY
OF SUCCESS
Innovating for a ‘segment-of-one’ market

• If the industrial age was marked by


standardisation, the digital era is about
3D printing to surge, driving expansion of
customisation. The consumer and user is ever mass customisation
thousand units € billion thousand units billion euro
more central to innovation, by virtue of being more
8000 20
active and responsive, hence shaping the value chain
and leading the way towards more tailor-made, 7000
personalised, on-demand products and services.  6000 15
• The extensive data trails that people leave online and 5000
offline are facilitating this trend, with more and more 4000 10
companies across sectors able to anticipate customer
3000
expectations with precision – or even trigger them.
• Brands that create personalised experiences 2000 5
are already seeing average revenue increase 1000
by 6% to 10%, while also growing their loyalty 0 0
base.12 The NikeID platform for example, which 2015 2017 2020 estimate
enables customers to personalise their sportswear, Source: Statista, International Data Corporation
has contributed to a sharp rise in Nike's overall
profits, with direct-to-customer sales rising from • Direct-to-consumer products, services and discounts,
17% to 28% of the company's – overall expanding – increasingly aiming for a ‘segment-of-one’, are
revenues between 2013 and 2017. transforming traditional business practices.
Some companies are tightening their business
• Possibly one of the largest drivers of mass
models and even re-shoring production where
customisation is 3D printing – enabling the
closer proximity to demand coupled with high-tech
production of personalised products at near mass
manufacturing can offer a faster response rate to
production prices and speeds. Previously a niche
customer preferences.14
and prohibitively priced tool, 3D printing is entering
a phase of exponential growth.13 The additive • While customisation is already rife in the private
manufacturing industry is expected to grow from sector, the trend is spilling over in the public
4.3 billion euro in 2015 to 17.5 billion euro in 2020, sector, with a more visible shift in areas
while the number of 3D printers sold globally could such as personalised healthcare as well
reach 6.7 million units by 2020. as individualised education and learning
schemes. While governments are trying to make
• As the innovation frontier shifts increasingly
public service provision more effective in general,
towards the intersection of customer-company
they often continue to lack the necessary data and
interaction, innovation manifests itself not only
tools to leapfrog beyond general targeting into real
in patents, but also in new relationships with
customisation.
customers, supply chains and even competitors.
• Demand is increasingly met at an individual scale
and modes of delivery matter more than ever.
Sharing platforms are further erasing the distinction
between consumer and producer, giving rise to a new
generation of ‘prosumers’ and reducing distance
between supply and demand to a mere click.

9
TREND 6
THE GEOGRAPHY OF
INNOVATION IS BEING
REDRAWN Innovation is no longer the
preserve of 'the West'

• Once considered primarily as a low-cost producer and


copy-maker, China is now often leading the innovation China is investing in R&D at a rate that
wave, buoyed by large-scale government investments eclipses both the EU and US
in the domestic tech industry, an innovation-friendly R&D spending in billions of dollars (current, in purchasing power
parity terms)
regulatory framework and a massively expanding
consumer market, as the Chinese middle and upper United States EU China Japan Germany
France India Russia South Korea United Kingdom
classes grow rapidly.
450
• The country has seen an extraordinary increase 400
in R&D investment over the past two decades. 350
China is today the world’s second largest R&D 300
spender, accounting for 20% of total global 250
150
R&D expenditure in 2015 – against just 5% in 100
2000.15 50
• Success in transforming R&D into innovations has 0
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
also led to a surge in China’s patent applications,
with start-ups sprouting at a rapid pace. Source: Veugelers, R., The challenge of China's rise as science and
technology powerhouse, Bruegel, Policy Contribution, Issue no 19, July 2017
• There are today more than 50 Chinese unicorns, http://bruegel.org/wp-content/uploads/2017/07/PC-19-2017.pdf
companies with valuations above 1 billion
US dollars. Ant Financial Services Group, formerly
known as Alipay, the affiliate company of the Chinese
Alibaba Group, is now the most valuable fintech And its rate of new patent applications
company in the world and leads the global unicorn is surging accordingly
index, with a valuation of 150 billion US dollars. International patent applications (in thousands)
Indeed, there are 4 more Chinese companies in the United States Japan China France Britain
top 10 of global unicorns. 70
60
50
40
30
20
10
0
2000

2002

2004

2006

2008

2010

2012

2014

2016

Source: World Intellectual Property Organization

10
• A more permissive approach to new technologies
and data availability has facilitated advances in new China well on its way towards AI supremacy
areas such as Artificial Intelligence – where data is Market valuation in billions of dollars, April 2018
the quintessential ingredient – as well as technology- 3
enabled transportation, drones or online payments.
• Not only is China the global leader in the
2
construction of commercial drones with Da-
Jiang Innovations, it now also boasts the world’s
most valuable AI startup: SenseTime Group Ltd, 1
a company specialising in systems for image and
facial recognition, reached a valuation of more than
3 billion US dollars in April 2018, with an average 0
revenue growth of 400%. The company plans to build Mobvoi Face++/Megvii Yitu Sensetime
at least five supercomputers in top-tier cities over the Note: Companies considered include seed, early and late-stage start-ups
coming year. Source: Crunchbase, Bloomberg

AFRICA ALSO LEAPFROGGING INTO THE WORLD OF INNOVATION


Driven by necessity – and perhaps facilitated by its lack of legacy infrastructure in areas such as telecoms,
transport or energy – Africa is embracing technological disruption at full speed and becoming home to a
number of game-changing innovations.

One of the most-known innovations to come out of Africa is the mobile money transfer, which has
transformed business and service provision across the continent. Mobile money accounts have today surpassed
bank accounts in sub-Saharan Africa and the technology behind it has been exported to the West.16 Thanks to
this development, people who previously had no access to bank accounts, particularly in rural areas, can now use
the technology to make transfers and pay their taxes and utility bills – or even receive remittances, government
support or humanitarian assistance.

New digital-based financing mechanisms, such as crowdfunding and cryptocurrencies, are also opening up
new opportunities for under-served finance markets. Combined with other innovations, such as off-grid energy
solutions, African countries can now leapfrog to pioneer pay-as-you-go models that combine the leasing of solar
panels with digital payments – something that would arguably be harder to do in countries with centralised grid
models and established banking systems.

Drone technologies also promise to be a major vector of innovation, helping to overcome infrastructure gaps,
while the continent is also seeing a rapid rise of e-health and online education services.

11
TREND 7
DAVID VS
GOLIATH REVISITED
In a world of disruptive innovation,
the nature of competition is changing

• The emergence of the new digital paradigm has • In this environment, start-ups are being seen in
created a world of contrasts in which competition a new light – as a means of completing service
has both multiplied exponentially and shrunk at offerings with exciting new features, and a source
the same time. of entrepreneurial vigour, providing novel insights
• On the one hand, customers have access to into innovative technology solutions and lean
unprecedented levels of choice to satisfy their management. This explains why online behemoths
needs as firms harvest data to tailor goods and such as Google, Amazon, Baidu, Intel, Apple and
services to user preferences and needs. Any company others have been racing to snap up promising
with a good idea can hit the jackpot. Niche markets, new start-ups. This is particularly true in the AI
which would hardly have been profitable in the past, space, where expertise is a rare commodity.
have become viable thanks to the possibility of • This type of platform consolidation is today
aggregating demand at the global level. In fact, tech ranked as a top barrier to innovation by start-
start-ups are now challenging the status quo in ups themselves.17 Yet, although these types of
areas ranging from financial and consumer services, acquisitions may have a significant impact on
to automotive, the hospitality sector or health. competition, they currently frequently skip the
• On the other hand, extremely strong network effects scrutiny of competition authorities because they do
and economies of scale in the digital space mean not fit within the definitions of traditional notification
that established online platforms are actually turnover thresholds.
subject to very low competitive pressures from
new entrants. This is all the more true as access
to vast amounts of customer data becomes the Artificial Intelligence start-up
key parameter of competition – most of which is acquisitions rose by 44% in 2017
controlled by a mere handful of companies, able to Number of merger and acquisitions per year
ensure a certain degree of user lock-in due to high
120
'social' costs for those wanting to switch to another
100
platform.
80
• In this context, the pressure for incumbents to
innovate comes from the users themselves, 60
rather than from other players per se. There is 40
constant need to innovate, upgrade and expand so 20
as to maintain customer satisfaction and discourage 0
users from switching to other services. 2013 2014 2015 2016 2017
Source: CB Insights
• As a result, while many large platforms were at first
mainly active in a specific digital sector (e.g. Google
as a search engine, Amazon as an online book
ordering platform), they are continuously moving into
new areas – increasingly also into the physical
world – producing high-tech gadgets and services
that range from e-books and smartphones, to electric
or self-driving cars and drone delivery, and moving
into the retail and health sectors.

12
The race to acquire top Artificial Intelligence start-ups is heating up
Dates of acquisition (only includes first exits of companies)

2010 2011 2012 2013 2014 2015 2016 2017 2018

Dark Blue Labs


Vision Factory Api.ai AIMatter
DNNresearch Moodstocks
CleverSense Jetpac Granata Halli Labs
DeepMind Timeful Banter
Emu

Emotient SensoMotoric Regaind


Perceptio tuplejump Lattice
Init.ai
Novauris Technologies Vocal IQ Turi RealFace Pop Up Archive

Masquerade Technologies
Face.com Mobile Technologies
Wit.ai Zurich Eye Ozlo

Harvest.ai
Evi Technologies Orbeaus Sqrrl
Angel.ai

Nervana Systems
Indisys Saffron Technology Movidius
Itseez

SwiſtKey Maluuba
Netbreeze Equivio Genee

Encore Alert Cosmify


OculusAI
Wrapidity Algo

Madbits Whetlab
Magic Pony
TellApart

PredictionIO
Tempo AI
MinHash MetaMind

Source: CB Insights

13
TREND 8
'BETA' AND 'PIVOT'
ARE THE NEW
BUSINESS MODELS
Trial and error is today's path to perfection

• In a world where competition is fiercer than ever and • In this context, acceptance of failure also plays
speed is ever more of the essence, entrepreneurs a central role as it is sometimes seen as a
are no longer content to wait around for the ‘perfect’ precondition for success. It is not without reason
product or service to commercialise. that the mantra 'fail often, fail fast' is deeply
• Instead, start-ups are increasingly ‘trial and embedded in Silicon Valley and see as a badge of
erroring’ their way to market penetration, honour rather than a reputational stain.
making new releases on a regular basis. By walking
before they can crawl, they may risk getting it wrong
– but more importantly, they gain access to honest
customer feedback and can build a valuable bond SOME OF THE WORLD’S BEST
as a first mover with early adopters and prospective 'FAILURES'
customers.
3M’s attempt at inventing glue was a flop
• In fact, 'beta' launching of products and services because it did not stick, but it became the basis
is increasingly common among many of today's for the Post-it note, which can now be found on
corporate giants. Most of Google's products are today everyone’s desk.
launched in beta with bugs fixed and improvements
YouTube was launched as a video dating site,
made based on user data analytics.
without much success. Then users started
• As such, experimentation, exploration, risk- uploading funny videos, taking the project into a
taking and uncertainty are even more inherent completely new direction.
to the innovation process – as are bugs,
Twitter began as a podcasting platform. However,
missteps and failure.
with fierce competition from iTunes, the team
• The ability to innovate quickly and cheaply, started working on a side project that evolved into
continuously refining, correcting or modifying Twitter, one of the largest social media platforms.
products or even business models, drawing on
PayPal started as a cryptography company
lessons from earlier experiments – a term coined as
designed for exchanging money over Palm Pilots.
‘pivoting’ in Silicon Valley – are key.
Without much success, it pivoted to the market of
• To achieve the required agility, businesses are enabling people to make secure on-line payments.
increasingly swapping hierarchies for networks.
Nokia was founded in 1865 as a pulp mill
This means flattening organisational structures
company and has reinvented itself more than
and pushing the decision-making process beyond
once. After leading the mobile phone revolution
the comfort of in-house, and out to market, where
in the 1990s, it rapidly fell into irrelevance with
customers and partners can provide direct feedback
the rise of the smart phone. When its mobile
and shape outcomes more responsively than through
phone business was acquired by Microsoft,
a traditional chain of command.
Nokia managed to reinvent itself once again as
a successful player in the telecommunication
infrastructure and Internet of Things market.

14
EUROPEAN BANKRUPTCY LAWS HAVE and begin afresh. In Europe, many businesses enter
into protracted liquidation processes when early
CREATED A CULTURE OF restructuring could have saved them.
RISK-AVERSION
Even though Europe is home to firms famous for Across Europe there is a growing effort to facilitate
being able to pivot and reinvent themselves, half pathways towards a second chance at doing business.
of Europeans say they would not start a Partly expedited by the financial crisis, new insolvency
business because of fear of failure.18 This fear and resolution laws have been introduced with a view
is undoubtedly connected with the substantial costs to limiting discharge periods to a maximum of three
associated with failure in many Member States. years to help entrepreneurs who do fail to get back
In the US, ‘chapter 11’ bankruptcy rules allow on their feet quicker.19
companies to restructure their debts and obligations

Insolvency laws in some Member States have amounted to a 'life sentence'


Period of time to obtain full discharge from debts (number of months), 2014
100
90
80
70
60
50
40
30
20
10
0
Romania
Spain
Montenegro
Luxembourg
Hungary
Turkey
Belgium
Portugal
Bulgaria
Italy
Sweden
UK
France
Lithuania
Slovakia
Austria
Iceland
Average
Latvia
Finland
Denmark
Ireland
Netherlands
Croatia
Slovenia
Cyprus
Estonia
Norway
Czech Republic
Germany
(150 months) Greece
(no limit) Malta
(no limit) Poland
Source: Ecorys

15
TREND 9

MORE KIDS ON THE


INNOVATION BLOCK
The young, the restless and the robots

• For a long time, innovation was confined to • Open innovation is happening everywhere. Large
labs – or sometimes garages. Today, it happens companies are opening up their coveted ideas to
everywhere.20 Unprecedented access to knowledge competition, targeting start-ups and individuals with
via the Internet, coupled with ever cheaper and more a view to bring in fresh inspiration. Open innovation
accessible technology, makes anyone a potential is also becoming a business as such, with platforms
innovator. such as Kaggle23 crowd-sourcing competing input
• In 2017, the European Patent Office granted 105,635 from about half a million statisticians and data
patents – a new record high, and twice as many scientists with a view to producing the best models
as it did only a decade ago. More than one third for predicting and describing datasets uploaded by
of applications came from smaller entities – i.e. companies and users.
individual inventors, SMEs, universities and research • What is more, humans are no longer alone in
institutes – a 3% increase on the previous year.21 innovating. A hybrid innovation workforce is
• The 'democratisation of innovation' also means emerging, comprised of robots or smart machines
that the biggest game-changers no longer and humans working together in order to achieve
necessarily come from peer-to peer greater results in comparison to what either
competition, but often from ‘outsiders’. In the group could accomplish working alone.24 Machines
digital era, taxi drivers and hotel owners compete allow scientists and researchers to engage in idea
with ordinary citizens following the boom of sharing generation and a series of 'what-ifs' on a completely
platforms and applications such as Uber and Airbnb. new scale, triggering better analytics, learning and
Similarly, the online search engine came from Google, anticipation.25 This in turn can lead to innovations
not AOL; the electric car was rolled out by Tesla, not that would hitherto have been unattainable.
Daimler; a global on-line social network was created
by Facebook, not Microsoft.
• The shift toward ‘open source’ and idea-sharing
has supported this democratisation, leading to new
co-creation models and fast-paced innovation
communities.22 By making resources and intellectual
property accessible, open innovation lowers the
cost of experimentation and allows new actors –
such as freelance developers – to participate in the
innovation chain on more flexible terms.

16
INNOVATION SPACES SPROUT AS The measurable impact such spaces have on
the performance of start-ups varies, but early
ECONOMIES REALISE THE VALUE OF evidence suggests that they may have a
NURTURING INNOVATORS positive impact on regional entrepreneurial
Over the past decade, the number of start-up ecosystems, particularly with regard to the
incubators, accelerators and co-working hubs financing environment. Metropolitan areas where
has seen a rapid rise around the world and across an accelerator is established have subsequently
Europe. In 2017, Station F, the world’s largest start- more seed and early-stage entrepreneurial financing
up campus opened in Paris.26 Its aim is to support activity. This appears not to be restricted to start-
start-ups with potentially disruptive ideas at an ups in accelerators, but seems to also spill over to
early stage by offering working spaces, lab facilities, 'non-accelerated' companies – primarily thanks to the
financing for a fixed-period of time, or offering increase in investors.27
mentorship aimed at accelerating the life-cycle of
young innovative companies, compressing years’ Countries and cities around the world have also set
worth of learning-by-doing into just a few months. up innovation councils to facilitate access to funds,
Companies such as Airbnb, Reddit, or Dropbox all synergies and networks. In this vein, the European
came out of incubators and accelerators. Innovation Council is being piloted as part of a
targeted strategy to focus on empowering innovators
and unleashing the potential of scale-ups, while
making EU programmes less complex to access and
more interdisciplinary in nature.28

Accelerator and incubator programmes are on the rise in Europe


Surveys conducted across ten European countries found that the compound annual growth rate of incubator and accelerator programmes
increased much faster after the financial crisis.

300 Financial crisis

250
Number of programmes

200
150
29%
100
12%
50
0
2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Source: Wagner and Watch, Brookings Institution (2017), based on Telefonica Global Affairs and New Ventures

17
TREND 10

GROWTH CAPITAL
ON THE RISE
But scaling up is still a challenge –
especially in Europe

• European venture capital has increased • In 2016, growth capital represented just 5%
threefold between 2012 and 2017, from roughly of the overall funding in Europe, with 3.9 billion
4 billion euro to 14.7 billion euro.29 However, there euro, against 73.8 billion euro of total private equity
has been an even bigger increase in other advanced raised.30 This low share of growth capital in Europe
regions of the world, like the United States or Asia. partly reflects the heavy reliance of the European
In fact, venture capital in Asia was slightly lower than economy on bank finance, which tends to be risk-
in Europe back in 2012 but now exceeds Europe by a averse and is therefore notoriously difficult to access
factor of 4 – or more than 40 billion euro annually. for start-ups and scale-ups.
• Europe has made real advances in narrowing the • This trend is worrisome for Europe because it means
gap to the US with regards to seed and early-stage these promising, high-growth companies – which
funding, unleashing a wave of entrepreneurial activity have all made it through the first funding rounds and
and giving birth to promising start-ups, from Helsinki have tried-and-tested business models – are often
and Lisbon to Warsaw and Paris. unable to secure the necessary follow-up finance.
• A large gap remains, however, in the later-stage This prevents them from scaling up and turning
funding of companies once they have become into truly global players, and at least partly explains
mid-caps (enterprises with a market capitalisation Europe’s dearth of major companies in the global
between 2 and 10 billion US dollars) or unicorns digital economy.
(privately-held start-up companies valued at over
1 billion US dollars).

European Venture Capital has grown 3x over the last 5 years but remains minute in
global comparison
Total annual VC funding by continent, billion dollars
VC funding in Europe VC funding in the US VC funding in Asia
17.6
13.6
12.6 71.9
9.6
76.8

5.2 6.4 61.4


59.4
70.8
32.6 36.1 42.5
5.2 7.3 21.6 32.7
2012 2013 2014 2015 2016 2017

Source: PwC, CB Insights MoneyTree, Report Q4 2017

18
• European unicorns like Delivery Hero and Spotify, for • The emergence of these superfunds helps innovation
example, had to turn to foreign investors to gain funding flow to places – both countries and industries
access to the capital they needed to scale up – where VC funding has so far been scarce, a trend
and become globally competitive. This may be that will likely accelerate the redrawing of the
part of the reason why Spotify chose not to go public geography of innovation.
in Europe but list on the New York Stock Exchange
instead.
• Another aspect of the lack of European growth Non-European investors are filling the
finance is that many of the best companies
become attractive targets for acquisitions by
void in later European rounds
European company financing rounds
non-European venture funds or investors. China
is able to leverage its considerable state-backed funds European rounds with European and Non-European investors
for acquisitions and investment in innovative firms, European rounds only with European investors
while Japan and the US are battling it out to create 17%
the world’s biggest superfund. Japan’s Soft Bank Vision
Fund has managed to leverage 100 billion US dollars 70%
(83 billion euro) to invest in tech companies, with 30 83%
billion US dollars (25 billion euro) already invested only
– almost on par with 33 billion US dollars (27 billion 30%
euro) raised by the entire American VC industry in only
2017. As a response, Silicon Valley’s Sequoia Capital is Early (Series A and earlier) Later (Series B and later)
putting together its biggest-ever fund. Source: CB Insights

Funding gap between the US and Europe


is widening in later stages
Investments in Europe and US by stage focus in 2017, in billion US
dollars
Investment in Europe-based companies
Investment in US-based companies
US - as a multiple of
European investments 2.9x < 3.2x < 3.8x < 5.8x

Equity financing in VC
- backed companies 38.9
in 2017 ($b)

13.2
11.4 3.5
1.3 3.5
0.4 6.7

Seed Series A Series B Later Stage


Source: Dow Jones VentureSource

19
Notes
1. Wessel, M., Levie, A., Siegel, R. (2016), The Problem with Legacy Ecosystems, Harvard Business Review.
2. Christensen, C. (2013), The innovator’s dilemma: when new technologies cause great firms to fail. Harvard Business Review Press.
3. Organisation for Economic Co-operation and Development (2015), The Future of Productivity, OECD Publishing, Paris.
4. Bloom, N., Sadun, R. and van Reenen, J. (2012), Americans Do IT Better: US Multinationals and the Productivity Miracle, American Economic
Review, 102(1): 167-201, and van Welsum, D., Overmeer, W. and van Ark, B. (2013), Unlocking the ICT growth potential in Europe: Enabling
people and businesses, report prepared for the European Commission.
5. Mayer, Warr, Zhao (2018), Do Pro-Diversity Policies Improve Corporate Innovation? Financial Management.
6. Currier, J. (2017), 70% of Value in Tech is Driven by Network Effects, Medium, https://medium.com/@nfx/70-of-valuein- tech-is-driven-by-
network-effects-8c4788528e35
7. Constine, J. (2014), WhatsApp’s First Half Of 2014 Revenue Was $15M, Net Loss Of $232.5M Was Mostly Issuing Stock, in Tech Crunch.
8. Davidson, L. (2015), How Sweden became the startup capital of Europe, the Telegraph, https://www.telegraph.co.uk/finance/newsbysector/mediat
echnologyandtelecoms/11689464/How-Sweden-became-the-startup-capital-of-Europe.html
9. McKenna J. (2017), Why does Sweden produce so many startups?, World Economic Forum, https://www.weforum.org/agenda/2017/10/why-does-
sweden-produce-so-many-startups/
10. Edgecliffe-Johnson, A. (2013), Lunch with the FT: Daniel Ek, The Financial Times, https://www.ft.com/content/ca45f6b8-25bd-11e3-aee8-
00144feab7de
11. Crawford, S. (2016), You didn’t notice it, but Google fiber just began the golden age of high speed internet access, Wired, https://backchannel.
com/you-didn-t-notice-it-but-google-fiber-just-began-the-golden-age-of-high-speed-internet-access-67b3f775fb85#.qoc2uf1c6
12. Boston Consulting Group (2017), Profiting from Personalisation, https://www.bcg.com/publications/2017/retail-marketing-sales-profiting-
personalization.aspx
13. Diamandis, P. (2018), 3 Major Shifts Are About to Transform Manufacturing as We Know It, SingularityHub.
14. The Economist (2017), Adidas’s high-tech factory brings production back to Germany, https://www.economist.com/news/business/21714394-
making-trainers-robots-and-3d-printers-adidass-high-tech-factory-brings-production-back
15. Eurostat, Organisation for Economic Co-operation and Development and UNESCO
16. World Economic Forum (2016), Is Africa leading the innovation revolution? and GSMA (2016), The State of Mobile Money in Sub-Saharan Africa.
17. Inc. (2017), Top barriers and opportunities for technology innovation in 2017, https://www.inc.com/yoram-solomon/top-barriers-and-
opportunities-for-technology-innovation-in-2017.html
18. Flash Eurobarometer 354 (2012), Entrepreneurs in the EU and beyond, http://ec.europa.eu/commfrontoffice/publicopinion/flash/fl_354_en.pdf
19. European Commission’s Press Release (2016), Commission proposes new approach to business insolvency in Europe: promoting early
restructuring to support growth and protect jobs, http://europa.eu/rapid/press-release_IP-16-3802_en.htm
20. European Political Strategy Centre (2016), Opportunity Now: Europe’s Mission to Innovate, https://ec.europa.eu/epsc/publications/strategic-notes/
opportunity-now-europe%E2%80%99s-mission-innovate_en
21. European Patent Office (2017). EPO grants record number of European patents in 2016 https://www.epo.org/news-issues/news/2017/20170307.
html; Granted patents available at: https://www.epo.org/about-us/annual-reports-statistics/statistics.html#granted
22. von Hippel, E. (2005), Democratising Innovation, The MIT Press, Cambridge, Massachusetts, 2005; http://web.mit.edu/evhippel/www/books/DI/
DemocInn.pdf
23. The Home of Data Science & Machine Learning, Kaggle website, https://www.kaggle.com/
24. Shani, O. (2017), Man, Machine and Multiplicity: How AI And Humans Can Coexist Harmoniously, Forbes, https://www.forbes.com/sites/
forbestechcouncil/2017/07/06/man-machine-and-multiplicity-how-ai-and-humans-can-coexist-harmoniously/#4e304e2317df
25. Prabhakar, A. (2017), The merging of humans and machines is happening now, Wired, http://www.wired.co.uk/article/darpa-arati-prabhakar-
humans-machines
26. Wired (2017), Station F, the world’s largest startup campus opens in Paris, http://www.wired.co.uk/article/station-f
27. Hathaway I. (2016), What Accelerators Really do, Harvard Business Review, https://hbr.org/2016/03/what-startup-accelerators-really-do;
Wagner J. and D. Watch (2017), Innovation Spaces: The New Design of Work, the Brookings Institution, https://www.brookings.edu/wp-content/
uploads/2017/04/cs_20170404_innovation_spaces_pdf.pdf; Hathaway I. (2016), Accelerating growth: Startup accelerator programs in the US,
the Brookings Institution, https://www.brookings.edu/research/accelerating-growth-startup-accelerator-programs-in-the-united-states/
28. High-Level Group of Innovators Report (2018), Europe is back: Accelerating breakthrough innovation, https://ec.europa.eu/info/sites/info/files/
eic_hlg_bz_web.pdf
29. From 5.2 billion US dollars in 2012 to 17.6 billion US dollars in 2017. Source: PwC, CB Insights MoneyTree, Report Q4 2017
30. Invest Europe, (2016) European Private Equity Activity https://www.investeurope.eu/media/651727/invest-europe-2016-european-private-equity-
activity-final.pdf

20
Disclaimer
This publication has been prepared by the European Political
Strategy Centre. The information and views set out in this
publication are those of the authors and do not necessarily
reflect the official opinion of the European Commission.

© European Union, 2018


Reuse is authorised provided the source is acknowledged. The
reuse policy of European Commission documents is regulated by
Decision 2011/833/EU (OJ L 330, 14.12.2011, p. 39).

The European Political Strategy Centre (EPSC) is the


European Commission’s in-house think tank. It reports
directly to President Juncker and operates under his authority.

The mandate of the EPSC includes: strategic analysis and


policy advice, both short and long-term, to the President
and the College on issues related to the policy priorities of the
Juncker Commission (as defined by the President in his political
guidelines presented to the European Parliament on July 15
2014); and outreach to decision-makers, think tanks and civil
society at large.