While the EU presents itself as a unified market, the reality for startups trying to grow quickly is quite different. European startups face the challenge of navigating 27 distinct countries, each with its own set of rules, regulations, and barriers to entry. Unlike their American counterparts who can scale across a relatively homogenous market, European entrepreneurs must grapple with diverse legal systems, currencies, tax codes, and cultural differences—making their journey to market a much slower and costlier affair.
This fragmentation is often blamed for the European tech ecosystem’s smaller scale compared to the US, a challenge that has caught the attention of policymakers. According to Daniel Ahremark, CFO at Mews, a Dutch-based hospitality software company with operations in 86 countries, “Europe still operates as a collection of individual countries rather than a cohesive market.” He argues that this fragmentation makes it harder for companies to scale, leaving a market dominated by strong local players rather than true pan-European giants.
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Despite this, there is hope. European startups have proven that great businesses can thrive here. However, understanding the challenges of international expansion and adopting strategies to navigate them is crucial for growth. Here’s how startups can break through the barriers of a fragmented Europe:
1. Local Knowledge Is Key
For European startups, market research is just the starting point. To succeed in a new market, you need boots on the ground. The importance of local representation cannot be overstated. While US companies don’t need to focus on localization at home, European businesses often have no choice but to understand the local legal landscape, compliance requirements, and business norms.
Ahremark explains how Mews has strategically deployed a distributed “localization” team across the countries where it operates. This team works to understand the intricacies of each market, a process that adds significant overhead but is essential for success. As Tiphaine Bergault, executive director at J.P. Morgan, notes, “In France, for example, not having a local presence makes it very difficult to succeed in certain sectors like e-commerce and fintech.” Building trust and connecting with local customers is an investment that pays off in the long run.
2. Understand The Full Cost Of Expansion
The complexities of operating across Europe go beyond regulatory challenges—they also bring substantial costs. Every country has its own legal framework, which increases operational overhead. According to Bergault, not only does this impact direct costs (such as higher VAT rates), but it also increases the time and resources needed to navigate each country’s legal system.
At Mews, Ahremark highlights the intricate matrix of VAT rates across different countries in the hospitality industry. For example, Spain applies a 10% VAT on accommodations, while Germany’s rate is 7%. Getting these details right is crucial, as even minor oversights can lead to significant financial penalties. Understanding the full scope of local tax and employment regulations—including social contribution rates, which can vary dramatically—helps startups avoid costly mistakes down the line.
3. Pay Attention To Local Spending Habits
Cultural differences extend beyond business norms—they also affect customer behavior. For instance, Germans prefer direct debits, while in Romania, a significant portion of the population doesn’t have a bank account. These consumer preferences have a direct impact on payment systems, and understanding these differences is critical for successful market entry.
James Allington, head of global advisory for e-commerce and fintech at J.P. Morgan, points out that payment systems in Europe are far from uniform. While open banking has seen success in the UK, Germany is still catching up, and other countries are implementing EU directives at varying speeds. These inconsistencies make cross-border expansion more complicated for European startups, creating additional challenges in how they collect payments and interact with customers.
4. Master The Flow Of Money
Managing currencies across borders is another hurdle European startups must face. Juggling multiple currencies can lead to inefficiencies, as cash may be stuck in one country when it’s needed in another. Moreover, currency exchange often involves hidden fees that can eat into profits.
As Allington explains, businesses that operate in multiple countries don’t necessarily need to hold every local currency. If a company’s financial operations are based in euros, it’s important to assess which currencies need to be held locally and which can be handled centrally. While many automated financial services charge foreign exchange fees, understanding how money flows across your operations and minimizing unnecessary currency conversions can help streamline operations and reduce costs.
Europe’s Fragmentation: A Barrier Or An Opportunity?
The fragmentation of the European market presents a unique set of challenges for startups, but it also offers opportunities for those who can navigate the complexities effectively. By understanding the nuances of local markets, budgeting for regulatory hurdles, adapting to regional consumer behaviors, and managing cross-border financial operations with precision, startups can not only survive but thrive in Europe’s fragmented landscape.
