Profit Meets Policy: How Regulation Can Become a Growth Catalyst

Europe excels in research and development, accounting for 17% of global patent applications and with Germany spending 3.2% of its GDP on R&D, more than the USA. However, Europe significantly lags in commercializing innovations, with two-thirds of patented inventions never commercially exploited. The USA hosts 0.8 tech unicorns per million inhabitants, while Germany achieves only one-quarter of that. The core issue is a complex, fragmented, and often opaque regulatory environment.

The Challenge: A Regulatory Burden Navigating Europe's bureaucracy is business-critical for start-ups. Over 55% of small and medium-sized enterprises (SMEs) report regulation and administrative burden as their top challenge. This diverts time and resources from product development towards paperwork.

• 83% of start-ups have difficulties obtaining clear regulatory guidance.

• Regulatory uncertainty led 83% of Venture Capital (VC) investors to choose not to invest in start-ups.

• 53% of start-ups experienced delays in time-to-market due to regulation.

• 40% of start-ups had to change their product because of regulation.

Many promising companies fail or emigrate due to regulatory bureaucracy. Between 2008 and 2021, 30% of Europe's unicorns moved their headquarters abroad, mostly to the USA, where regulatory paths are often more straightforward. Regulation itself was a leading cause of failure for nearly one in five start-ups (18%) between 2018 and 2021. The case of KASPR, fined €240,000 under GDPR due to a lack of clarity on data collection rules, exemplifies this problem. ClimateTech start-ups face even more hurdles, as seen with Northvolt, which filed for bankruptcy partly due to regulatory uncertainty around the European Battery Regulation.

Missed Opportunities through Regulatory Inertia Europe has missed significant opportunities by not acting faster:

• Planted, a Swiss plant-based meat alternative start-up, faced legal uncertainties and rebranding efforts due to fragmented labeling standards, hindering market clarity and investment in sustainable protein alternatives.

• Europe could capture a large share of the $3.1 billion global investment in cultivated meat if a clear regulatory pathway existed, similar to Singapore’s, potentially missing out on an industry worth up to $140 billion by 2030.

• Climeworks, a European direct air capture leader, relocated its flagship project to Iceland due to more advanced permitting and storage infrastructure, a missed opportunity for the EU to anchor high-skilled jobs.

• Isar Aerospace could have launched its Spectrum rocket earlier if a unified and agile launch regulation had been introduced, preventing Europe from building a robust private space ecosystem to rival global players like SpaceX.

The Solution: Regulatory Entrepreneurship based on the Israeli Model The solution lies in regulatory entrepreneurship, where policymakers, start-ups, and investors actively shape the conditions for success. Israel exemplifies this through its "entrepreneurial governance," where agencies like the Israel Innovation Authority (IIA) act as active ecosystem enablers. They use flexible grant programs, innovation sandboxes, and de-risking mechanisms, supporting over 1,000 start-ups annually. Key practices include adaptive licensing and expedited approval processes for pilots. The success of HomeBiogas was enabled by permissive waste treatment regulations and targeted governmental support. Israel's Ministry of Environmental Protection aligns regulation with broader environmental and economic goals through "climate missions," balancing flexibility and oversight.

The Way Forward: Shaping the Rules Together There is growing political will in Europe to change. Mario Draghi advocates for a better financing environment and harmonized legislation for disruptive innovation. The German government also plans a "start-up protection zone". This indicates a consensus that Europe's future competitiveness depends on smarter, more agile regulation and a stronger partnership between innovators and policymakers. Policymakers increasingly expect active engagement from start-ups, investors, and industry groups.

What does this mean for you?

• For Start-ups:Make regulation a core part of your business plan, including a go-to-market regulatory roadmap and KPI modeling. Use networks strategically for influence and participate in political dialogues.

• For Investors:Make regulation a Key Performance Indicator (KPI) in start-up evaluation, systematically applying regulatory metrics from due diligence to post-investment tracking. Actively navigate start-ups through the regulatory landscape and educate LPs on regulatory foresight. Notably, 83% of VCs want to actively shape regulation.

• For Policymakers:Listen to founders and investors to understand real-world challenges, implementing consultation platforms and roundtables. Adapt regulations and laws to enable responsible innovation through fast-track permitting and one-stop regulatory portals. Become an innovation accelerator by positioning regulation as a competitive advantage, implementing regulatory sandboxes and innovation acceleration programs.

The rules of tomorrow are being written today. It is crucial for all stakeholders to take responsibility, initiative, and a seat at the table to create a regulatory ecosystem that fosters innovation and secures European competitiveness.