The European startup and scaleup definition paradox

This article explores the discrepancy between the EU’s strong focus on startups and scaleups as drivers of innovation and the absence of a unified legal definition for these entities at the EU level, which is relevant to determine eligibility for various EU funding and support programmes. 

While the European Commission’s ‘Choose Europe to Start and Scale’ strategy outlines general characteristics, the lack of formal definitions leads to varied interpretations across support programs and institutions. To address this, the article proposes its own working definition of a startup, highlighting key characteristics such as age, innovativeness, founder ownership, and SME qualification.

This working definition is put in contrast this with the well-defined criteria for Small and Medium-sized Enterprises (SMEs) based on staff headcount and financial thresholds, raising the question of whether startups can be considered micro-enterprises. The piece concludes by emphasizing the ambiguity surrounding the term “startup” and introduces a forthcoming series that will delve deeper into the unpacked definition of SMEs.

EU Startup and Scaleup strategy

Last week, the European Commission launched a comprehensive EU Startup and Scaleup Strategy ‘Choose Europe to Start and Scale‘, aiming to make the EU the world’s top destination for technology-driven innovative companies, including plans to expand and simplify the EIC. 

In the report, we can read that “startups and scaleups are engines of disruptive innovation and create new markets where the EU can assume global leadership”, but how Startup nor Scaleup, should be understood as there is no formal definition at the EU level. 

Who are Startups and Scaleups?

The strategy describes “startups” as early-stage companies that are pivotal in introducing innovative solutions, targeting niche or emerging markets, and addressing challenges often overlooked by larger companies. These entities are characterised by their agility, creativity, and potential to disrupt existing markets.

The term “scaleup” refers to companies that have moved beyond the startup phase and are experiencing significant growth. Although the document does not specify exact criteria, scaleups are generally understood as enterprises that have achieved a certain level of market validation and are expanding their operations, customer base, or product offerings.

Who are Startups and Scaleups?

The strategy describes “startups” as early-stage companies that are pivotal in introducing innovative solutions, targeting niche or emerging markets, and addressing challenges often overlooked by larger companies. These entities are characterised by their agility, creativity, and potential to disrupt existing markets.

The term “scaleup” refers to companies that have moved beyond the startup phase and are experiencing significant growth. Although the document does not specify exact criteria, scaleups are generally understood as enterprises that have achieved a certain level of market validation and are expanding their operations, customer base, or product offerings.

A fragmented landscape of definitions

Each individual support program designed to assist such businesses, each country implementing economic policies, and each institution involved in data collection or regulatory oversight possesses the autonomy to establish its own unique definition of what constitutes a “startup” and its more mature brother “scaleup”.

This decentralized approach, while allowing for tailored definitions that address specific needs and objectives, can also lead to a complex, and sometimes fragmented, landscape for businesses operating across different regions or seeking support from diverse sources.

Acknowledging this inherent variability and the lack of a universally accepted standard, and drawing upon extensive experience in the field, a thorough examination of numerous relevant documents and prevailing legislations has been undertaken. 

FundingBox’s contributions

FundingBox’s comprehensive analysis, grounded in practical observation and a deep understanding of the SME ecosystem, has culminated in the formulation of our own distinct startup definition. This internally developed definition aims to provide a clear and consistent framework tailored to specific operational context and the types of businesses.

It reflects a considered synthesis of various existing definitions, adapted and refined to accurately capture the key attributes and developmental stages of the startups we seek to understand and support at FundingBox. 

A startup typically refers to a young, innovation-focused company aiming for scalability and rapid and exponential growth.

Key characteristics:

• Generally less than 7 years old from the date of their first commercial sale
• Newcomer with innovative product, service or process
• Owned and operated by the founder/s holding the majority of shares
• In most cases (especially when the public donor is involved) qualified as SME (Small and Medium Enterprise).

The concept of an SME, on the contrary, is very well defined in the Annex to the COMMISSION RECOMMENDATION (2003/361) of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises.

There, we can learn that the main factors determining whether an enterprise is an SME are:

• staff headcount and
• either turnover or balance sheet total

• Should we consider start-up as micro-enterprise? Let’s add to its definition:

  • Headcount <10
  • Annual turnover or balance sheet <= €2 million.

  Unfortunately, with the SME definition involved, we are opening a Pandora’s box of hundreds of bigger and smaller requirements, like ownership, direct or indirect control and many more.

  While we appreciate the current flexibility in the definition of startups and scaleups and believe that a legal definition of startups is not essential, we do anticipate the introduction of one. This is especially likely with the upcoming European 28th regime, which, as outlined in the Strategy paper referenced above, “will provide a single set of rules for companies. It will establish an EU corporate legal framework, driven by digital-by-default solutions, and will help companies overcome barriers in setting up, scaling, and operating across the Single Market.”

  At FundingBox, we are experts in assessing SME status, with experience gained from supporting over 2000  startups over the past 13 years.  At FundingBox, we focus our efforts in “deep tech” startups & scaleups: those that are looking at having an impact in society based on science-related innovations. This also includes learning how to support them in the investment phase through our FundingBox DeepTech Fund I.

  Stay tuned for our series: SME definition unpacked

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  *We used AI for the research and to polish the text.

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