27oς economia Φοιτητικός Διαγωνισμός
1o Βραβείο Ατομικής Εργασίας
STARTUPS IN GREECE: THE INFLUENCING FACTORS OF A GROWING ECOSYSTEM
University of Macedonia, Department of Economics
Innovation is a contributing factor to a nation’s economic growth (Maradana et al., 2017). With startups’ unique characteristics and abilities to promote innovation, commercialize nascent technology and encourage youth entrepreneurship and creativity, it is in a country’s best interest to create the ideal conditions for the development of a startup ecosystem that provides economic, as well as social benefits (Szarek & Piecuch, 2018). In Greece, although almost nonexistent prior to the financial crisis, the startup scene has been growing constantly in recent years in terms of size and popularity. According to Enterprise Greece (2019), the number of Greek startups is estimated at around 2000, while their capitalization is valuated at 3.5 billion euros (Konti, 2020). The purpose of this essay is to present the main factors that affect the Greek startup ecosystem and to identify key actions leading to the fostering of an innovative and competitive environment.
2. MAIN INFLUENCING FACTORS OF THE GREEK STARTUP ECOSYSTEM
2.1 Business Environment
Concerning the business environment, Greece’s ranking in the World Bank’s “Ease of Doing Business Index” has significantly deteriorated over the past decade and is currently placed 79th out of 190 countries, outranked by 25 out of the rest 26 European Union’s member states. This drop was, among others, the result of an outdated, bureaucratic public sector with burdensome regulations that require lengthy procedures for those who want to start their own company. Therefore, an essential step for Greece to improve in this aspect, is to digitally reinvent and transform its public sector. Although it was originally planned at a slower pace, COVID-19 accelerated this transition significantly as it became necessary for the state to offer its services to individuals and businesses remotely (EIT Digital & Found.ation, 2020). Public investments in innovation-friendly, digital infrastructure and technology such as 5G networks and e-services, are crucial since they create an institutional environment with more efficiency, quality and stability for existing and aspiring entrepreneurs.
Another major incentive for the establishment of businesses in Greece would be a favorable taxation system. Evidence from the US suggests that higher corporate tax rates reduced innovation, as companies filed less patents, invested less in R&D and introduced fewer new products (Mukherjee et al., 2017). As part of the various fiscal reforms to tackle the Greek economic crisis, the corporate income tax rate (CIT) had increased from 20% in 2011 to 29% during the period of 2015-2018, thus discouraging entrepreneurs and disorganizing the strategic planning of businesses due to the high tax burden and its lack of consistency. More recent relief measures in the past two years, led to the reduction of the CIT rate to its current level of 24%, although still higher than the European average of 21.90% (Asen, 2020). Greece ranked 29th out of 36 countries in the “International Tax Competitiveness Index 2020”, which shows that further tax rate reductions and reforms are needed in order to increase competitiveness and motivate not only local, but also foreign startuppers to found their enterprises domestically.
The Greek legal framework also lags behind the needs of startups. Regulation designed specifically for startup companies, with more flexible and entrepreneurship-friendly laws regarding lower capital requirements, tax-free employee stock options (ESOs) or Incentive Stock Options (ISOs), tax breaks on R&D expenses and debtor-friendly bankruptcy codes would benefit the ecosystem. Harvard professor, Shikhar Ghosh (2011) stated that “failure is the norm” for startups, with a probability of asset liquidation at 30% to 40%. In the case of debt financing, bankruptcy codes with more emphasis on debtors’ rights induce greater innovation while the opposite is true when creditors’ rights are stronger (Acharya & Subramanian, 2009). Softening regulations for startups could also make Greece more competitive against bigger European startup hubs.
2.2 Access to funding
From the early stage of turning an idea into a business to the extent of expanding to foreign markets, sufficient capital plays a pivotal role. Traditional bank lending poses several barriers for Greek startups, such as high interest rates, lack of adequate collateral, poor negotiation conditions and time-consuming processes (Hyz, 2011). Alternatively, bootstrapping (i.e., self-financing) or relying on family and friends may offer very limited potential for expansion and further investments. Therefore, angel investors, venture capital (VC) firms and public subsidies are essential to cover the funding gap of this rapidly growing industry.
Facilitating venture capital investments leads to the emergence of high growth, innovative startups (Audretsch & Lehmann, 2004). Moreover, according to Chemmanur et al. (2011), VC-backed startups appear to be more efficient due to improvements in revenues and lower increases in production costs, and experience lower failure rates than non-VC-backed startups (Puri & Zarutskie, 2008). In Greece, venture capital can be channeled through Equifund, a fund-of-funds programme, financed by the Hellenic Republic and the EU, along with the European Investment Fund (EIF) and the European Investment Bank (EIB). Approximately €92 million, out of €215 million directed towards startups, has been invested since 2017. In spite of COVID-19, the amount invested in 2020, compared to 2019, remained steady at €34 million. As announced, funds will also be set up by the Hellenic Development Bank in order to support startup activity.
However, the majority of capital has originated from other sources such as angel investors or US-based VC firms. In 2020, these investors contributed more than double the amount of Equifund. The fact that funding rounds from Equifund are getting larger for Greek startups at various stages shows signs of a maturing market. Yet, when compared to US startups, it has been more challenging for European startups to raise as large funding rounds, especially at later stages due to investors’ risk aversion and different goals, making it difficult to compete internationally (Baroudy et al., 2020). Hence, attracting additional investments by providing incentives for angel investors (e.g., recent legislation provided exemptions for taxable income from investments in Greek startups) will expedite the expansion and maturity of the ecosystem. A marketing campaign would also increase international exposure and establish Greece’s presence as an innovation hub in Southeastern Europe. However, investors should be cautious of investing in ideas that lack potential to succeed, as it would negatively affect the attractiveness of the whole ecosystem.
2.3 Open innovation & Networking
A well-functioning, innovative startup ecosystem can produce greater value than the sum of its parts. Startups are more likely to scale and succeed if they collaborate with incubators, accelerators, innovation clusters, funding providers, academic institutes and larger corporations. Hallen et al. (2014) argue that support provided by accelerators, is superior to prior entrepreneurial experience or academic background. By utilizing open innovation through networking, cooperation and knowledge-sharing, Greek startups could improve their success rates.
Evidence from Jordan indicates that certain networking behaviors such as cultivating internal or external contacts and participating in professional activities had a positive effect on the success of entrepreneurial startups (Albourini et al., 2020). Moreover, Schott and Sedaghat (2014) found that networking relations in the public sphere, e.g., within the workplace, with institutions and domestic or foreign corporations, enhanced innovation. Especially for entrepreneurs with limited business experience, as Kaufmann and Schwartz (2008) suggested, it is important for incubators to provide startups with support not only for R&D activity, but also for creating a solid network. Despite the current restrictions of physical interactions due to the COVID-19 pandemic, virtual communities through professional social networking websites can still be effective for knowledge-sharing (Scarmozzino et al., 2017). In Greece, the majority of ecosystem members are located in Athens, Thessaloniki and Patras where most events and competitions also take place. In particular, startup competitions (SUCs) contribute greatly to entrepreneurial learning and strengthen the quality of the ecosystem (Passaro et al., 2017; Stolz, 2020) The transition of services and events that support startups’ development to a virtual environment due to COVID-19, could benefit startups which are dispersed in various other places in Greece or deem location as an insignificant factor for starting a company.
Apart from conventional office spaces and remote working, a third option for startups is also available. More specifically, coworking spaces can offer multiple benefits besides avoiding the higher costs of renting and furnishing offices, which can be a considerable burden on a newly founded startup’s budget. Shared offices allow social interactions, exchange of ideas and development of projects which can have a positive effect on productivity and self-efficacy (Bueno et al., 2018; Bouncken & Reuschl, 2016). The majority of coworking spaces in Greece are located in Athens and Thessaloniki, and a few in other smaller cities such as Kalamata or in islands (e.g., Crete, Lefkada). In such entrepreneurially weaker locations, coworking spaces should be combined with accelerators or incubators in order to stimulate networking and promote entrepreneurship more effectively (Fuzi, 2015).
2.4 The role of higher education
Universities have a dual role for the ecosystem through education and research. The public education system enables a large number of high school graduates to pursue bachelor studies in STEM or business-related fields, creating a highly educated talent pool. However, corruption, political instability, the tax system, and restricted access to finance were reported to discourage students from entrepreneurial activities (Bagiatis et al., 2019) and subsequently result to brain drain. In addition, the misconception of associating innovation exclusively with large firms (Kakouris, 2016) could drive them away from forming or joining startup companies. Enriching university curricula with specialized seminars or courses on startup innovation, guest lectures by startup founders and internship opportunities could increase graduates’ involvement with startup companies.
Universities and polytechnic institutes are also the birthplace of various innovative solutions developed by academic spin-offs and can be supported by an existing network of researchers. Startups affiliated with academic institutes may also seek the support of Science & Technology Parks which serve as business incubators. Evidence from Italy (Colombo & Delmastro, 2002) showed that on-incubator startups outperformed off-incubator startups in terms of growth, establishing collaborative arrangements and accessing public funding. Thus, public policy should reinforce these institutions with additional investments in order to promote the research and development of innovative technologies.
2.5 The challenges & opportunities of COVID-19
The effects of COVID-19 on Greek startups were mixed and varied by sector. The social distancing and lockdown measures to mitigate the virus’ spread, and peoples’ increased concerns severely affected sectors such as tourism, as inbound tourists decreased by 76.5% in 2020 (INSETE, 2021), and real estate, especially short-term leasing. In contrast to the layoffs and inactivity recorded in these sectors, the pandemic created favorable conditions for the growth of e-commerce or delivery startups.
Despite the hurdles born by the pandemic, it is of utmost importance for startups to adapt to current conditions as well as identify future trends. In the health care sector, for example, EnzyQuest and BIOPIX-T received funding from VC firms and the EU to expand in the multibillion-euro diagnostics market which is expected to grow even more due to the rise in global demand. Additionally, exogenous shocks such as COVID-19, expose the vulnerabilities of existing supply chain models. Startups can provide significant support in the digitization of supply chains and build future resilience through robotic process automation (RPA), data management and artificial intelligence. Lastly, as tourism is one of Greece’s most important sectors, startups could provide alternative experiences to engage international tourists through virtual and augmented reality technologies (Mohanty et al., 2020).
Greek startups managed to emerge in a strenuous situation of economic recession and a number of them have become success stories. The high growth in recent years and the increasingly valued exits, with the three largest startup acquisitions taking place in 2020, have highlighted Greece’s potential to become a European innovation hub. To achieve this, collective effort from all ecosystem members is needed. Reforming the current business environment and encouraging international funding should be top priorities for the Greek state. Startups should adopt open innovation practices through networking and knowledge-sharing with other members of the ecosystem. Remodeling university programmes and funding research will confirm the determinant role of higher education. Lastly, events such as COVID-19 may pose challenges, but they also bear opportunities for ideas of groundbreaking innovation.
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