After struggling to find its footing for decades, the Italian startup ecosystem is slowly emerging. But will it be enough to catch up with the rest of Europe?
Italy has a bad reputation when it comes to startups. From heavy tax burdens to a deficit of support infrastructures for entrepreneurs, being a founder in the country means facing a slew of challenges. Although, it’s hardly surprising why The Boot is lagging behind other European enterprising hotspots. “We are very young in the venture business,” says Gianmarco Carnovale, CEO of Roma Startup, the network for entrepreneurs in Rome, and Rome Startup Week. “We didn’t get on the wave around the internet bubble in the early 2000s and only started to build an ecosystem around venture-backed businesses around 2010.” Despite being slow off the blocks, there are signs that Italy’s ecosystem is making up for lost time. “Because we’re a very conservative country, we’re a very slow follower of international trends,” Carnovale says. “We’ll get there in the end, just much later than everyone else.”
Importantly, while VC-backed enterprises are a reasonably new thing, that doesn’t mean the Italian Republic is a stranger to SMEs. “Italy’s economy is big on micro businesses,” says Emanuele Angelidis, CEO of Breed Reply, the VC firm investing in internet of things startups across Europe. Indeed, 99% of the country’s companies are SMEs, according to the European Investment Fund. However, there’s a huge difference between having lots of small businesses and having loads of scalable startups, not to mention a culture that supports them. Up until recently Italy had neither. “So in the past, if you had an innovative idea the typical approach was to go abroad where they had a more developed ecosystem,” says Angelidis.
Still, some companies managed to rise to prominence in the past three decades. For instance, Yoox Net-a-Porter, the fashion e-commerce platform; Technogym, the fitness manufacturer, and FastWeb, the telecom company founded by Angelidis, all became successful in those years. Although, they didn’t do so with ease. “It was very difficult,” he says. Being able to reach their potential despite having to overcome overwhelming bureaucracy is certainly inspiring for the new generation of entrepreneurs. Indeed, they need all the inspiring examples they can get. “Honestly there are not very many of them,” says Angelidis.
But then, just as the world regained its footing following the financial crisis, something happened in startup Italy. “There was a completely new boom,” says Marco Trombetti, co-founder of Pi Campus, the early-stage VC firm. Suddenly, new startups seemingly popped up left and right. In fact, three-quarters of Italian scaleups with investments over $1m were founded after 2010, which is the second highest percentage in Europe after Portugal, according to the Startup Europe Partnership, the innovation platform established by the European Commission. “For a few years Italy grew faster than anywhere else,” Trombetti says. “Sure, it was starting from a very low number, so it was easy to grow percentage-wise. Still, it was baffling.”
So what happened? “There was a cultural shift,” says Trombetti. He argues that three things happened thanks to the tech titans of Silicon Valley spearheading the dawn of the new age: the world became more global, young entrepreneurs realised that they could be part of the new digital trends and these two occurrences opened the eyes of potential investors who had until then saved all their money in banks. “Angel investors and a change of culture was the driver for this new trend,” says Trombetti.
Additionally, as angel investors and budding founders started to eye these opportunities, the country also became better catered to in terms of accelerators and incubators. “If you look at the number of accelerators it’s still very small compared to the UK but what has changed is that we’ve gone from zero to 20,” Trombetti says. For instance, in 2012, LVenture Group, Italy’s most active early-stage venture-capital firm, launched Luiss EnLabs, Europe’s biggest accelerator at the time that could comfortably house 40 startups in its 50,000 square foot offices in Rome.
But you don’t have to be an investor or an entrepreneur to recognise the positive impact a flourishing startup culture can have on a region. “At the end of the day it benefits the whole country because even early-stage companies will be in a position to hire more people, be more successful and provide more competitive services to the market that make more customers happy, says Angelidis. Win. Win. Win.
Understanding this, the government has made efforts to help the ecosystem grow. For instance, in 2012 it launched the Italian Startup Act to make it easier to launch startups. “These efforts have been extremely effective,” says Angelidis. The government has also slashed red tape for non-bank investors, eased up on taxes to encourage investment in innovation and introduced startup visas to encourage more international entrepreneurs to try their wings in the republic. Moreover, new enterprises that sign up the government’s official startup registry – which unfortunately is a time-consuming exercise in paperwork – can also benefit from relaxed labour laws, lower taxes and other benefits that simplify their journey off the launchpad. “They’ve been useful and it’s extremely important that these kind of actions keep going on in the future,” he says.
The slight wrinkle with these measures is that, while certainly welcome, they are not enough. “A lot has been done but, you know, we’re a bit like pigs: they’re never happy with what has been handed down to them,” says Roberto Magnifico, director at LVenture Group. And he’s hardly alone in having this view. When the World Economic Forum released its latest Global Competitiveness Report in September 2017 it ranked the country as the 43rd most competitive country in the world, after nations like Azerbaijan, the Czech Republic and Indonesia. The main reason why it fell behind other European countries was because of its sluggish bureaucracy, followed by taxes and strict labour laws. Additionally, it’s expensive to work in Italy with income taxes being between 23% and 43%. “So we have a lot of catching up to do and clearly there have been measures put in place but we need to develop the venture-capital culture further,” he says.
A consequence of all the red tape startups have to cut through and the young age of the ecosystem is that many Italian entrepreneurs still find it easier to launch their businesses elsewhere. “At the moment our best startups are simply flying away,” says Carnavole. While there are now several early-stage investors in Italy, the country isn’t particularly well-catered to in terms of late-stage investors. The Startup Europe Partnership estimated that 86% of all seed and series A rounds were led by Italian investors but dropped to 78% for series B and then to about 50% for later stages. “They are seeking investments in other ecosystems like Berlin, Barcelona and London,” he says. “Many are flying to New York or Silicon Valley. So we are not closing the cycle, which means we can’t attract other investors.”
Encouragingly though there are some startup success stories in the country: 94 Italian tech scaleups were acquired between 2010 and 2016, according to the Startup Europe Partnership. While this was about four times lower than the number of exits in the UK and three times fewer than in Germany, these success stories are vital for the continuous growth of the country’s startup hotbeds. “Exits are very important both for capital-fund managers and for the development of the local startup ecosystem itself,” says Magnifico. “Because if stakeholders start to see results in terms of exits either through IPOs or through M&A transactions then that means that there are concrete opportunities for entrepreneurs.” Moreover, not only are these deals inspiring for the next generation of entrepreneurs but exits also mean that the founders behind these deals will reinvest in the ecosystem through VC funds or angel investments, making the market more attractive for foreign investors in the process. “Whenever you have an exit you create opportunities with the liquidity from these exits for entrepreneurs to reinvest in other startups,” he says.
And as the number of exits continues to grow, they may embolden more people at the beginning of their careers to launch a new venture. Sadly, while there has been a clear cultural change in the past decade, many students still don’t consider going at it alone to be a viable option. “The issue is that often university students’ main objective is to get a degree and to find a job in large corporate because the perception is that there is where they should begin their professional careers,” says Magnifico. The perception among the people in the startup community is that, while there have been efforts to merge the cultures of entrepreneurialism and academia, Italian universities still lag behind other countries in terms of educating their students about the opportunities of going into business by themselves. “Today technology offers the opportunity for many talented people to move into an entrepreneurial activity but not everyone realises that they have an entrepreneurial talent,” he says.
Given it’s still early days for Italy’s startups, it’s difficult to pinpoint any particular ‘house specialty’ that the republic’s startups will become extraordinarily strong in. “Many people seem to think of Italy as a fashion industry only but honestly, there’s a lot happening in every sector,” says Angledis. As an overview almost a fifth of the country’s scaleups are e-commerce companies, a tenth operate in fintech and 9% are digital-media businesses, according to the Startup Europe Partnership. There are also entrepreneurs innovating in healthcare and manufacturing and as the ecosystem finds its footing it may be easier to see in the future where its entrepreneurs’ strengths really lay.
After years of lagging behind the rest of the continent, Italy has taken strides to catch up with the rest of the pack. “There are lots of opportunities,” says Magnifico. However, for the country to fully take advantage of the nascent market the government must play a bigger role. He argues that the government should draw inspiration from France where Emmanuel Macron pledged to invest $11bn in disruptive technologies and that Italy’s leader should create more legislative sandboxes to make it easier for startups to grow. “We need to get things moving and to get them moving fast,” he concludes. “To get them moving, clearly the government needs to play a decisive role in terms of putting money on the table and to attract more private capital.” If it can do that, then both international investors and native entrepreneurs may find that all roads truly leads to Rome once again.