A new glass ceiling for the Italian startup ecosystem?

Could it be that 2 billion euros is the new "glass ceiling" the Italian startup ecosystem is not able to break? The 1 billion euros financial and psychological barrier has been surpassed long ago, so much that this result is now considered structural: the startup ecosystem, most analysts say, will not get back to that limit. Doubling it, however, seems a different story.

In 2023, according to figures and analysis from Politecnico di Milano, total equity investments in Italian hi-tech startups amounted to 1.13 billion euros. This is dangerously close to that 1 billion threshold and, however, a significant contraction (-39%) compared to 2022 total value of 1.86 billion euros.

The global economic scenario it's not helping, of course. And it must be pointed that 2022 was a good year for investments in startups, with a marked growth over 2021 and its 1.39 billion euros in equity investments. So, a 2023 decrease is not strange, all considered. But there's something in Italian startup market that gives you that well known feeling: the metaphoric glass is half full or half empty depending on your point of view.

If you are in the half-full camp, you should know that "Italian figures are in line with international evidence, which sees, for example, the value of European venture capital market declining by -49% in the first 9 months of 2023 compared to previous year" says Andrea Rangone, Chief Scientific Officer for Politecnico's Hi-Tech Startup Observatory.

But a decline is a decline anyway, so something is - apparently - not going as many hoped. The Observatory itself underlines the main issue that's holding the Italian startup ecosystem back: local formal equity investors keep playing their important role, while other investors are spending less. Much less.

In 2023, investments by formal national players (independent venture capital funds, corporate venture capital funds, government funds) declined just -14% compared to 2022. In contrast, corporate investments, whether structured or not, continue to play a marginal role, despite the growing attention of industry experts on the topic.

Funding from informal players (venture incubators, family offices, club deal, angel networks, business angels, equity crowdfunding platforms...) showed a decline of -43%. Why? Because in a context of economic uncertainty, investing in startups becomes too risky. And today there are much safer assets on the market.

What matters more - and is a big problem for Italian startups - is that this risk aversion is stronger when it comes to international financing. In 2023, this component marked a decline of -55% for Italian startups. Half of all the money that could have come from large international players simply disappeared. Most of all because in 2023 there were no more large investment rounds or big late-stage investments.

A gap to close

The debate on the relatively low appeal of Italian startups for international investors is an old one. And it doesn't still have a clear answer: all strongly depends on your personal point of view. Italian success stories aren't still enough - maybe not in number but in value - to close the subject definitely.

For those who want less opinions and more facts and figures, the main issue is the Italian startup investments market value. Its gap with other comparable European startup ecosystems remains: what Italian formal investors invest is still a fraction of what their French or German counterparts do (respectively, just 1/6 and 1/4).

Now that we all are sailing in troubled waters, this gap could be partially closed. This is what Antonio Ghezzi, Director of the Hi-Tech Startup Observatory, clarly says: "It is crucial to take advantage of the slowdown in the entire global market today to try to narrow the gap with other European ecosystems, a goal that cannot be achieved without the continued commitment of policymakers, corporations and national institutions".

Easier said than done, of course. Also because Italy still seems to lack a widespread real venture capital mindset - startups are still perceived as too risky - and because most Italian companies don't have the size and the money to regularly acquire tech startups for their innovation developments. This means less successful exits, less IPOs (if any) and therefore less incentives to equity investments.

Things are changing, of course, and any positive change, even small, will help. Most of all, in the next future startups will be the main sources of innovation for Italian companies. Today, 58% of large companies and 11% of SMEs collaborate with startups for their innovation. If we also include those planning to do so, the percentages rise to 80% and 40%, respectively.

"Startups play a critical role as an engine of economic growth and innovation", Ghezzi underlines. And the issue is critical indeed. The more this idea becomes an integral part of every company's development strategy and, also, of Italian innovation policies, the more we'll have a wide, diverse and appealing startup ecosystem.