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30th Nov 2022

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Startups told to pack their bags after three years

  • Article 13 of the EU Copyright Directive introduces a system that no startup can comply with (Photo: Allied For Startups)

When complex political systems like the European Union tries to forge compromises on hot topics, negotiators get smart finding ways forward.

For a long time, one of the thorniest questions - how can rules police the big guys without harming the small - was addressed simply by carving-out some groups. Whoever was the darling of policy makers got a pass. Mostly this meant Small and Medium Sized Enterprises (SMEs), but typically also non-profits or academia.

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  • It is already too difficult for Europe's startups to scale and succeed (Photo: Allied For Startups)

This is the path currently under consideration for Article 13 of the EU Copyright Directive.

What distinguishes startups from the groups above is that they are not static but ideally grow at the speed of a rocket. Thresholds like €10 million in revenue, 5 million users and company age of less than 3 years old are always arbitrary and create a false impression of having solved a problem.

A startup is a bit like obscenity, you can't describe it but you know when you see it. By nature, any exemption for startups would be imprecise and temporary.

The compromise text put forward by France and Germany is lipstick on a pig and is doing disservice to startups in Europe.

Good laws work for all, bad laws need exemptions

Generally, and especially in today's fast changing world, legislation can best full fill its purpose if it works for everyone in society. Legislation should not be governing specific actors but uphold certain principles.

Static rules often seek to address problems in a short term but they since they don't reflect a majority they require exemptions to get passed.

Instead, a government's product should be specific and beneficial for all, not only a few.

Now let's focus on why some legal exemptions are bad for a startup ecosystem, while others may work.

Article 13 introduces a system that no startup can comply with. An expensive time bomb that censors and frustrates users without providing legal certainty.

By delaying this for startups by three years, the problem of bad legislation doesn't get solved but procrastinated. Startups are thrown a bone to give up their opposition to such a law.

The issue at stake concerns content from media giants like Sony or Universal online.

Startups older than 3 years are supposed to close licensing deals, i.e. pay these giants for the theoretical possibility of their content running on a platform.

Hundreds of experts have argued that these measures are excessive and disproportionate - the current carve-out aims at appeasing critics.

The problem with copyright is much bigger than whether or not startups should be exempted from Article 13.

The fact that governments, especially France and Germany, who often piggyback on the startup hype, throw a bone to startups while publishers are supposed to have steak, is a recurring theme that risks keeping Europe as a startup continent that founders leave to scale their companies.

Politicians need to stop romanticising past economic ideas and establish rules that allow the next generation of success stories to happen in Europe.

Instead of building a disproportionate and simply bad laws, startups should be able to comply with Article 13 by implementing a workable "notice and take down" process.

This needs to be reinstated in Article 13.

It's simple: A rights holder or any user on the platform, comes across copyright infringing content, flags it and after the infringement is deemed legally sound - the platform removes the content.

Actually, that's how the EU plans to deal with terror content, so why can't this concept be used to protect commercial interests of a few wealthy rights holder organisations?

Carve-outs lower the startup's ambitions

Unlike the traditional concept of SMEs, startups shoot for the moon. With a scalable and repeatable business model at core and nearly unlimited computing power, startups can only succeed at scale.

This is why the OECD found that these high growth firms create many more new jobs compared to other firms. However, it is already too difficult for Europe's startups to scale and succeed; the European Commission concluded that "too few startups survive beyond the critical phase of 2–3 years".

An exemption that would ease regulatory burden on early stage might increase the number of companies below this threshold, but worsen the valley-of-death effect the Commission identified.

Creating a carve-out gives founders an unnecessary reason to stay below the glass ceiling. Their ambition to reach the moon from Europe would be challenged by a reward for staying small.

Growing means catching a bullet, not growing means dodging it

Carve-outs will reinforce short term rent seeking behaviour and make it harder for sustainable businesses to grow.

Founders would need to consider the dilemma of a carve out from day one.

Founders can accept the privilege in the short term and aim at an exit before hitting the threshold.

Founders who want to to build a sustainable company post-copyright will need to invest in infrastructure that has taken the likes of Google or Facebook 10+ years and millions of dollars to develop.

This means that European startups will become more likely to be acquired at an early stage instead of scaling-up.

Research by Startup Europe Partnership shows that 94 percent of startup acquisitions were completed by non-European companies, and 70 percent of the startups were younger than five years.

More legal carve-outs are likely to reinforce that and generate a drain of intellectual property, talent and investments from Europe.

As described above, exemptions work for static entities either by size or by their type of activity. Startups are, by definition, dynamic and growing. So why are exemptions proposed over and over again?

To some extent because the political process explores alternative possibilities when other avenues seem exhausted. When various sides in a political negotiation are opposed and no compromise can be found, negotiators have found that carving out specific interest groups from the scope of the law can be a way forward to break a gridlock.

The fundamental flaw with carve-outs remains, it confuses means and ends.

Unintended consequences should be avoided from the outset. By exempting startups, policy makers are addressing the symptom [a missing majority] and not the cause [of a flawed legislative proposal].

This article discusses the (mis)use of legal carve-outs or de minimis rules in laws governing fundamental, consumer or property rights. Industry or business legislation such as taxation, bankruptcy or government funding may well benefit from the use of definitions, thresholds, credits or differentiated treatment.

Disclaimer

This article is sponsored by a third party. All opinions in this article reflect the views of the author and not of EUobserver.

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