Solutions for the Dutch Tech

Introduction

In the previous post we looked at the main challenges highlighted in the State of Dutch Tech report issued by teachleap.nl earlier this year. If you have not read the earlier post yet, you can check it out here. If you don’t do that, I applaud you for living by the adage “Rather than trying to change something old, build something new”. You are in the right place and should subscribe to this blog. However, here we will be talking about fiscal policy (brace for it). This is a slow-moving field and the knowledge of how things are now is therefore important. As a brief summary, the challenges were:

1. Startups glow slowly.
2. Access to growth capital is limited.
3. Finding the right talent is hard.

Aside from the challenges we also highlighted strengths of the ecosystem:

• Number of strong research institutions, with good patent output.
• Investors’ seeing the Netherlands as a strong hub for biotech and green tech ventures.
• Geographically decentralized ecosystem of incubation and accelerator programs.
• The BeNeLux being the HQ of number of EU-level institutions (European Medicines Agency in Amsterdam, European Investment Fund in Luxembourg, …)

In this post, we will look at how to address these challenges, while acknowledging the existing strengths. But before we do that, let’s give credit where credit is due. Lot of information in this post was put together by teachleap.nl in the State of Dutch Tech report (download here). Chapeau to them!

Solution 1: Ain’t nothing (big) money can’t solve

Dutch startups generally grow slowly. This is a product of a multitude of factors, both cultural and structural. Both are difficult to fix. Here, let’s focus on the more tangible of the two: the structural factor. One obvious way to encourage more growth is by providing adequate levels of funding. The challenge is that driving growth at this stage does require a substantial amount of capital, and the system must find ways to support this by making this capital structurally available. If this sounds like coordination and some amount of politics, then you are listening right (fiscal politics here we come).

The techleap’s report highlights that larger investment rounds into Dutch startups are likely to include foreign capital (75% at 10-100 M level, and 85% at 100M and beyond). This goes to underscore the importance of international cooperation that could mobilize more growth capital. While I second the need for cooperation on international level, I think that this is potentially too-slow, and in any case a barbwire of conflicts of interests (once EU makes capital available to NL, it cannot refuse to do so for other member states). This is probably also while the most recent example of this, the Dutch Future Fund II by EIF (European Investment Fund) is relatively modest, with 200 M EUR committed from the EIF.

While it seems that this leads to secondary effects and mobilization of more capital, it is unclear how important this effect is. First, I did not find any counterfactual evaluations. Wouldn’t this “secondary”-capital have been invested anyway? Second, this capital is made available progressively, and split among multiple VC funds. Consequently, it seems ill-suited to deal with the problem that needs addressing the most, i.e. making large sums structurally available for growth investments. As per usual, it probably started off with everybody being well-intentioned, but politics got the better side of it, reducing the effectiveness of the final implementation. Let’s now look at what I believe to be at least equally promising ways to get access to this type of capital. A one the techleap’s report only briefly mentions, by recalling that demissionary minister of Economic Affairs and Climate Policy (EZK) highlighted a gap in the existing system. Namely, that institutional investors (such as pension funds) seem to be interested in investing in startups and scaleups but lack precedence and framework to do so.

A small detour on a familiar subject

Fiscal policies, pension funds, and international collaborations may sound all too remote and abstract, so let’s now look at everyone’s favorite subject to complain about, the Dutch housing market crisis. Many expats coming to the Netherlands (me included) will be quite surprised by how “right winged” the situation is when it comes to housing. Historically, this seems to have been treated as people’s problem. There was little regulation on rents, and not enough care given to whether enough, and adequate, housing is being built. The consequences of that are apparent now, with the crisis of the housing market.

A corollary of this issue is that housing is seen as the primary means of investment in the country. I am by no means expert on this, and have much to learn. I do think though, that it is safe to say that real estate investment (at least for one’s primary residence) is the most tax-favorable vehicle there is in the Netherlands. I have a lot of issues with it, but for now let’s keep this to the most pressing one in the context of this article. And that is: it locks up huge amounts of capital. There are 8+ millions of housing units, with an average (and growing) price of 370k EUR [source]. These have aggregate value of 8e6*0.37e6=3e12 EUR. That’s 3 trillion, or 3’000 billion EUR.¹ If even just 10% of this value was redirected into growth investment, it would allow for 3’000 investment rounds @ 100M EUR. According to the State of the Dutch tech report there are ~1’250 startups that received 0.1-10M worth of funding in the whole county. Releasing 300bn EUR from housing could lift this whole ecosystem to series C+ level 2.5 times instantly. This calculation, of course, is extremely simplistic. The purpose of it here is to illustrate the magnitude of the opportunity.

It seems a good idea to look at whether other countries have figured this out at least a bit better. I previously lived in Switzerland, which has a more regulated housing market. There is lower proportion of house ownership (35% compared to 57% in the Netherlands), with larger role of (non-profit!) housing corporations. Even in tenant-occupied housing, the rents are regulated much more tightly than in NL (as written before, I find the Dutch setup much too liberal). Rents are, for example, linked to inflation (so are they in NL, but read on), and can increase only by sub percent values above it. When the inflation is negative (i.e. there is deflation), the rents in fact have to drop! The Swiss government does a much better job at recognizing housing as a right, and something that should not be seen as (significant) investment or source of income.

Hitting (at least) two birds with one stone: Incentivize VC-able pension schemes

The Swiss, being relatively less able to save and invest by means of real estate ownership, have perks that make up for it. They benefit from low taxation on stock ownership, with corresponding low capital gains tax on their sale. This is really nice, as it allows one to invest the best way an individual investor can these days – passively. With little work you can reap returns that are above the housing market returns AND, save yourself a lot of hassles with house ownership, AND remain more geographically mobile. This all sounds great, but it does have the disadvantage of you mostly shoving your capital into hands of frequently US-based institutional investors, while the capital could have arguably been used locally to drive competitiveness and growth of your own geographical region. By the way, this is what pension funds mostly do, and why it is so important to diversify their investments to something with better secondary effects for local economies.

The Swiss have understood this, and implemented an institutionalized system of private pensions plans (PPP) that creates more flexibility in how individual pensions are invested. Dubbed the third pillar, it has two parts. 3a – restricted PPP, and 3b – unrestricted PPP. Both are potential contributors to funding local scale ups, but it is the 3b that is the best cut out for it. These investments lie somewhat between an investment into the stock market and traditional pension funds. They allow individuals to select a risk profile and to some degree allow for channeling pension-directed savings into riskier vehicles such as startup and growth funding.

Let’s make a simple back of the envelope calculation to get a sense for whether this can matter. Assume that half of the Swiss population in their working age (say 25-65) invest in the 3b third pillar, and that they invest 3’000 CHF a year.² Next, assume that they do so for a full 40 years, and that the yearly return on this investment is 4%. For each individual this leads to \(FV = P [((1 + r)^t – 1) / r]\), where P=3’000 r=4%, n=40. Running the numbers, this is 285k CHF. As there is roughly 4 million people between 25 and 65 in Switzerland (and we assumed half of them invest to pillar 3b), this gives in total 0.285e6 * 2e6 = 6e11, or 600bn CHF. If only 10% of it is allowed to be directed into growth investment in companies, it still would be enough for 600 series C+ with 100 M each. Assuming the Dutch would invest the same way, the amount would be double in the Netherlands (its population being double that of Switzerland).

While this has been another simplistic calculation, I hope it illustrates the opportunity that lies in the capital that is directed towards pension savings. This case is especially pronounced for the Netherlands, which is a top five/six country worldwide in terms of total assets in pension funds. Leveraging the existing capital in pension funds, as well offering new ways to save for pension, all offer opportunities to channel substantial capital into driving economic growth. It also has the advantage of incentivizing people to save for retirement. If the Dutch government does not explore this way to structurally increase access to growth capital, it is leaving a large opportunity on the table.

The money invested in retirement savings is the most substantial source of capital in this context. There is one more investment vehicle that has been successfully explored (in the UK,) and is currently being implemented in other countries in Europe (Germany, and France). Most recently, France is implementing policies that allow individuals to gain a tax break of 30%, or even 50%, on pre-seed and seed investments into startups (up to 100 and 150k EUR]. Similar schemes exist for a number of years in the UK, where they contributed 2.1bn GBP of early stage funding in 2022/3. While this is not evaluated at the counterfactual (i.e. how many of these investors would have invested anyway), it seems to provide a reasonable amount of incentive and a policy other countries should seek to adopt.

Compared to the pension-redirection system we described above, where diversified investments are made from a large pool of money with long time horizons, here the risk profile is much higher, and shouldered entirely by the individual. This is why it will remain reserved to modest total capital, and interesting only for high net-worth individuals (or gamblers). If implemented in the NL, it would be a move in the right direction, as it would encourage high-worth individuals to explore investments with more positive secondary effects for the economy, rather than passively investing into stocks, or locking up capital in housing.

Solution 2: Promote academic entrepreneurship

The Netherlands has a strong ecosystem of universities and research centers with good academic output. It is in the top 10 countries worldwide by academic output, and does particularly well in health sciences. So far so good. However, the translation of the innovation into value is sluggish. Seven out of every eight patents filed in the Netherlands never turn into a company. The rate is as bad as 1 in 10 for universities and it improves somewhat to 1 in 6 for university medical centers (UMCs).

Living in the country, I see that there is a good number of institutions and organizations that target prospective entrepreneurs and early stage founders. From incubators, to accelerators, to funders. I think there are two reasons why this support network does not translate to (better) results. First, many of the entrepreneurship-encouraging activities are fairly new, and their impact will take more time to materialize. Second, entrepreneurship is not seen as an attractive career choice by the vast majority of academics. This hampers deeptech venture creation. Such a situation is in contrast to the US, where many students join a top-notch scientific lab already with the intention to start a company, and are supported by their PI in doing so.³

Europe is generally pretty heavy on work-life balance, and the Dutch are certainly one of the champions in that.⁴ Starting a company has an image of hustling on something that is probably not going to work. Try to motivate yourself to do that while your friends are landing permanent contracts in-between their frequent trips to Intratuin and IKEA to equip their newly bought homes. Handling peer pressure in this context is challenging but for the most determined founders. The culture needs to change. Founding a company should be seen as something fulfilling both professionally and personally, with a potential for large upside on the impact and income level. Perpetuating the image of a lonely founder without work-life balance is not useful. The goal is not to paint a rosy picture, simply a more realistic one. For every founder who hustles with no work balance there will be others who pull it off while keeping functional relationships and high life satisfaction through most of it. It is important to create a more representative and living image of what founding means in any given field, time, and locale. A simple and powerful way to do it is to create more opportunities for interaction between early stage founders and academic trainees. This is happening in some areas, but needs to become more common. While doing so, it will be important to keep diversity and inclusion in mind, as well as account for survivorship bias by inviting a diverse pool of founders, including those whose ventures failed. I recently joined Nucleate where we are helping to create this type of interface. It was one of my main motivations to start a branch in the Netherlands, as I personally felt the lack of these interactions. Another reason was to change the academic experience of PhDs and postdocs, which I turn to next.

Throughout the 4+ years I was at the university as a PhD, the only business I heard of was the one in “business as usual” and “minding your own business”. On the other hand, I was asked to do coursework for 45 Graduate School (GS) credits, amounting to 540 hours of workload. I don’t assume any ill intent, but that does hinder me from calling the courses by their right name: a waste of time. Save a few small exceptions, that’s what the majority of them were.⁵ The only “upside” of such a system was that it allowed me to get some of my work-related activities recognized towards these credits (such as organizing a panel at the iGEM Jamboree in 2023), and that I could scrape some credits by doing MOOCs from other universities. Calling this an upside is an overstatement. I would have done these activities anyway. The net value of the whole GS is in red numbers.

The good news is, there is a framework that has PhDs put in 500+ hours (that is 3 months of full time work!) towards something. Now we just need to make this something useful. There is some good precedence available elsewhere (e.g. here, and here, and I am personally interested in updating and adapting it to the local ecosystem. Nucleate is an organization that has capacity to do this, and we are looking for partners within universities and institutional partners to make this happen. Please get in touch if you would like to learn more or contribute!

Solution 3: Grow, attract and retain talent

The Netherlands struggles with talent shortages, and it is not doing well in addressing them from neither the local, nor the global talent pools.

On the local level, the country must promote STEM fields as attractive areas of study. The Netherlands sees only 19% of its university students graduate from STEM. That’s only about half that of Germany. It also underfunds this area relative to other countries. Next to universities, the country also must promote these subjects at schools of applied sciences, and foster the creation of more technical apprenticeships. Local and national governments should work with businesses to leverage this opportunity.

Let’s turn to the global level now. The Netherlands does courtesy to its name (low-lands) and culture (doe normaal) – it does not stand as a location for global talent. It’s by all means a fair country, with a good balance across a number of aspects. It is well connected between its individual cities and internationally. It affords a good tradeoff between family life and career opportunities. It is easy to settle in, as everyone speaks good English, and there are a lot of expats already. It has good educational institutions and is very safe. Even the weather is not that bad, and summers are generally quite nice.

The problem with this description is that similar things could be said about a number of other countries, leaving the Netherlands somewhere in the middle of the pack of “good” countries where to live (say in the top 20 or so, depending what factors matter to you). If the Dutch are serious about doing better than this, they must acknowledge that the competition for talent is fierce, and take adequate action.

The battle for talent starts early, and so it is important to enter it early. This is why English taught bachelors are likely net-positive, and something the Dutch would have done better by not doing anything about, instead of scaling them down).⁶ The battle for talent is probably the most rampant at the master level. I have long been a critic of charging some students (much) more for their degree. If you come from non-EU/EFTA, you will pay about 25k EUR per year for your masters in the Netherlands, 10-fold more than students from the EU/EFTA countries! Talent seems to be valued only as long as it has very deep pockets or a pedigree. This obscenity continues on PhD level, where PhDs arriving on foreign scholarships will not see the level of their reimbursement matched up to a university (and country)-wide standard. EPFL, as an example, does implement this matching.

Finally, many countries either historically had (US, UK, …), or recently decided to create (Germany, Switzerland), opportunities for pursuing doctorate without masters (so called direct doctorate), which continue to be lacking in the Netherlands. Whatever the intent of this messaging is, the results are quite clear. If dealt with the opportunity to do so, students across bachelor, master and PhD level, are likely to pursue their studies and careers elsewhere. Consequently, the country is missing out on some of the best talent.

The battle for talent continues after graduation. To attract skilled employees, it is important to offer adequate compensation through salary, and especially in the early-stage, through equity. Aside from directly increasing starter salaries (which is in my opinion badly needed), the Netherlands has historically implemented a 30% ruling that shielded expats from some degree of taxation, effectively bumping up their salaries. Initially available for eight years, it has been cut to five, and most recently scaled down substantially more. The scaling back also includes removal of partial foreign tax liability, which massively reduces the attractiveness of the country for expats. I, for one, would have probably not come to the Netherlands to do a PhD if these changes happened a couple of years earlier.

Unlike the 30% ruling, which the government would have done the best not to touch (too late!), improving employee compensation through equity is in need of reform. The way stocks are distributed to company employees, and taxed, in the Netherlands, is unattractive. Number of other countries implement ESOPs (employee stock ownership programs) do a much better job in this aspect. The Netherlands must adopt similar policies, otherwise it will continue to be unattractive for those who seek to use their talent where it has the largest leverage - in early stage companies.

Ok, this should have been post about solutions, and I admit to have been complaining a lot (that’s what growing up in communist country does to you! To end on the correct note, the solutions we discussed in this section are: 1) channel more funding into STEM degrees and increase the number of students therein, 2) increase the number of technical apprenticeships 3) retain English-taught bachelors or even scale them up, 4) abandon high-tranche tuition fees for non-EU/EFTA nationals, 5) match-up PhD scholarships up to a standard level, 6) create options for direct doctorate, 7) increase salaries, 8) retain 30% ruling, and 9) reform ESOP taxation to make equity ownership in early stage companies more attractive.

Conclusions

We have seen that there are a number of solutions available to address shortcomings in the current tech entrepreneurial landscape in the Netherlands. Few are as simple as not changing the good things, or re-implementing measures that were scaled back. Many, however, do require large scale coordinated political action. I am optimistic about the Dutch political leadership eventually figuring out what the right thing to do is, and doing it. I am however NOT optimistic about how long this is going to take. Consequently, I expect the Netherlands to struggle keeping its position as an attractive destination for expat talent among competition. Netherlands-based individuals should be focusing on the things they can control. Working with universities, researchers and recent graduates to create dialogues around entrepreneurship, building cross-border networks to facilitate exchange of talent and capital, and creating in-house apprenticeship programs to foster talent internally are all examples of actions with potential for large positive impact.

This post has been a mouthful! Thanks for reading everyone! If you spot any inaccuracies or would like to engage in a discussion, please write below in the comments. If you would like to read more content like this as it becomes available, subscribe!

Footnotes