There is one root reason why there are limited start-ups in Europe. It boils down to the dead hand of state intervention, which is generally much greater in Europe than in the US or East Asia. This works in both direct and indirect ways. The direct effect is that the European governments tend to provide funding that is very specific, but in the wrong ways, as I shall explain later.
In the indirect way the generally higher level of employment laws and corporate taxes tends to reduce the incentive to take risks. This hits in two ways; firstly many countries have an effective incentive not to grow companies because bureaucratic red-tape increases as a company grows. A 5 person company can typically avoid most bureaucracy, a 15 person company typically needs at least one person to work full time placating various bureaucrats and so on. Effectively, as the company grows the red-tape burden also increases, but the bureaucratic burden increases at a faster rate. This is then tied to the difficulty in removing excess or unsuitable employees. In most of Europe it is hard and expensive to stop employing someone; typically a significant payoff must be made, even if the employee was considered incompetent, and in some cases there may be legal requirements to continue employing people despite having no job for them.
The net effect is that a European company has a distinct incentive not to take the risk of adding staff. Rather than bulk up in the good times in the hope of making more money for leaner periods, a European company will often prefer to not take the risk of seeking orders from new customers because they can’t afford the risk that they will end up with a higher cost base that it is unable to shrink later.
There is of course an additional secondary side effect: since risk-taking is discouraged a European who is likely to wish to take risks will consider taking the risk of emigrating to a more entrepreneur-friendly environment, thus depriving Europe of his talents, while a risk-taker elsewhere has little incentive to move to Europe. There is periodic talk of the “brain-drain” to the USA; I think the above is the correct explanation of why this occurs. That is not to say that Europe has no entrepreneurial talent, just that it fails to nurture what it has and discourages the arrival of new talent.
Finally the generally high tax burden for the well-paid means that not only is the incentive to a take the risks that could lead to a large payoff reduced, but also a person who is inclined to take risks may decide that he can get a better result from finding a way to evade paying tax than increasing gross earnings.
To return to the way European governments try to support start-ups by providing grants and incentives: these tend to fall into two categories, firstly location-dependent funds where enterprises that (re)locate themselves in a particular place are entitled to various incentives; and secondly funds that support commercialisation in particular areas of research. The first is a problem because the funds act purely as crude corporate welfare and can, if gamed correctly, allow an unscrupulous individual to set up a shell company, pocket the grants and not do anything except pay salaries to the founder and his friends. Moreover they are a way of trying to apply a band-aid to a broken system rather than fixing the system; if a location is attractive for start-ups then they will come and flourish, if it isn’t then subsidizing start-ups to come and not flourish just wastes entrepreneurial talent.
The problem of gaming the system also occurs with research field support. In addition if a field is worth supporting then almost certainly some commercially minded VC will fund business plans in that area. If it isn’t then they won’t fund the plans, and any start-ups founded are likely to be either prematurely commercialising something, or to be working on something that has no commercial future. In which case the start-up will consume lots of tax money without producing any sensible return.
Finally, one way that a government can act to help start-ups is to be a customer. Unfortunately the main field where the government can be a customer is in the military and, apart from the UK and France, most European militaries are neither interested in high technology nor have sufficient budget. Healthcare, however, the other area in which governments can be customers, is about the only one where Europe does have a number of success stories, which may help prove my point.