Mario Draghi’s report And Unlocking Europe’s Venture Capital Potential
Europe’s venture capital ecosystem is facing significant hurdles, as outlined in the Draghi* Report on EU competitiveness.
While the region’s startups show considerable promise, Europe attracts only 5% of global venture capital funding, a stark contrast to the dominant shares of the US and China. A key factor behind this disparity is the fragmented Single Market, which restricts the ability of high-growth companies to scale efficiently across borders. As a result, over 30% of European unicorns relocated abroad between 2008 and 2021, primarily to the US, to access more robust capital ecosystems and favorable regulatory frameworks. The absence of a fully realized Capital Markets Union and the reliance on traditional bank financing, which is ill-suited for high-growth ventures, further limit the sector's potential. To foster a stronger capital ecosystem, Europe must unify its capital markets, reduce regulatory barriers, and enhance investment support through institutions like the European Investment Bank (EIB) and European Innovation Council (EIC), ensuring startups can grow and thrive without leaving the continent.
The report and EU VC Investment
Here’s a brief overview of the key factors affecting venture capital in Europe, as highlighted in the Draghi Report on EU competitiveness. These points underscore the challenges and opportunities in developing a more dynamic and integrated venture capital ecosystem across the continent.
- Venture capital (VC) funding in Europe is significantly underdeveloped, capturing only 5% of global VC funds compared to 52% in the US and 40% in China.
- A primary factor in the low level of VC funding is the fragmentation of the Single Market, which reduces the growth potential of companies within Europe. As a result, many high-growth companies seek VC funding in the US.
- Over 30% of European "unicorns" (startups valued at over USD 1 billion) relocated their headquarters abroad, primarily to the US, between 2008 and 2021. This is largely driven by the inability to scale in the EU due to regulatory barriers and market fragmentation.
- The EU's fragmented capital markets and lack of deep institutional investment pools result in a reliance on bank financing, which is not well-suited for high-growth and innovative companies.
- Early-stage innovation in Europe could benefit from expanding angel investment, enhancing coordination between the European Investment Fund (EIF) and the European Innovation Council (EIC), and increasing the budget for VC support. There are proposals to enlarge the mandate of the European Investment Bank (EIB) Group to co-invest in larger ventures, reducing risk for private investors.
- The absence of a Capital Markets Union (CMU) and high regulatory and compliance costs for operating in multiple EU Member States have been cited as key factors dissuading potential investors.
- Europe's failure to create a conducive environment for tech-driven innovation, particularly in digital and AI sectors, hinders the ability of startups to attract venture capital. The tech sector in Europe lags behind due to low productivity, limited R&D investment, and inadequate infrastructure.
These factors indicate that the EU’s fragmented market and regulatory inefficiencies limit venture capital’s growth, leading to a relocation of promising startups to more favorable markets, especially the US. The report emphasizes the need for a unified regulatory framework, better capital market integration, and improved infrastructure to retain startups in Europe and attract higher levels of VC investment.
IPO CLUB’s experience with Europe
At IPO Club, our experience in the European venture capital market has been limited, with only three of our 25 investments based in Europe—NewCleo, Stabiliti, and BlaBlaCar. The companies we've encountered tend to be smaller, primarily in the pre-seed stage, and we have yet to see many promising late-stage growth names emerge. When we do invest in Europe, a consistent theme is our anticipation that founders will eventually aim to list or exit in the United States, largely due to the poor liquidity of European markets, including London. This trend underscores the ongoing challenges within Europe's capital ecosystem.
The EU Funding Paradox
It’s not just that investors deploy capital in the United States due to its more efficient and liquid capital markets, especially in venture and technology. Europe’s biggest or most promising startups also relocate to the U.S. to seek funding. This creates a paradox where European startups move to the U.S. and receive funding from European investors who prefer the liquidity of U.S. markets.
As a result, Europe loses twice—first, by losing the potential employment and tax revenues from the startup, and second, by seeing its own capital diverted to the U.S., even though the asset remains fundamentally European.
*Mario Draghi is an Italian economist and former President of the European Central Bank (2011–2019). Widely credited with stabilizing the eurozone during the sovereign debt crisis, Draghi has been a leading voice on economic and monetary policy in Europe. He also served as Italy’s Prime Minister (2021–2022), and his recent work focuses on boosting European competitiveness and innovation in the global economy.
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Disclaimer
Private companies carry inherent risks and may not be suitable for all investors. The information provided in this article is for informational purposes only and should not be construed as investment advice. Always conduct thorough research and seek professional financial guidance before making investment decisions.
