Europe’s Scale-Up Funding Gap: Six Constraints on Venture Capital Supply and a Reform Agenda - Intereconomics | Review of European Economic Policy

An article in Intereconomics | Review of European Economic Policy argues that Europe's difficulty in scaling innovative firms stems mainly from constraints on the supply of venture capital rather than weak demand from start-ups. The authors note that the EU produces fundamental research comparable to its main competitors but lags in converting that research into commercial innovation, a pattern described as the "European paradox" (Argyropoulou et al., 2019). The article cites a European Investment Bank (2024) finding that EU scale-ups raise 50% less capital than US counterparts over their first decade.

The funding gap is most visible after seed stage. Citing Dealroom (2025), the article reports that US VC transactions reached US $405.4 billion in 2021, more than five times the US $72.8 billion invested in the EU, and that by 2025 US investment had recovered to US $283.3 billion while the EU stagnated at US $39.1 billion. Pre-seed and seed investment in the EU, roughly US $3 billion, was slightly above US levels of US $2.7 billion, but early- and growth-stage rounds showed the US at US $115 billion against US $28 billion in the EU. The authors describe this as the "Valley of Death" in which firms exhaust R&D funding before reaching profitability.

The article attributes the shortfall to six supply-side constraints. Structural constraints include the role of pay-as-you-go pension systems in Europe, where pension funds supply 7.6% of VC funding compared with 30.7% in the US; the near absence of endowments and foundations, at 5.5% in the EU versus 27.8% in the US; and a bank-dominated financial system in which financial intermediaries provide 41.3% of EU VC funding against 10.8% in the US. Disincentive constraints include regulatory capital charges under Solvency II and Basel III, which the authors say reserve capital against VC holdings for insurers and banks despite serving legitimate financial-stability objectives; tax and legal fragmentation across member states; and a weak exit environment with limited IPO and acquisition opportunities. The article states that existing EU policy responses are steps in the right direction but insufficient, and it sets out policy recommendations to address the gap.