In the accelerated recovery phase that the EU is experiencing, extra-European funds – particularly the American ones (Pitchbook, 2021) – seek relatively lower valuation values in the EU than in the United States (34 million euros on average in Europe between 2016 and 2021 compared to €130 million in the US). We also note, among these extra-community investors, a growing participation of non-traditional investors (sovereign funds, hedge funds, private equity funds) in raising funds from European start-ups.
These funds fill a long-identified funding gap for growth-phase European start-ups (Ekeland et al., 2016; Duruflé et al., 2017; Tibi, 2019). However, after the correction currently observed in the United States, extra-EU capital flows may decline in the second half of 2022.
Pushing the limits of European venture capital
Although the EU has a significant savings surplus (average funding capacity of more than €300 billion per year in the last 5 years), there is still a lack of European funding in the growth stages of start-ups. This is due both to the characteristics of European investment funds and to the structuring of private savings.
European VC funds are much smaller in size than American and Asian VC funds or non-traditional funds. Thus, the largest venture capital fund created in 2021 in the United States was €5.7 billion (cf. annual report of the American Venture Capital Association) compared to €1.6 billion in the EU. The necessary diversification of their exposures thus limits the ability of European funds to invest in large-scale transactions.
A reason regularly presented to explain this European lag is the lower appetite of institutional investors for this asset class (Hafied et al., 2021). This is based on several main factors. On the one hand, pension funds are less present in Europe than in other countries where they play an important role in financing the growth of start-ups. On the other hand, the prudential rules applicable to insurers (Solvency 2) impose a high capital charge in the case of holding unlisted shares. Finally, European households tend to prefer guaranteed investments due, in particular, to greater risk aversion (Bekhtiar et al., 2019). In order to offer this type of savings product, institutional investors thus favor liquid and safe investments, thus diverting them from investments in start-ups.
A strategic imperative that calls for better mobilization of European savings
The development of European venture capital poses a dual challenge of economic and strategic autonomy for the EU. The lack of EU capacity in this area, especially in advanced stages of growth, contributes to the delay in building European alternatives for American or Asian technology companies. Furthermore, the intervention of non-resident investors can weaken the business ecosystem in the long term by promoting the relocation of start-ups and the drain of skills outside the EU (Braun et al., 2019).
The fragmentation of European capital markets is an obstacle to the development of continental-scale venture capital players. The European Commission action plans on the Capital Markets Union (CMU) aim to encourage the increase in the size of funds and the development of cross-border investments (in particular through the reforms of the EuVECA (European Venture Capital Funds) regulation of 2017 and 2019 , the approximation of corporate insolvency regimes or the single point of access to corporate information). The number of cross-border venture capital transactions in the EU thus recorded strong growth between 2019 and 2021 (Demertzis et al., 2022). Finally, to further enhance this asset class, it seems necessary to develop exit prospects for venture capital investors, through the listing of start-ups on the stock exchange or their acquisition by larger companies.
The development and better integration of venture capital in the EU will promote a better allocation of European capital, geographically and sectorally (in particular for companies contributing to the ecological transition and digital transformation), strengthening their strategic autonomy. Although public financial support, such as the recent creation of a fund supported by the European Investment Bank and dedicated to start-ups that reach an advanced level of development (scale-ups), plays a significant role, they cannot replace the mobilization of capital. (see the German government’s new start-up strategy). The reinforcement of European venture capital will therefore depend on the proper implementation of the UMC, on targeted public financial support and, in general, on a greater maturation of the business and financial ecosystem.