European VCs Call for More Growth-Stage Capital
Venture capitalists in Europe are calling for an increase in late-stage growth funding to better compete with the U.S. and support the scaling of its technology companies. While Europe is producing more billion-dollar SaaS and martech firms, a persistent lag in available scale-up funding presents a challenge for founders with global ambitions.
The late-stage funding gap for European scale-ups is significant, with companies raising 50% less capital than their peers in San Francisco by the time they are ten years old. This disparity persists across various industries and business cycles. The scarcity of European investors capable of financing large growth rounds often compels founders to seek funding from abroad. Total venture capital investment in European companies is six to eight times lower than in American companies annually. In 2023, European VC deal value saw a steep 45.7% decline from the previous year, settling at €57.1 billion. The late-stage sector was hit hardest, with a 50.6% reduction in deal value. The average venture capital fund size in Europe is approximately $128 million, significantly smaller than the U.S. average of $282 million. This difference in fund size directly impacts the availability of capital for startups as they mature. Consequently, U.S. companies receive 82% more funding in later stages than their European counterparts. A major factor contributing to this gap is the composition of Limited Partners (LPs) in venture funds. In Europe, public entities like the European Investment Fund account for a significant portion of VC funding, while in the U.S., 72% of venture capital comes from private institutional sources like pension funds. European pension funds allocate ten times less to venture capital than their U.S. counterparts. This funding shortage has tangible consequences for European tech companies. Many are pushed to seek foreign buyers or list on foreign stock exchanges to access the necessary capital for expansion. The challenge is not a lack of early-stage companies, as Europe has created more startups per year than the U.S. over the past five years, but rather a failure to convert them into late-stage successes. The issue extends beyond just capital availability. Regulatory fragmentation across European Union member states presents another hurdle for scaling companies. Unlike the fluid interstate mobility for talent in the U.S., startups in Europe must navigate 27 different sets of labor laws and immigration policies, which can add significant operational costs and slow down growth. Despite these challenges, certain sectors in Europe, such as SaaS and martech, continue to attract investment. In 2023, 47% of all venture capital investments were directed towards startups with a SaaS business model. Cities like London, Berlin, and Paris have become major hubs for SaaS funding. Initiatives are underway to address the late-stage funding gap. For example, some governments are creating incentives for pension funds to allocate a larger portion of their assets to venture capital. The success of these measures will be crucial for fostering a more competitive European tech ecosystem capable of supporting companies with global ambitions.
