Brussels seeks to spur capital to prevent the flight of start-ups

In a meeting with journalists in Brussels, Zaharieva – the first in the role, created in 2024 – laments the limitations of local venture capital. A suffering shared by European institutions: a senior official from the European Council recently criticized that “companies lack funding for the scalable phase – the stages of greatest growth and size for startups”. This wound on the side of community startups stems from the lack of capital to undertake the final rounds of their process, the most demanding in terms of capital. In fact, according to the latest European single market and competitiveness report, the ratio of venture capital investment to European GDP is only 0.06%. According to the same document, this is a tenth of the figure for the USA.

The sector confirms that these impediments have, for years –decades, even– been hindering the final stages of growth for local startups. The president of Tech Barcelona and co-founder of Antai Ventures, Miguel Vicente, states in an interview with ARA that the problem has been “especially serious in Spain,” because “it has had smaller funds than France, Germany, or the United Kingdom.” “We don’t have funds with enough muscle for all of this to stay here,” he concludes.

The fragmentation of the capital market also anchors the projection of European emerging companies, and defines the attitude of venture capital investors. According to Zaharieva, “many European venture capital companies focus too much on regional investments” and do not have the capacity to become continental. Vicente, for his part, points out that the extreme regulatory diversity of the Twenty-Seven in terms of investment is often the stopper: “We need this to be a single market, with the same regulation”, to encourage risk investments outside the immediate environment, he says.

“There is no time” for the single market

According to the commissioner, a European savings and investment union would serve to eliminate many of the barriers that startups face. However, the EU does not expect to achieve it before 2028, and the pace of technological innovation means that the date is too far off: “We cannot wait until then,” she adds. In this regard, she defends Brussels’ investment strategy, through tools like the European Innovation Council, which has managed to mobilize 3.5 euros of private investment for every euro of public funds activated.

The Commission also has a new vehicle, the Scaleup Europe Fund, of public-private origin, to fill this gap. The new fund focuses on operations of a certain volume, dedicated to companies at key growth moments; and will undertake tickets above 100 million euros. The initiative has 5 billion euros to act as a tractor for particularly demanding financing rounds. Vicente praises the proposal, although he comments that “we need many more, and perhaps some even larger”.

Lack of buyers

Both European authorities and the sector point out that financing is not the only problem: it also becomes complex to reach the final phase of the life of scalable companies, which is the exit. When a business is mature enough to be integrated into a corporation – and leave profits for the funds that have invested in it – European companies often lack the economic capacity to compete. It is a problem, according to Vicente, that “is not sufficiently detected”: “The majority of European startups that are sold are sold to American corporations.

The issue of exits, it must be said, is a potentially even more serious problem than venture capital: through financing rounds, an investor can change the ownership balance of a European startup or scale-up, but the management team normally stays in the region of origin. With an acquisition, “the competitiveness effect does not remain solely within the technological ecosystem; it extends to the entire industry.” That is, large European companies may find that American competitors, or those from other regions with greater investment capacity, are acquiring community-origin technology that improves their production capacity to the detriment of competition.

For the investor and president of Tech, the solution is already provided in the Commission’s single market strategy: the famous “European champions,” sectoral giants that would consolidate through mergers and acquisitions to compete with their transatlantic counterparts. “If instead of having twenty-seven telecommunications companies, we had three, it would be much easier to undertake technological acquisitions,” he observes. However, a regime that spurs continental mergers at the pace the Commission desires has not yet been established.

Saver conservatism

Outside the public sphere, Zaharieva highlights the role of institutional investors, such as pension funds, which have a lot of capital but “do not invest in member states”. In this regard, she urges the community institutions to “teach” potential investors “the returns and the possibilities of getting involved in venture capital”. Among other issues, the commissioner has highlighted the role of the European Innovation Council and the new Scaleup Europe Fund to “motivate institutional investors to approach venture capital”; as well as the collaboration between Brussels and the European Investment Bank to activate this capital. The commissioner herself, however, acknowledges that some national regulations are “too conservative” for these investments to become a reality.

Vicente acknowledges a problem of “management culture” among community institutional funds, historically risk-averse, but also points out that the Union’s financial regulations do not make it easy to mobilize capital in this regard. “It’s a risk classification problem,” she reasons: the regulator is very reluctant to accept that pension funds or insurance companies dedicate resources to these types of products, which are more profitable but less secure. France, for example, overcame this blockage through the Tibi initiative, which has managed to treat technology as an asset suitable for institutional investors. According to the French Ministry of Economy, the project has already managed to commit more than 30,000 million euros since the program’s inception, having gathered around 176 institutional funds.