Part III: Venture Capital Investing in the EU vs. US — How Europe Can Close the Gap

The EU’s progress and suggestions on improving their VC & Entrepreneurship Ecosystem

Current Progress is Promising

First, we will look at what the EU is currently doing, including accelerators and incubators and the EUVeCa.

  1. The Single EU Equity Financial Instrument which supports European businesses’ growth, research and innovation (R&I) from the early stage, including seed, up to expansion and growth stage.
  2. The European Fund for Strategic Investment (EFSI) which is a Fund-of-Funds investing across a variety of sectors and fund managers.
  3. The Pan-European Venture Capital Fund-of-Funds program (VentureEU) aims to further address Europe’s equity gap by investing in VC Funds-of-Funds. VentureEU was seeded with €410 million ($460 million) and aims to raise up to €2.1 billion in public and private investment to support local startups.
  4. The European Scale-up Action for Risk capital (ESCALAR) program is a risk/reward mechanism to support scale-ups with venture capital and growth financing.

Policy Changes

One simple improvement seems to be fairly obvious, even if it might not be easy: policy changes. The first policy change that seems crucial is developing a larger LP base for VC funds. This is crucial, as VC funds can only fund so many companies. Increasing the average fund size in the EU would allow for funds to invest more money in portfolio companies, hire more junior VCs (increasing deal flow & quality of deals) and also invest in more startups. One way in which Europe can widen the LP base is by encouraging pensions, university endowments, and other large institutions to invest in VC funds in their home countries. Currently, Europe doesn’t have the same set of institutions that back VC and lack larger pension funds & university endowments that supports so much of the VC investment in the US. Too many venture capital fund managers in Europe still don’t have a vehicle that is a viable proposition for these types of investors.

Strategy Two: Taxes

A second strategy should be lowering the capital gains tax. Currently, the US capital gains tax is 25% federally (long-term) for the highest tax bracket and the combined state and federal for each state are shown below.

Culture

The culture of entrepreneurship in the US vs the EU is vastly different. A founding team is key to a successful startup, no matter how original and fantastic the idea is. A good team is led by people who are not risk-averse, extremely passionate, relentless, independent, smart, charismatic, and well-spoken.

Conclusion

When looking at what drives a country, a society, a community, or anything forward, one must take as general of an approach as possible. No one factor, discipline, or cause will determine an outcome. We live in a complex world with many different factors at play. Capitalism is the mode that almost all countries have decided works best to solve our problems with a market as a collection of individuals that determine a reward for its solution. Entrepreneurship is the heart that makes capitalism beat and venture capital is the critical resource that provides startups and founders with the capital they need to grow and succeed in their goals.

We shouldn’t be asking ourselves how we can maintain our dominance as a VC ecosystem in the US, but rather how we can help other countries mimic our success and learn from our failures.

Learning how these different variables affect our daily lives and can impact the lives of our descendants, for better or worse, is paramount to achieving a more utopian world.

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