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

This is the third Medium post in a three-part series that will look at the discrepancies between VC investing in the US vs. Europe, and the EU in particular. The series will take a macro-perspective on the issue and look for various correlations and variables that play a role and then seek to prove or disprove common sense intuitions on the possible discrepancies and reasons for them.

As we saw in the first post in this series, VC investments and the availability of funds for startups are closely intertwined with a country’s historical economic success. Variables that we examined include the unemployment rate, human capital index, (HCI) GDP growth, inflation, and market capitalization. When looking at the discrepancies between the EU and the US, we saw how they differ in terms of government regulations, capital markets, human capital and exit opportunities. So at this point we are left looking for a viable solution to help the EU close this large gap and improve their VC ecosystem.

Current Progress is Promising

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

In Post II, we dove into the extent of accelerators and incubators in the EU and how they have certainly helped solve some of these problems, but are ultimately proving to be as effective as one could have hoped. The more promising program is the move towards a pan-European venture capital market. In 2013, the EU adopted the Regulation on European Venture Capital Funds (EUVeCa). This allows for VC funds to market themselves throughout EU countries under a single set of regulations. There have been 4 programs enacted since that have sought to do even better things for entrepreneurs across the EU including:

  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.

These programs are very encouraging signs and show that the EU is seriously dedicated to solving this important problem and therefore aiding others to solve problems they see by starting their own ventures. Providing sustainable equity financing for the next generation of entrepreneurs in Europe will help spur economic growth, create jobs, lower inflation rates, and help those who need it the most. While these programs are a good start, there is more work that can and should be done. Below I will discuss some of the changes that I think will help the EU completely close the gap between the US and unlock a future full of unicorns!

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.

“Although venture funds in Europe are now raising on average almost €100 million at final closing — almost double the average of 10 years ago — many global institutional investors, such as pension funds, often make minimum investments in between €20 million and €50 million.”

— Michael Collins, CEO of Invest Europe, the European private equity and venture capital association.

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.

In the EU, the top capital gains tax rates vary heavily from each country, but for countries looking to maximize VC investment, it seems that following the suit of countries like Luxembourg, Switzerland, and others who have a 0% capital gains tax would do just this.

Some other policies to consider include: increasing the number and dollar amount of loans to small businesses, decreasing the cost & length of the patent process, and lowering the burden of bankruptcy. We discussed many of these in the last post, so I won’t delve too deeply into them. Finally, the EU can encourage more investment in start-ups through larger public markets and therefore more opportunities for exits. This is crucial in order for VCs to be able to achieve liquidity in their investments and therefore a return on capital.


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.

As I wrote in Part II,

“American entrepreneurs differ from their European counterparts mostly in the categories of risk-aversion and independence. The pioneer spirit of early settlers in North America came with the belief that hard work and a good attitude can help one to achieve anything; this fostered a strong entrepreneurial spirit in Americans early on.”

The EU must encourage entrepreneurship and risk taking through education, media, and the development of students in higher education specifically as entrepreneurs and job creators. This is a long term change that will take many years and a few generations, but the rewards will be significant if properly implemented and taught.


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.

This is why VC funding availability correlates so highly with macroeconomic variables such as human capital, unemployment rate, total market cap of all public companies, GDP growth, and inflation. Again, there is a lot at play here and VC funding availability is not the sole cause for the success of a country but it can be a leading indicator, as we saw in Post I.

The EU has a larger population than the US, a diverse and intelligent population, yet they fall way behind the US in startup financing and success. We discussed the role of capital markets, culture, human capital, exit opportunities and policies in Post II to explain some of this.

Finally, this article has shown us how hard the EU is trying to close this gap and how it can take the next couple of steps over the coming years to set itself up for future success.

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.

I hope you enjoyed this series and if you have any questions, comments, or concerns please comment below!!

Links to previous posts:

Part I: Venture Capital Investing in the EU vs. US — VC Funding Availability

Part II: Venture Capital Investing in the EU vs. US — Where Europe Falls Short



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Jonathan Kendall

Jonathan Kendall

Startups & VC with a ~dash~ of philosophy