A significant difference in the opportunities for providing venture capital to businesses in the European Union and the US is reported by the European Central Bank (ECB) in a publication on its website, BTA reported.
US-based venture capital funds are more numerous and larger than in the EU. While the total size of US venture capital funds amounts to approximately €930 billion, in the EU their size is around €150 billion. This means that in the US, venture capital funds have around six times more money to invest than their European competitors, the ECB said.
However, the challenge facing European venture capital goes beyond the overall size of the funds, the bank added.
Compared to the US, the EU venture capital market is less well-equipped to finance companies in the later stages of their growth, when financing needs increase significantly. The gap with the United States widens in later-stage venture capital funding rounds, which require larger amounts. This creates an obstacle to financing companies with high growth potential and significant investment needs, the eurozone central bank warns.
An important factor driving the smaller size of venture capital funds in the EU is the composition of their investor base. Venture capital funds in the US have benefited from a greater involvement of pension funds, partly because differences in pension systems and regulatory reforms have allowed them to take a more active role as investors.
These US funds can provide significant financing, flexibility and risk tolerance, catering to the needs of emerging, fast-growing and innovative companies with the greatest potential for growth and productivity.
In Europe, this is partly offset by a greater involvement of state entities, including the European Investment Fund and state-backed investors.
The shortage of EU investors capable of providing financing for business expansion is prompting companies to seek financing abroad. Foreign investors often provide the additional financing needed by growing companies in the EU, while foreign acquisitions and initial public offerings remain the predominant exit routes from investment in Europe, the analysis says.
Some small but highly developed venture capital markets in Europe, such as Estonia, remain heavily dominated by US investors. Successful start-ups in these markets often target global expansion at an early stage of development.
While foreign venture capital can bring a number of benefits, it can also pose risks to European manufacturing capacity. An internationally diversified investor base can provide capital, expertise, networks and access to global markets. At the same time, however, heavy reliance on investors outside the EU, especially in the later stages of a company's development, could create strategic vulnerabilities, the central bank warns.
According to the ECB's findings, even when they have the same levels of innovation capacity and maturity as their US counterparts, larger and faster-growing EU companies are failing to secure venture capital financing.
While software and IT services attract the largest share of venture capital financing on both sides of the Atlantic, the EU allocates relatively more funds to sectors such as automotive and capital goods.
The share of venture capital directed at the software development and IT services sector has stagnated in the EU since 2020, unlike in the US, where it has grown, which is likely to contribute to the productivity gap between European and US companies.
A more developed and integrated venture capital market could to help the European Union finance innovative companies, support productivity growth and retain more of the value generated by the European innovation ecosystem, ECB experts conclude.