26 startup associations: Get institutional investors more involved in VCs!

A group of European startup associations have written an open letter to the newly appointed European Commission outlining the steps that are needed to get more money flowing into venture capital funds and make sure that European innovations don’t end up benefitting foreign investors.

In the letter to Commission President Ursula von der Leyen and other key policymakers, they say the current funding chain is "deficient" and that European VCs must become better equipped to fund large scale-ups.

"Otherwise, Europe will once again be left in the position of a large but fragmented single market, leading in research and talents, but which uses technologies made abroad, because it could not support the development of its own ecosystem," says the letter, whose signatories include InvestEurope, The European Startup Network and France Digitale.

"The current state of play is not ideal for startups and scale-ups in the EU," the letter adds. "Faced with a fragmented market and a lack of capital, they often develop their ideas in the continent before seeking funds overseas, notably in the USA, at their growth or exit stages. Consequently, the value created by ideas brought forward by Europeans and often incentivised by European public funding ultimately benefit US funds and flows indirectly… to American retirees."

Calls for a VC initiative

Von der Leyen has already pledged to make the EU more startup friendly by cutting red tape and increasing private investment into innovation. But the startup associations are asking for more direct measures, including:

→ Establishing a European VC initiative using a fund-of-funds model to connect institutional investors with VCs and create a platform that would facilitate collaboration across Europe's funding chain.

→ Mobilizing private savings by introducing new financial instruments to get retail investors involved in innovation funding.

→ Updating capital requirements to encourage institutional investors to participate more actively in startup financing.

→ More incentives to make angel investments in order to “foster a viable ecosystem in Europe.”

The VC initiative is especially needed to get institutional investors more heavily involved in VC funding, the associations claim, because without their help its hard for startups to get the money needed to scale up once they become successful.

"While new technologies such as AI, cleantech and quantum computing need large rounds of funding, European VCs are not capable of meeting these needs – and US VCs are the ones filling this gap," the letter says. "The absence of larger VCs can be attributed to several factors, and one is widely known: the lack of involvement from European institutional investors. These important financial actors are over-investing in the US market and under-investing in the European risk market, due to our regulatory and cultural barriers."