The year 2025 saw a modest recovery of venture capital (VC) investment in Europe after three years of decline, with a total of €66.2 billion deployed.
Even so, this was only 22% of the amount invested in the US, despite the two economies being of roughly equal size. While the share of worldwide venture activity in China, India, and Israel, among other nations, has boomed in recent decades, European firms’ share of global venture investment activity has remained flat or even declined by some measures.

It might be thought that this should not be a major policy concern: after all, the pool of venture capital in the US is less than 1% of that of publicly traded stocks and bonds.
But the consequences of this gap are much more significant. In 2024, Mario Draghi, former President of the ECB and one-time Italian Prime Minister, noted in an influential report on European competitiveness that “no EU company with a market capitalisation over €100 billion… has been set up from scratch in the last fifty years, while all six US companies with a valuation above €1 trillion have been created in this period” (Draghi 2024). All six US firms he alluded to (and the two others that crossed this threshold by the end of 2025) were originally backed by venture investors.

Taking a broader view, fully half of all US companies that have gone public over the past two decades – the most successful and dynamic firms in the economy – were venture-backed. What’s more, these venture-backed firms undertook almost 90% of the R&D undertaken by young publicly traded firms. Essentially, almost all the innovation by young American firms is undertaken by those backed by venture financiers (see Figure 1C in Lerner et al. 2026).

Why has Europe struggled to build a dynamic venture sector? It is certainly not owing to a lack of scientific excellence or entrepreneurial talent in Europe. But the paucity of venture funding has driven many entrepreneurs away from Europe, frequently to the US. One example (of many) was the struggle of the Collison brothers in the late 2000s to raise funding for their Limerick-based startup that developed software for eBay sellers and buyers. After their funding proposal was rejected by Enterprise Ireland — the government innovation agency that was (and remains) the key anchor venture investor in the nation — they moved to San Francisco to join an acceleration programme run by Y Combinator. After a successful exit, they went on to found Stripe in the Bay Area, recently valued at over $105 billion.

The anaemic ability to raise funds — 2025 was a particularly woeful year for fundraising by European venture funds, despite the recovery in investment volume — is partially explained by financial performance. The investment custodian State Street reports that the annual rate of return of European venture funds in recent decades was 8.6%, compared to 14.6% for US funds (and 10.4% for those based in emerging markets). When we look at the ratio of value created for investors (either realised or unrealised) to the capital invested, a similar picture holds: European funds report a multiple of 1.66, as opposed to 1.79 for the US and 1.83 for the developing nations.

The venture capital gap between Europe and other regions has only widened in the year-and-a-half since the Draghi Report was released, largely because an increasing share of venture funding is now backing firms seeking to develop artificial intelligence models and exploit them in different industries. This funding is highly concentrated in a few hubs, far more so than venture capital as a whole. The Bay Area, which in recent years has represented about one-quarter of venture funding overall, hoovered up over half the global venture investment in AI in 2024. While Europe has its success stories such as Mistral, AI investing is increasingly looking like a ‘winner takes all’ market dominated by the US and China (Maslej et al. 2025, NVCA 2025).

One potentially helpful dynamic for the European venture capital industry, however, is the Trump administration. Its “America First” orientation has created enormous pressures on Europe to boost its self-reliance in national security. Given the limited scale and lagging competitiveness of many major European defence contractors, new ventures are likely to play a critical role. These startups present a potential source of improved investment returns for European investors. A second change has been the cutbacks to Federal funding of academic research in the US. These declines present an opportunity to reverse the long-term flow of European scientists and technologists to the US. While the extent to which European universities and policymakers can respond quickly — and forestall similar efforts by Australia, China, and Singapore, among others — remains unclear, chaos has created opportunity.

Closing the venture capital gap

While, as suggested above, there are significant structural challenges that handicap Europe in comparison to the US and China, such as its cultural and linguistic diversity, a concerted effort by industry and political leaders could make a real difference in boosting the venture activity there. Three avenues for reform stand out.

Most importantly, it is not a matter simply of making more public funds available. In recent decades, governments worldwide have spent nearly as much financing entrepreneurs and venture funds as the independent venture sector, but often with relatively little to show for it (Bai et al. 2021).

Three areas that deserve urgent attention are as follows:

1. Undo the segmentation of capital markets

Abundant academic evidence suggests that large public markets geared toward young entrepreneurial firms encourage entrepreneurial vitality (Jeng and Wells 2000). With listing and disclosure requirements geared toward young firms and legions of investors and analysts who understand the risks and opportunities associated with these firms, these markets can boost high-potential entrepreneurial activity. 

In the US and China, capital flows freely across their economies, with investment rounds typically combining funds from many different states or provinces. When it comes time to go public, the main markets geared towards entrepreneurial firms — New York’s NASDAQ, Shanghai’s Star Market, and Shenzhen’s ChiNext — are reliable homes for new venture-backed firms to list. In contrast, one of the defining characteristics of European venture markets is its segmentation. French companies, for instance, continue to largely raise capital from French funds, who in turn access capital from French financial institutions and the government. If and when firms go public, they are likely to do so on a French exchange.
 

The aftermath of the October 1987 stock market crash illustrates the value of large, robust public markets like NASDAQ (see Appendix A in Bernstein et al. 2020). In the wake of the crash, initial public offering (IPO) activity in Europe dried up, as it did in the US. While the US recovered fairly quickly with a ‘hot’ IPO market beginning in 1991, in Europe the recovery was much slower. With the reduction of activity, small European firms and their venture backers were left with few options. The most promising firms could list in the US. But for the vast majority of European firms, the only options were staying private or selling out. The poor state of the European IPO market discouraged venture capitalists from making new investments and asset owners from backing new funds.

To address these issues, a group of venture investors created a pan-European stock exchange to promote IPOs. They envisioned a substantial market, with many listed firms and frequent and low-cost trading. But competing efforts soon appeared: for instance, the Nouveau Marche in Paris and exchanges launched by, among others, the Amsterdam, Brussels, and Frankfurt exchanges. Many of these national rivals had modest listing requirements, which attracted dubious firms. As a result, EASDAQ was unable to achieve a critical mass, while scandals on other exchanges raised questions about the validity of small-capitalisation markets in general. In 2003, EASDAQ was shut down.

European leaders need to try again, and this time protect their new EASDAQ from local competition by agreeing on stronger, universal listing requirements.  

2. Focus on a few clusters

One enduring obsession of policymakers is to encourage geographically widespread venture activity. Consistent with this observation, initiatives of the European government bodies — a key source of funds for venture capitalists in Europe (Aragoneses and Saxena 2025) – frequently seek to ‘share the wealth’ across many member states. Behind these patterns lie intense political pressures and conflicting interests. Within countries, the same dynamics lead to funds being spread widely across regions.

The desire to assure equality of opportunity is in some senses admirable. Unequal growth is likely to have broad social and economic consequences. If stagnant regions could gain vibrant innovative clusters, much hardship and social turmoil might be alleviated. But despite its social worthiness, spreading investments broadly runs afoul of the realities of startup economics. Around the world, entrepreneurial businesses are clustered geographically; venture-backed businesses even more so (Glaeser et al. 2010, Chen et al. 2010). These patterns affect not just the location of venture investments, but also the creation of innovations and high-quality jobs (Kalyani et al. 2025). Geographic inequality is particularly striking in science-based entrepreneurship, often the focus of policymakers. Place has a strong impact on the successful commercialisation of scientific inventions (Lerner et al. 2024).

In short, innovation, especially venture-backed innovation, is very much an ‘increasing returns’ business, as spillovers between inventors and firms make each other far more effective in clusters. A dramatic illustration of co-dependency of local inventors is illustrated in a study of Rochester, New York. Traditionally, innovation in Rochester was driven by film-maker Kodak, which was the fifth most prolific patenting entity in the US. But as adoption of the digital camera rose in the 2000s, Kodak’s stock price and employment collapsed. By 2007, the number of Kodak inventors in Rochester had declined by 84%. Interestingly, other inventors in Rochester — even those inventing in areas far removed from film — experienced a collapse of productivity over the same period, seemingly due to the loss of spillovers from their former neighbours (Moretti 2021).

Unfortunately, many European efforts to boost high-potential entrepreneurship end up directing far too much funding to areas and companies with little activity or potential. Funds that could be very helpful in a core area end up where they are not useful. 

3. Learn from others

The legacy of policies worldwide to boost venture activity has been a mixed one. While many efforts in the 1990s and 2000s were well intentioned, the harsh law of unintended consequences led to many disappointments. In large part, these failures reflected the fact that many of the programmes were being tried out for the first time.

Fortunately, leaders today can learn from both the good and bad experiences of their predecessors. Avoiding the mistakes of the past is a key guidepost. Yet many efforts in Europe today recycle bad ideas from the past. One of the most egregious examples is tax policy. There is substantial evidence, dating back to the 1980s, that venture capital is sensitive to tax rates (Poterba 1989, Gompers and Lerner 1998, Denes et al. 2023). These rates appear to both influence potential entrepreneurs’ decision to begin firms and where they choose to locate them.

Yet there is a growing European fascination with taxing entrepreneurial wealth — even paper gains that have not yet been realised. An illustration is the traction that the proposed ‘Zucman tax’ has gained in France (Boulman 2025). This appeal is despite the dismal track record in the nation that pioneered such taxes, Norway. After the initiation of this tax in 2022, the annual out-migration rate of affected households increased from 0.2% to over 2%, with over 40% of the departures being of active firm owners (Blandhol 2025).

Rather than recycling bad ideas, Europe would be much better served emulating role models elsewhere, such as Singapore and Israel. Political and business leaders there have taken a broader view, seeking not just to address deficiencies in the availability of capital, but the many other barriers that limited the creation of an arena in which entrepreneurs can thrive. Efforts to address these limitations have been carefully evaluated and restructured to boost their effectiveness.

Conclusions

Creating a vibrant venture sector is more important than ever for Europe. The secret to doing so is not simply to spend public funds, but to carefully craft policies that address the barriers that entrepreneurs face. This imperative suggests the need for European entrepreneurs and venture investors to grab a firmer ‘seat at the table’. The European policy establishment is large, and all too often out of touch with the entrepreneurial realities on the ground. They need to hear much more from those struggling to create companies, and to understand how policy prescriptions, however compelling they may sound in Brussels conference rooms, must be refined to reflect the unique challenges and opportunities of the moment.

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