Innovation Finance: New strategic approaches to strengthen growth financing of technology-intensive startups
Europe lags significantly behind in international comparisons regarding the financing of innovative companies, particularly in later business stages (later stage). While large amounts of venture capital (VC) are available in the USA and China, Europe often lacks sufficiently large funding rounds in the growth financing sector, which provide companies with the necessary scaling boost. As a result, promising European startups either move abroad or are acquired early by larger, mostly non-European investors.
The Draghi and Letta Reports identified the absence of a fully developed Capital Markets Union (CMU) as a main reason for Europe’s low level of VC investment, particularly in companies with high-risk and technology-intensive business models. The missing CMU severely limits the ability of European asset managers to mobilise savings and pension funds across the continent to invest in high-growth sectors. The lack of funding in these areas hampers the continent’s competitiveness and innovative strength and makes it difficult to successfully commercialise forward-looking technologies from Europe.
What has been achieved so far?
Innovation financing has increasingly become a strategic priority across Europe. Through COSME, INVEST EU and Financial Instruments under the Cohesion Policy, the EU supports innovation and startups through Financial instruments. In addition, various national initiatives complement EU-wide measures.
Germany’s « Future Fund » (launched in 2021) aims to expand the financing of growth-stage startups with €10 billion, co-invested with private capital providers. A key element is the DeepTech & Climate Fund, which targets technology-driven startups, providing patient capital.
France’s « Plan France 2030 » has committed €30 billion to support technology-intensive growth companies, particularly in fields such as deep tech, climate solutions, and digital innovation, including a dedicated « DeepTech Fund ».
The Netherlands’ Invest-NL supports innovative scale-ups through public-private investment, leveraging significant private-sector capital for sustainability and technology.
What remains to be done? What are potential barriers?
Despite these positive developments, structural challenges continue to hinder the European VC ecosystem: Unlike the US, where institutional investors (e.g., pension funds) account for nearly 70% of VC investments, in Europe, their share is closer to 30 %. Instead European VC markets remain overly reliant on government-backed funding, which accounts for approximately 40 % of total investments.¹
Enhancing the involvement of institutional investors remains a critical challenge across Europe. Governments need to shift from being the primary investors to becoming facilitators of a more balanced innovation financing ecosystem. This means to fully implement the CMU and unlock billions in private capital, reducing the dependence on public funding and making large-scale late-stage financing more viable.
Addressing these barriers will require further reforms in legal, regulatory, and fiscal frameworks, increased incentives for institutional investors, and enhanced fund-of-funds structures at both national and EU levels.
Options for Policy Instruments
Given the tight fiscal environment, a significant expansion of public sector investment is unlikely. However, strategic adjustments could strengthen growth financing:
- Realign public instruments from early to later stage investment: Over the past 15 years, public funding has primarily focused on early-stage financing. Given tight public budgets and the growth of private early-stage VCs, a greater shift of public funds toward growth financing could be beneficial.
- Strengthen Fund-of-Funds Approach: Public innovation financing is currently spread across many programs. However, fund-of-funds structures have proven to be particularly effective, as they scale the investment volumes of private VC funds and direct capital specifically toward high-growth companies. A stronger focus on fund-of-funds or the creation of a « European VC Fund-of-Funds » would enable larger financing rounds, promote the growth of European VC funds, and generate long-term returns for taxpayers. International institutional investors, such as pension funds, invest in significantly larger volumes than a European VC fund-of-funds alone could cover.
- Public-Private Co-Investments: Direct public participation in high-tech startups—through funds providing patient capital like the DeepTech Fund (France) and DeepTech & Climate Fund (Germany)—should be expanded, particularly for critical sectors such as AI, biotechnology, and climate innovation. Co-investments with private and institutional VC investors sharing the risk on a pari passu basis should also be expanded, provided the investment horizons do not conflict.
- Capital Markets Union Acceleration & Regulatory Reforms: The call for a fully operational Capital Markets Union (CMU) must be prioritised. Implementing the CMU would remove financing bottlenecks, enabling asset managers to deploy long-term savings into venture capital, and reducing reliance on public funding for late-stage investments. Simplifying regulatory barriers and ensuring long-term capital access can significantly enhance Europe’s innovation ecosystem.
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¹ France Digitale: How can institutional investors boost the European innovation ecosystem? Online: https://media.francedigitale.org/app/uploads/prod/2024/12/05151558/France-Digitale-Unlocking-investments-for-competitiveness.pdf
