Europe has spent years trying to close its technology gap with the United States. It has built one of the world’s largest consumer markets, created strong research institutions and produced a growing number of globally recognised startups. But there is still one piece of the equation where Europe consistently falls short: capital.
A new analysis from the European Central Bank puts the scale of the problem into perspective. Venture capital funds located in the United States have a combined size of roughly €930 billion, compared with around €150 billion for funds located in the EU.
That means the US VC market is roughly six times larger. And the problem becomes more pronounced as startups mature. According to the ECB, the gap between European and US venture capital is particularly wide in later-stage financing rounds, precisely when companies require increasingly large amounts of capital to expand internationally, build infrastructure, hire aggressively or compete with established global players.
The result is a European paradox: companies can successfully emerge from Europe’s startup ecosystem, but once they reach the point where they need hundreds of millions — or eventually billions — of euros to become global leaders, they often have to look outside Europe for the money.
Europe can build startups. It struggles to scale them.
The ECB’s analysis, published in its Economic Bulletin, argues that Europe’s venture capital problem is not simply about having fewer investors or smaller funds.
It is about the structure of the market. Europe has fewer large institutional investors participating in venture capital, particularly pension funds and foundations. In the United States, these investors play a significantly larger role in VC and can provide the large pools of patient, risk-tolerant capital that high-growth companies need.
European public institutions partly compensate for this gap. The European Investment Fund and other government-backed investors are important participants in the European VC ecosystem.
But public money cannot completely replace a deep private capital market. The consequence is that European companies increasingly turn to foreign investors as they grow.
That is not necessarily a bad thing. US and other international investors can bring much more than money: international networks, sector expertise, access to global customers and experience scaling companies.
The problem arises when Europe becomes structurally dependent on foreign capital to finance its most successful companies. The ECB warns that heavy reliance on non-EU investors, particularly at later stages, can create strategic vulnerabilities. Successful European startups may ultimately relocate headquarters, management functions, intellectual property, talent or future listings outside the EU.
In other words, Europe may create the company but fail to retain the economic value created by that company. That is increasingly becoming a competitiveness issue rather than merely a venture capital issue.
The most worrying finding: good companies are being left behind
Perhaps the most striking part of the ECB analysis is that Europe’s financing problem cannot simply be explained by a lack of good startups. The data suggest there is a significant pool of mature, high-potential European companies that struggle to secure venture capital.
Among companies that failed to obtain VC financing, the median European company was nearly twice as large in terms of employment as its US counterpart and grew around 15 percentage points faster.
The companies were also broadly similar in terms of age and patenting activity.
That matters.
It suggests that the European financing gap is not simply a story about American startups being better at innovation or European founders failing to build attractive companies. There are European companies with scale, growth and technological capabilities that still face greater barriers to obtaining venture capital.
The capital market itself is part of the problem. As the ECB puts it, Europe has a sizeable pool of mature, high-potential companies that could benefit from deeper and more accessible VC markets. That is effectively an invitation to investors and policymakers: there may be more investable European growth companies than the current financing infrastructure is capable of supporting.
Europe’s VC problem is also a sector problem
There is another important difference between Europe and the US. Europe’s stronger traditional industrial base means that its venture capital market is distributed differently across sectors.
Software and IT services attract the largest share of VC funding on both sides of the Atlantic. But Europe allocates comparatively more capital to sectors such as automotive and capital goods.
Meanwhile, the share of venture capital going into software and IT services in Europe has stalled since 2020, while it has continued to rise in the US. That matters because technology-intensive sectors can have particularly strong productivity and scalability effects.
ECB Executive Board Member Isabel Schnabel has previously argued that Europe’s technology gap is closely connected to its productivity performance. If European capital markets consistently allocate less capital to the companies and sectors capable of driving the next wave of technological growth, the financing problem ultimately becomes a productivity problem.
And then a competitiveness problem.
Europe’s problem is not foreign capital
There is an important distinction here. Europe should not try to keep American investors out.
Quite the opposite.
Foreign capital is often exactly what European startups need. A company expanding from Berlin, Paris, Stockholm or Tallinn into the US, Asia and other global markets can benefit enormously from having international investors on its cap table.
The problem is not that European startups receive foreign investment. The problem is that European companies may have too few domestic alternatives when they reach the scale at which their financing needs become substantial.
A healthy European capital market should therefore be able to do both: attract global investors and provide European companies with enough domestic capital to remain globally competitive. At the moment, the balance is not there.
Pension funds could be Europe’s missing piece
One of the most obvious solutions is sitting in Europe’s pension system. The ECB argues that Europe needs a broader institutional investor base, particularly greater participation from pension funds. The logic is relatively straightforward.
Pension funds manage large pools of long-term capital. Unlike banks, they can potentially tolerate illiquidity and longer investment horizons. Those characteristics make them natural sources of capital for private equity and venture capital.
Yet European pension systems have historically been much less active in venture capital than their US counterparts. The ECB points specifically to the review of the EU’s IORP II framework for occupational pension funds and greater clarity around the so-called “prudent person principle” as potential ways of reducing regulatory uncertainty around investment in riskier asset classes.
This is also where Europe’s broader Savings and Investments Union agenda becomes important. Europe has enormous household savings. The challenge is getting more of that capital to productive investment. The European Commission and policymakers increasingly want to connect European savings with European businesses, infrastructure and innovation. Venture capital is one of the most obvious places where that connection could matter.
The EU has a fragmentation problem too
Capital is not the only issue. European investors and startups still operate across a fragmented regulatory and legal environment. A company scaling from France to Germany to the Netherlands to Spain does not operate within one fully unified corporate, legal and capital-market framework in the same way that a company expanding between US states can benefit from a much more integrated domestic market.
The ECB points to proposals such as a potential 28th company-law regime as a way of reducing some of this fragmentation. It also highlights the potential review of the European venture capital funds framework, with the aim of making the regime more attractive and usable for fund managers, including larger funds. These reforms may sound technical. For founders, however, they ultimately translate into a very simple question:
How easy is it to build a €1 billion company in Europe without having to leave Europe to finance it? That is the real test.
The scale-up gap has been visible for years
The ECB’s findings are not appearing in isolation. The European Investment Bank has previously documented what it calls Europe’s “scale-up gap”, arguing that financial market constraints hold back innovative firms in the European Union. Research from the ECB has similarly highlighted the benefits of deeper equity markets and the role they could play in Europe’s Capital Markets Union.
And in January 2026, former German Finance Minister Jörg Kukies and former Banque de France Governor Christian Noyer published the final report of the German-French FIVE task force, focused specifically on financing innovative ventures in Europe. Its recommendations were designed to improve access to private capital for startups and scale-ups and to strengthen Europe’s wider capital-market infrastructure.
The direction of travel is therefore becoming increasingly clear. European policymakers are no longer treating venture capital as a niche issue for the startup industry. They are increasingly treating it as part of the continent’s industrial, technological and geopolitical competitiveness strategy.
The next European unicorn may not have a European cap table
This is ultimately what makes the debate important for founders. Imagine a European startup that raises a seed round from local investors, grows successfully, raises a Series A and B from European funds — and then reaches the point where it needs €200 million, €500 million or €1 billion to expand globally.
If European funds cannot provide that capital, the company has three choices: raise from foreign investors, sell to a foreign company or eventually list outside Europe. None of those outcomes is inherently negative.
But if they become the default path for Europe’s most successful companies, Europe risks creating an innovation ecosystem where the early economic benefits remain local while the largest financial returns, ownership stakes and strategic decisions migrate elsewhere.
That is precisely why the debate around Europe’s VC market has moved beyond the startup community. The question is no longer simply whether European founders can raise money. It is whether Europe can finance its own winners.
Europe doesn’t need more VC everywhere. It needs the right VC.
The ECB’s conclusion is notably more nuanced than simply calling for “more venture capital”. Europe does not necessarily need to replicate the US market across every segment. Instead, it needs to address the parts of the financing chain where the gap is largest.
That means larger funds capable of following companies into later-stage rounds. More institutional investors. Greater participation from pension capital. More cross-border investment. Better conditions for strategic high-growth sectors. And a more integrated European market in which companies and investors can operate across borders without unnecessary legal and regulatory friction.
If those pieces come together, Europe could unlock a pool of companies that already exists but is currently under-financed. And that may be the most important takeaway from the ECB’s analysis. Europe’s next technology giants may already be here. The question is whether Europe has built a financial system capable of helping them become giants.
Sources & references
- European Central Bank (2026), “Europe’s venture capital gap and the financing of high-growth firms,” ECB Economic Bulletin, Issue 5/2026. The analysis was prepared by Adam Baumann, Zakaria Gati, Francesca Vinci and Gerome Wolf. Read the ECB analysis
- Angeloni, I. and Cavallini, A. (2026), Feasible Steps to Finance Innovation in Europe: Six Proposals to Strengthen EU Capital Markets, Institute for European Policymaking at Bocconi University, 9 January. Read the report
- Banu, E., Derin, T., Evrard, J., Lambert, C., Legran, D. and Schuster, W.E. (2026), “Exploring the investor landscape for venture capital,” Financial Integration and Structure in the Euro Area 2026, ECB, 7 May. Read the ECB analysis
- Böninghausen, B., Evrard, J., Gati, Z., Gori, S., Lambert, C., Legran, D., Schuster, W.E. and van Overbeek, F. (2025), “Should we mind the gap? An assessment of the benefits of equity markets and policy implications for Europe’s capital markets,” Occasional Paper Series, No. 373, ECB. Read the paper
- Fratto, C., Gatti, M., Kivernyk, A., Sinnott, E. and van der Wielen, W. (2024), “The scale-up gap: Financial market constraints holding back innovative firms in the European Union,” Economics – Thematic Studies, European Investment Bank, 24 July. Read the EIB study
- Kukies, J. and Noyer, C. (2026), Financing Innovative Ventures in Europe: Recommendations to close the scaleup financing gap, deepen the savings and investments union and strengthen Europe’s competitiveness, FIVE Task Force, January. Read the report
- Schnabel, I. (2024), “From laggard to leader? Closing the euro area’s technology gap,” inaugural lecture of the EMU Lab at the European University Institute, Florence, 16 February. Read the speech
- Vanacker, T.R. and Manigart, S. (2010), “Pecking order and debt capacity considerations for high-growth companies seeking financing,” Small Business Economics, Vol. 35, No. 1, pp. 53–69.
- Weik, S., Achleitner, A.-K. and Braun, R. (2024), “Venture capital and the international relocation of startups,” Research Policy, Vol. 53, No. 7.
