It's not the first time Europe has faced this criticism. Europe has a reputation in some quarters as a difficult place for startups and high-growth companies, being seen “more as a bystander than an innovator, known more for its aggressive regulation of foreign tech firms than building businesses of its own,” according to The New York Times. Nicolai Tangen, president of Norges bank said that cultural factors hold Europe back, describing it as “less hard-working, less ambitious, more regulated and more risk-averse” than the US.

Many investors were dismayed but not surprised by the news that European tech unicorn Klarna had decided to IPO in the US instead of Europe, and that overall venture funding in Europe had fallen to $45 billion in 2024, down from $100 billion in 2021.

While Europe can certainly do more to attract investors, it’s crucial not to overlook what makes its VC ecosystem distinct. Europe’s regulatory culture, though sometimes restrictive, creates opportunities for industries like climate technology and fintech. Moreover, the perceived lack of capital has forced European funds to innovate and optimise limited resources.

To chart the best way forward, Europe must build on its strengths as well as address weaknesses. Vanity metrics, often espoused by commentators across the Atlantic, such as fund sizes and where companies IPO, should not guide evaluations of success. Instead, performance should be measured by empirical data showcasing strong returns and sustainable growth.

What gives Europe its edge

While it is true that there is a significant gap in the scale of VC funding deployed in the US and EU, there is a fair amount of evidence to suggest that broad stereotypes involving the European startup market miss its complexity

Europe is a huge and diverse ecosystem. Western Europe has created some of the world’s leading B2B growth tech success stories, while Eastern and Southern Europe are leading different charges.

Europe has seen several massive tech success stories like Spotify, BioNTech and Adyen, as well as housing some of the world’s most promising AI startups DeepL, Graphcore, Stability.ai, Synthesia, and Mistral to name a few.

In fact, European VC firms have consistently delivered greater proportional returns on investment than their US counterparts. While the size of Silicon Valley VC funds have grown ever larger, the health of the ecosystem itself has grown weaker. While the US has been home to the larger and wealthier VCs, Europe has proved more fertile ground for emerging managers. The size of America’s VC market can disguise the fact that a third of US VC firms founded in 2017 haven't returned capital from a single investment according to recent data.

Europe’s more capital-efficient ecosystem prioritises product-market fit and unit economics, enabling businesses to scale sustainably. Without a flush pool of available money, European companies have had to employ an emphasis on ingenuity and nimbleness, rather than trying to solve every problem by throwing money at it.

We have found that companies succeeding at the European level have had to have a more rigorous focus on product-market fit and unit economics at every stage, given less funding is available that would help mask such problems.

All this is enabled by a rich and diverse talent pool, bolstered by world class academic institutions that have pushed out leading technology.

Case in point: climate fintech

A key example of Europe’s unique qualities can be found within a specific industry – climate fintech. This sector, which is broadly defined as fintechs that aim to accelerate decarbonisation, has seen increasing investment across the board, but has found the most investment in Europe.

Evidence from our climate fintech report has shown that Europe has been a vibrant and growing market for this sector. Our recent figures show that in H1 of 2024 European Climate fintechs raised 1.5x more VC funding in 3x more financing rounds compared to the US.

The EU’s environmental regulation has introduced tailwinds, not headwinds, creating certainty and spurring new demand for climate fintechs, many of which help provide the crucial information needed to keep up with new requirements. Regional consensus on the urgency of climate change further positions Europe as a leader in this field.

Europe can make steps forward

All this is not to say that there isn’t more policymakers could be doing to incentivise greater investment. For instance, recent progress towards “EU-inc”, a standardised corporate law across the bloc is encouraging, and would allow for the kinds of cross border collaborations and expansions that could supercharge European business.

Rules could also be adapted to make it easier for entities such as pension funds to invest in VCs, given that they currently contribute much less than in the US, reducing available capital as a result. The UK has made some promising changes in this regard, aiming to merge local government pension funds, potentially unlocking £80bn in available investment capital.

In this vein, European policymakers should make sure new regulations coming down are ones that enhance the competitiveness of their investors, rather than stifle them.

Europe can improve, but it shouldn’t become just another Silicon Valley

While Europe’s VC landscape can improve, its unique characteristics should not be sacrificed in a race to replicate Silicon Valley. Europe’s academic and entrepreneurial communities form a talent pool that is the envy of the world. The continent’s regulatory approach fosters innovative industries, as seen in climate fintech.

By learning from others while safeguarding its own distinct qualities, Europe can continue to thrive on its terms, paving the way for sustainable, globally impactful innovations.

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