Prepare yourself for a shock: Europe has a faster growth rate in new startups year-on-year than the US. Many end up moving to the US.

Spotify, founded by Sweden in 2006, began music streaming in Europe, before moving its main operations to the US. Stripe, founded in 2006 by two Irish brothers and headquartered in the US, has become a major player in the payment services industry. Sword Health, a Portuguese company, entered the US market by 2020. By the following year it had reached a unicorn valuation of $1 billion.

It’s a worrying trend for Europe. While Europe is generating an influx of startups, US companies are 40% more likely than European firms to have secured capital funding within their first five years. Many of Europe’s brightest and best are moving across the Atlantic Ocean in order to scale.

Fragmentation is the main problem. The Single Market is plagued by a patchwork of rules, regulations and laws across the EU. For example, tax and stock option regimes vary from country to country. The rules governing how investors or founders can cash out also differ from country to country. Most European startups struggle to navigate the red-tape of doing cross border business.

Cross-border fund-raising remains problematic. The EU’s plan for creating a single capital market, the Capital Markets Union dates back to 2014. It is still not fully realized. In contrast, the US is a large, unified market. Startups scale.

The real problem in Europe is not seed money. In the first quarter 2024, European startups raised $13.7billion, an increase of 5% on last year. In 2023, the continent’s share in global VC was 17%. 60% of European venture funding was raised by just three EU member countries and the United Kingdom.

The second stage of funding is where the biggest challenge lies for minnows who want to become full-fledged Unicorns. The US has a large pool for venture capital that targets later-stage startups.

For founders and investors, the US is a more attractive place to cash out than Europe. It has a long-established IPO and a large pool potential acquirers. In Europe, however, regulatory divergences as well as different national corporate codes are slowing sales.

Investors are putting money into artificial intelligent. AI accounted for eleven European mega-rounds exceeding $100 million. This month, the French startup Mistral AI raised EUR600,000,000 to compete with ChatGPT’s owner OpenAI. It had already raised EUR400 millions.

European leaders are aware that startups face many challenges. In a recent joint op/ed, French president Emmanuel Macron and German Chancellor Olaf Scholz recognized the urgent necessity for reform. They wrote that “too many European savings were being invested overseas rather than in Europe’s most promising start ups and scale-ups.” “We need to be serious about a truly unified European financial market.”

Similar suggestions are made in a report by Enrico Letta, former Italian Prime Minister. Another report from another former Italian prime minister Mario Draghi is due to be released in the next few weeks. It will also focus on increasing EU’s competitiveness.

Recent European Parliamentary Elections and the upcoming appointment a new European Commission offers an opportunity. Calls have increased to provide alternative investment sources via pension funds for startups. Stock option policies must be modernized and streamlined. A passport scheme for the EU could help startups access talent and solve work visa issues. should be to appoint as a Commissioner for Digital Entrepreneurship.

The EU is at a crossroads. The choices made in the coming years will determine if it succeeds and if it can reverse the “crossing of the pond” trend.

Padraig Nolan is Chief Operating Officer at ETPPA, an important EU fintech association. He is also a member of the advisory board for Europe Startup Nations Alliance, based in Lisbon. Padraig has a Bachelor’s Degree in Law and Economics (University of Galway), and a Masters in European Law (Utrecht University ).

Bandwidth, CEPA’s online magazine, is dedicated to advancing the transatlantic cooperation in tech policy. All opinions are the author’s and do not necessarily reflect the views or positions of the institutions or Center for European Policy Analysis.