European scale-up companies have expanded with the assistance of public organizations, including the European Investment Bank (EIB) Group.
However, these businesses continue to face persistent financing barriers that the EU can do more to address, according to a new report from the EIB.
The report, titled “The Scale-Up Gap: Financial Market Constraints Holding Back Innovative Firms in the European Union,” highlights the importance of increased investment in these companies for the EU to maintain its technological competitiveness and global standing.
Here are the key takeaways:
Slower capital accumulation for firms
The report says that closing the financing gap for scale-ups would enable technological advances in areas including green tech, artificial intelligence, and quantum computing.
The limited size and depth of EU capital markets hinder the ability of innovative companies to raise capital, particularly at the scale-up phase when the availability of financing in Europe is more scarce.
This has resulted in slower capital accumulation for firms, affecting their growth, productivity, and employment.
Enhancing Europe’s capital markets
To address this, the report suggests enhancing Europe’s capital markets, specifically the venture capital market, and highlights the role of the EIB Group in supporting innovative companies and scaling up key technologies.
In the venture capital market, the European Investment Fund (EIF) acts as a lead investor and attracts private investment, while the EIB plays a major role in the venture-debt market.
“The EIB Group is playing an important role in supporting Europe’s innovation ecosystem,” says EIB President Nadia Calviño.
“We stand ready to do more, especially in paving the way for a true capital
markets union, a key priority to drive sustainable growth and job creation,” says Calviño.
European VC investment is six times less than the US
The EIB report highlights that although the EU is appealing to foreign venture capital investors, there is a lack of domestic savings being directed towards financing innovative companies.
Consequently, European venture capital investment is around six times lower than in the United States, leading to slower capital accumulation.
After 10 years in operation, European scale-ups raise 50 per cent less capital than their counterparts in Silicon Valley.
Rely on foreign investors
European scale-ups frequently depend on foreign investors for financing, with many lead investors hailing from outside the EU. Consequently, at crucial stages such as change of ownership, scale-ups are often acquired by foreign companies or listed abroad.
This trend results in the depletion of entrepreneurial talent in Europe and diminishes the prospects for the next generation of European startups.
“It is imperative to address the growth constraints of innovative companies to ensure that Europe remains at the forefront of technological advancements and sustains its global competitiveness,” says Debora Revoltella, director of the EIB Economics Department.
To provide support at earlier stages of technological development
In addition to completing the European capital markets union and achieving financial integration, the report recommends that the public sector in Europe catalyse private investment, provide support at earlier stages of technological development and offer diversified sources of funding – steps also urged by European Commission President Ursula von der Leyen on 18 July when she won a second five-year term.
Her new Commission – working closely with the EIB – is due to put forward measures to facilitate the financing of fast-growing companies by commercial banks, investors, and venture capital.
Pension funds and insurance companies
Private pension funds and insurance companies are the EU’s second-largest market segment. They could play a vital role in investing in innovative companies and the capital market.
Encouraging these types of investors to participate in the market while ensuring financial stability would help mobilise national private savings.
Additionally, the report suggests coordinating EU and national policies within a broader industrial strategy and addressing labor shortages.