Europe produces many technology-oriented startups. The challenge arises when a good company seeks to become one of international significance. An analysis by the European Central Bank shows that this reveals a financing gap that extends far beyond individual startups. It affects Europe’s ability to sustainably combine knowledge, entrepreneurship, and economic value creation.
An early round of financing can turn an idea into a business. It funds the first employees, product development, and market access. For fast-growing companies, things then move to a whole new level. International expansion, research, and the development of robust structures require capital over several years. It is precisely during this phase that Europe becomes vulnerable.
In its Economic Bulletin, the European Central Bank describes a significant gap between Europe and the United States. In terms of fund volumes, the United States has approximately 930 billion euros, compared to about 150 billion euros in the European Union. These figures represent fund sizes by location and not annual investments. Nevertheless, the figures show how differently the capital markets are prepared to support high-growth companies.
This gap is particularly pronounced in later financing rounds. European funds are often smaller and have limited capacity to fund large growth rounds on their own. The problem, therefore, lies less in the creation of new companies and more in the ability to support these companies beyond the early stages.
The real gap arises during the growth phase
Public debate often focuses on the number of new startups or early-stage venture capital rounds. While this perspective captures an important part of the picture, it falls short when it comes to high-growth companies. A startup may have a compelling technology and attract its first customers. But that doesn’t address how it will finance its expansion across multiple countries or capitalize on larger market opportunities quickly enough.
Later funding rounds serve a different purpose than seed capital. They cover the costs of a phase in which a company has already proven that its solution works in principle but needs significant funds for further growth. Research and development continue. New markets must be tapped. Teams are growing. Capital requirements are rising faster than traditional sources of financing can often keep up with.
When suitable investors are lacking, the affected companies are forced to take several alternative courses of action. Some seek capital outside Europe. Others relocate their operations. Still others turn to non-European stock exchanges or acquisition markets. For the individual company, this may be a sound business decision. For Europe, however, it also means that a portion of the value created by local technological development is shifting to other locations.
That is the key point of the ECB’s analysis. The financing gap is not an isolated issue confined to the startup market. It affects a region’s ability to help its own companies advance to the next stage of development. Research can take place in Europe, and so can the founding of companies. If growth later becomes tied to capital structures outside Europe, the economic impact will partly remain elsewhere.
Capital follows structures, not just good ideas
According to the ECB, the differences between the U.S. and Europe depend heavily on the composition of the investor base. In the United States, pension funds and foundations provide long-term capital on a larger scale. In Europe, public actors play a more significant role. The European Investment Fund is specifically mentioned in this context.
This structure determines which funding rounds are possible. Large institutional investors are better able to sustain long-term investments and provide large sums in later stages. When such players have a weaker presence in the European market, funding rounds become smaller or more dependent on individual public programs. This provides support, but it is no substitute for a broad-based capital base.
Added to this is the fragmentation of European capital markets. Companies operate across national borders but encounter differing regulatory conditions and limited cross-border financing. This increases complexity for investors. For founding teams, it can mean that a European growth strategy hits national borders sooner than the business model actually anticipates.
This highlights a tension that is often underestimated in regional innovation ecosystems. Successful startups rarely emerge from a single building block. They require research, entrepreneurial execution, customer access, qualified employees, and capital. These elements may be present in a given location but still not sufficiently interconnected. In such cases, a company may be created, but it lacks a sustainable growth path.
This is exactly what we’ve seen in our work with startup teams. The transition from an early-stage solution to a company with international reach changes the relationships with all stakeholders. Research partners become crucial for further development. Small and medium-sized enterprises can play a role as early customers, industrial partners, or market experts. Investors must be able to assess development timelines and industry-specific risks. If any of these connections are missing, growth becomes harder to plan.
Europe’s strength does not lie in a uniform startup model
The ECB also points to differences in the sectoral distribution of venture capital. In the U.S., the share of software and IT services has grown more significantly. At the same time, Europe has a stronger traditional industrial base. This does not allow for a blanket assessment of the innovative capacity of the two regions. Rather, it shows that companies have different capital needs and growth patterns.
A software-oriented business model can reach many markets in a short period of time and organize its expansion differently than a company whose development is closely tied to research, production, or industrial approvals. Technologically sophisticated startups from industry and academia often require longer development periods and greater upfront investment. Their economic significance therefore cannot be gauged solely by speed or funding rounds.
This presents Europe with a twofold challenge. The existing industrial base serves as a key starting point for new solutions. It offers real-world applications, technical expertise, and established value-chain structures. At the same time, this sector needs financing models that accommodate longer development cycles and high levels of investment. A capital market that primarily favors rapidly scaling business models only partially reflects this reality.
This also changes the significance of collaboration. Technology transfer does not end with a research result, nor does it begin only with an investment decision. In between lie testing, market understanding, partnerships, and the question of whether a company can scale up its solution to a relevant level. Small and medium-sized enterprises, academia, startups, and investors each bring different perspectives to the table. It is only through their collaboration that a technological opportunity can be turned into economic impact.
BadenCampus is a place where such diverse perspectives can come together. With BadenCampus Invest as an investor in deep tech startups and industrial innovations in southwestern Germany, we not only finance successful startups but also create an ecosystem that elevates regional innovation to the international stage. However, this does not automatically guarantee growth success. We see just how much a company’s development depends on its environment. A startup needs access to knowledge and markets. An established company needs pathways to new technologies. Research needs partners who can turn results into applications. And capital, such as that provided by BadenCampus Invest, can only effectively connect these elements if the other relationships are sustainable.
The policy approaches being discussed by the ECB therefore focus on greater integration of European capital markets, expanded investment opportunities for institutional investors, and reduced regulatory fragmentation. However, this does not guarantee that the financing gap will be closed. Capital structures alone cannot replace sound business models or resilient partnerships. But they do play a role in determining where growth can take place.
Europe’s challenge, therefore, is not to produce as many startups as possible. What matters is whether these startups can grow into companies that continue their research, tap into new markets, and build long-term value in Europe. This requires more than just initial enthusiasm and individual rounds of funding. It requires an environment in which growth across national borders is possible and in which capital, knowledge, and industrial experience come together on a sustainable basis.
Source: European Central Bank, “Europe’s Venture Capital Gap and the Financing of High-Growth Firms”
