The scale-up gap: Financial market constraints holding back innovative firms in the European Union

Closing the gap in finance for scale-up companies is essential for the European Union to maintain its edge in technology and thrive amid the green and digital transitions. Addressing the growth constraints of innovative companies, particularly as they transition from start-ups to growth-stage companies, will ensure that the European Union remains at the technological frontier and competes internationally in the development and scaling up of key technologies, from Greentech to artificial intelligence and quantum computing.

Innovative EU companies grapple with significant financing constraints, with EU scale-ups raising only half as much capital as their Silicon Valley peers. The scarcity of EU investors able to provide financing at the scale-up phase pushes many EU companies to seek funding abroad and, at exit, look for foreign buyers or get listed on  foreign stock exchanges.

The report The scale-up gap: Financial market constraints holding back innovative firms in the European Union report provides new evidence on the financial constraints faced by companies entering the crucial scale-up phase. The analysis follows firms that received venture capital backing and reached the scale-up phase in the European Union after 2013. By tracking these firms over time, the report examines the financing they receive and the investors they attract. It includes a comparison between these companies and similar firms in two major start-up hubs, London and San Francisco, offering key facts and insights into the growth dynamics of successful innovative businesses. The report looks at the sources and characteristics of funding throughout a firm’s lifecycle, from establishment to exit, whether through stock exchange listing or acquisition. Furthermore, it investigates the relocation trends of these innovative companies.

The European Investment Bank (EIB) Group, known for its success in backing innovative companies and scaling up new technologies, can play a catalytic role in contributing to Europe’s global competitiveness. Addressing the scale-up gap requires the removal of investment barriers, including advancements in deepening capital markets, particularly the venture capital market, and targeted public interventions to jump-start the market.

Scale-ups are young firms with high growth potential at an intermediate stage of development between the start-up and mature stage.

• More productive than the average company, scale-ups have the potential to become the next generation of tech champions and support the local ecosystem.

It’s important to support these firms to boost EU productivity and develop key technologies critical to the EU policy agenda.

• In the European Union, financial constraints widen as companies grow.  By the time they reach ten years in operation, European scale-ups raise 50% less capital than their San Francisco peers. This capital accumulation gap persists regardless of industry, year of establishment or business cycle.
• The scarcity of EU investors capable of providing financing at the scale-up phase pushes many EU companies to seek funding abroad and, at exit, look for a foreign buyer or get listed on a foreign stock exchange.
• Lead investors play a critical role in funding rounds, attracting additional investment from less sophisticated market players due to their specialist industry knowledge and successful track records. In the EU, more than four out of five scale-up deals involve a foreign lead or sole investor, compared to only 14% in San Francisco.
• EU scale-ups are likely to get listed on a foreign stock exchange or get acquired by a foreign buyer.
• Relocating overseas offers market valuation gains for EU scale-ups, but it saps Europe’s potential to retain industry leaders and develop new technologies. It also weakens the flywheel effect, where new leaders support the next generation of start-ups, causing entrepreneurial brain drain and missed opportunities for the local business ecosystem.

• The financing constraints faced by EU scale-ups stem from the shallow and fragmented nature of European capital markets, particularly the venture capital market. Venture capital investment in American companies is six to eight times higher than in the European Union every year.
• The European Union is still not investing enough in equity and venture capital. EU venture capital funds raise only 5% of global venture capital compared to the 52% in the United States and 40% in China.
• While the EU venture capital market is expanding and developing expertise, the number of specialised and large-scale venture capital funds remains insufficient to support scale-ups.

Targeted public interventions can generate a virtuous cycle in which more investment supports the expansion of the business ecosystem.

• The European Tech Champion Initiative, managed by the EIF, part of the EIB Group, invested in eight large-scale venture capital funds, and to date it has mobilised €10 billion investments.
• The EIF supports 40-50% of venture-capital-backed start-ups in Europe in a typical year.
• As part of the Scale-up Initiative, the EIB has recently agreed to a €90 million loan to Rohlik, a leading Czech e-grocery business that operates across central and eastern Europe, to bolster the company’s digital advances and growth prospects.

Tackling the European scale-up gap entails the removal of barriers to investment and targeted public interventions.

• The EIB Group, known for its success in backing innovative companies and scaling up new technologies, can play a catalytic role in contributing to Europe’s global competitiveness.
• Regulatory and legal interventions can deepen capital markets and redirect investments, including from institutional investors, towards this strategic segment of the firm universe.
• Targeted public sector interventions can mobilise private investment, de-risk new technologies and provide diversified sources of funding as part of a broader strategy to enhance European competitiveness.
• Addressing other obstacles to growth, including enhancing the single market and addressing labour shortages, will ensure higher returns from investment.