Unlocking EU Tech Funding: A Roadmap to More Investment and Digital Innovation
Main takeaways
- Lack of access to finance is a major hurdle for EU tech innovators looking to scale up
- In order to free up billions of euros in funding for tech, the EU needs to make it easier for Europe’s pension and insurance funds to invest in digital start-ups and scale-ups
- Financial literacy must also be prioritised to help EU citizens diversify investments
Fixing Europe’s waning competitiveness rightly tops the agenda of the new European Commission, with President Von der Leyen launching the much anticipated Competitiveness Compass in Davos at the beginning of this year. Yet, nowhere is the EU’s competitiveness gap with the rest of the world more stark than in the field of digital innovation.
To change that, the EU urgently needs to unlock far greater levels of private investment. This was a key theme of Mario Draghi’s landmark report, as well as a comprehensive study by J. Scott Marcus and Maria Alessandra Rossi of the European University Institute, entitled Strengthening EU Digital Competitiveness.
In their study, Marcus and Rossi evaluate the effectiveness of measures taken to bolster EU competitiveness in the digital sector so far – examining why these have not achieved the desired results and putting forward actionable recommendations to help change this.
For one thing, Europe should address capital market fragmentation and partially rebalance pension funds into higher risk, higher reward opportunities. This would inject tens of billions of euros into EU venture capital funds and private equity firms, who would in turn greatly increase the capital available to European digital innovators. It will however require action on a number of fronts – legal, regulatory, and cultural.
1. Why EU tech firms struggle for funding
Although the EU produces more high-tech start-ups each year than the United States, they commonly struggle to secure adequate finance, particularly when looking to scale up. A report by the European Parliamentary Research Service (EPRS) found that over five years, private investment in EU artificial intelligence (AI) companies was just €32.5 billion, compared to over €120 billion invested in AI firms in the United States.
This is consistent with the research of Marcus and Rossi, which highlights that despite the EU economy being comparable in size to that of the US and China, and similar savings rates among Europeans, significantly less capital is being directed toward innovative EU firms.
2. How to unlock institutional investment
According to Marcus and Rossi, pension funds across the EU-27 hold around €4 trillion in assets, with insurance funds adding another €9 trillion. Allocating a small portion of these sums to better support digital innovation could be groundbreaking.
As outlined by the authors, while “the amount of pre-[initial public offering (IPO)] risk capital invested in the EU has increased over the past few years at an average annual growth rate of 8% and reached €72 billion at the end of 2021”, this “represents only 0.5% of European GDP”. By contrast, in the US it “stands at 6.9% of GDP” demonstrating a significant funding gap for EU start-ups.
To unlock this potential, structural legal and regulatory reforms are needed to enable and encourage European pension and insurance funds to invest in pre-IPO risk capital and initial public offerings. Marcus and Rossi note that a key factor in the development of the United States as a tech hotbed was a little-known regulatory change in 1974 that allowed pension funds to make prudent investments in riskier ventures. This unleashed a wave of capital which funded the decades-long tech boom in Silicon Valley.
There is no reason why the EU cannot follow suit. A slight rebalancing of just a fraction of these assets into higher-risk, higher-reward investments could deliver better returns for beneficiaries of pension and insurance funds while, Marcus and Rossi argue, injecting “many tens of billions of euros into EU-27 venture capital funds and private equity” which could solve the access to capital issue for Europe’s high-tech start-ups completely.
3. Why financial literacy matters
Unlocking investment funds is only part of the challenge when it comes to boosting European funding for innovation though. To support these reforms, EU policymakers should also prioritise improving financial literacy among citizens. The evidence is clear that Europeans place far more of their savings into relatively risk-free investments such as savings accounts than their counterparts in the US.
Indeed, in his Single Market report, Enrico Letta strongly advocates for “initiating a campaign aimed at raising awareness about the advantages (along with the risks) of capital markets”. It is imperative that Maria Luís Albuquerque, the new Commissioner for Financial Services, prioritises the financial literacy of EU savers and investors in the new mandate.
Conclusion
To truly turbocharge digital innovation in the European Union, we need to unlock more capital by freeing up new investment, overhauling financial structures, and improving financial literacy.
With a few critical changes, the EU can provide its tech start-ups and scale-ups with the resources they need to flourish. In this respect, CCIA Europe’s Blueprint for EU Digital Innovation also stresses the importance of a predictable and harmonised regulatory framework to attract more venture capital to the EU.
However, all of this will require legal and regulatory reforms alongside efforts to build trust and confidence among investors. If Europe is serious about its competitiveness agenda, the time to act is now.
