Scale-up companies have expanded in Europe with the help of public organisations including the European Investment Bank (EIB) Group, but these businesses face persistent financing barriers that the EU can do more to tackle, according to a new EIB report.
The study, entitled “The scale-up gap: financial market constraints holding back innovative firms in the European Union”, says greater investment in these companies is key to the EU’s ability to be at the technological cutting edge and compete at global level. It 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 slowed the capital accumulation of firms and stunted their growth, productivity and employment.
The report recommends deepening Europe’s capital markets, particularly the venture-capital market, and highlights the EIB Group’s role to date 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 mobilises private investment, while in the venture-debt market the EIB is the dominant player.
“The EIB Group is playing an important role in supporting Europe’s innovation ecosystem,” said 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.”
Scale-ups are innovative, high-growth firms at an intermediate stage of development. Situated between the start-up and mature-firm stage, they have the potential to become international champions in their sectors.
The EIB report says that, while the EU is attractive for foreign venture-capital investors, insufficient domestic savings are channelled into the financing of innovative companies. As a result, European venture-capital investment is approximately six times less than in the United States. This leads to slower capital accumulation: after 10 years in operation, European scale-ups raise 50% less capital than their Silicon Valley peers.
European scale-ups often rely on foreign investors for financing and most lead investors, who play a critical role in funding rounds, come from outside the EU. Then, at the milestone moment when ownership changes hands, scale-ups are more likely to be acquired by a foreign company or get listed abroad. This trend drains entrepreneurial talent in Europe and harms the prospects for the next generation of European start-ups.
“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,” said Debora Revoltella, director of the EIB Economics Department.
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.
Private pension funds and insurance companies are identified as the EU’s second-largest market segment and they could be a key source of investment for innovative companies and the capital market. Encouraging these types of investors to participate in the market while ensuring financial soundness would mobilise national private savings. Furthermore, the report recommends that EU and national policies be coordinated in the context of a broader industrial strategy and that labour shortages be tackled.
Read The scale-up gap: Financial market constraints holding back innovative firms in the European Union.
