One fund to scale them all? Filling crucial financing gaps with the Scaleup Europe Fund

The EU is currently setting up the “Scaleup Europe Fund” to improve financing conditions for scaleups. If designed well, the fund can fill a critical gap in Europe’s innovation financing landscape by combining large equity investments with the steering of private capital towards firms in strategic sectors with positive spillovers. Since strengthening the private European venture capital ecosystem will take time, the fund can serve as a bridge instrument in the interim. As investment decisions will be taken by an independent fund manager, it is essential that the European Commission now shapes its investment strategy and governance in a way that ensures three core principles are upheld: a focus on large investment tickets; directing the capital towards high-risk, high-reward technologies; and taking measures to keep funded companies in Europe. At the same time, the fund should be complemented by broader policy action to develop the EU’s VC ecosystem, make listing on local stock exchanges more attractive, and facilitate cross-border investments. 

1. Introduction

The financing gap for scaleups in Europe is a key policy challenge. The continent is losing talent, intellectual property, and long-term value because of it. More tech startups are founded in Europe than in the US, but they often fail, relocate outside of the EU, or do not grow their business. As a result, there are around 80% fewer scaleups and 85% fewer unicorns (firms valued at over $1 billion) than in the US. One major problem scaleups in the EU encounter is insufficient access to financing. These companies have proven their business model and now need significant amounts of capital to scale their operations. However, this is difficult in Europe because venture capital (VC) investment, which plays a crucial role for young, innovative companies, remains much lower than in the US. 

To address this issue, the EU is currently setting up a €5 billion fund to help scaleups in the EU to access capital as part of its Startup and Scaleup Strategy: the Scaleup Europe Fund. The fund’s target size consists of €1bn of public capital from the European Innovation Council section of the current Horizon Europe programme and €4bn from private investors, and will be managed by an independent, market-based fund manager. The fund offers the potential to fill a crucial gap in the EU’s innovation financing ecosystem and could help scale strategically important technologies in Europe. However, for the fund to become a strategic tool and avoid an outcome where it turns into a regular, fully private return-driven fund that just happens to be very large, it has to be designed with two objectives in mind. 

First, the Scaleup Europe Fund should help compensate for an underdeveloped venture capital (VC) sector in the short term. Specifically, it should offer larger investment sums to companies than what is currently available in the EU. EU-based scaleups often struggle to raise funds for capital-intensive later-stage funding rounds above €100 million. At this stage, the gap between the EU and the US is the largest, with EU later-stage VC investment amounting to $21.3 bn compared to about $133bn in the US. This is driven largely by the fact that very few European VC funds have a size over €1bn (see Figure 1), which makes it difficult to give out very large investment tickets. Existing public funding programmes are also ill-equipped to meet the sizable investment needs. Hence, the new fund should offer targeted support to capital-intensive scaleups and be accompanied by other policies to develop the VC ecosystem. This way, the fund can act as a bridging resource for companies while complex reforms are implemented and begin to take effect.

^{Figure 1 -Number of venture capital funds by fund size (2013-2023) (Source: Author’s illustration, based on EIB - The scale-up gap (2024))}

Second, the fund should anchor technologies vital for the green and digital transition in Europe. Technological innovation and economic sovereignty are not – given their positive externalities – sufficiently funded by the private sector. However, developing and keeping novel technologies in Europe is crucial for growth, security and prosperity. But putting this principle into practice is more complex. As the fund is independently managed, individual investment decisions are not politically determined. However, by shaping the official investment guidelines that investment decisions are based on, the fund can be tilted – more than purely private funds towards scaleups with positive externalities. Doing this effectively becomes more urgent considering that the capital in the fund is only sufficient to invest in a limited number of companies, so selecting the right ones is crucial. 

To achieve these objectives, the fund’s investment strategy needs to adhere to three principles: focus on large investment tickets; direct the capital towards high-risk, high-reward technologies; and take measures to keep funded companies in Europe. This way, the fund would effectively combine market expertise and incentives with political goals and public-good outcomes. In parallel to the launch of the fund, a number of other policy measures should be taken to develop the EU’s VC system in the medium term. If these points are implemented, the Scaleup Europe Fund will be a valuable addition to the EU’s innovation financing ecosystem.

2. What currently stops European companies from scaling up

Companies scaling across various EU countries face numerous obstacles, from navigating regulatory complexity across 27 member states to employment-related issues, including visa rules and the implications of diverse social security systems for cross-border remote work. However, one of the most-cited reasons why companies move abroad during their growth trajectory is insufficient access to capital in the EU. Especially capital-intensive but strategically relevant sectors currently remain underserved. 

2.1. An underdeveloped VC system leads to private financing gaps for scaleups

One major hindrance to accessing capital is the VC system in Europe, which remains underdeveloped compared to, for example, in the US. The European financial system is, for the most part, bank-based. However, banks are ill-positioned to finance high-risk but potentially high-growth ventures, which often only have limited tangible assets. Meanwhile, European capital markets remain fragmented and underdeveloped. This pattern is reflected when one compares VC systems: overall VC investment is lower (see Figure 2), and there are fewer and on average smaller VC funds, in Europe than in the US (see Figure 3). 

^{Figure 2 - Venture Capital Investments, 2013-2023 (Percent of GDP) & Figure 3 – VC Raised by Fund Size, 2020-2023 (Average in percent of total VC raised )(Author’s illustrations, based on IMF Working Papers – Stepping Up Venture Capital to Finance Innovation in Europe (2024))}

This represents a real problem for scaleups, which often need large volumes of capital to scale their operations. Financing rounds in the scaleup phase can stretch to over €250 million, with single investment tickets often coming to €50m or more. However, the smaller size of most European VC funds means that they invest smaller sums to diversify their portfolios adequately. Additionally, for one late-stage financing round, a company needs to seek out multiple funds that can invest such a large sum. As a result, the financing gap for young EU companies is most pronounced in their later growth stages. The lack of large European VC funds is also reflected in the fact that European investors represent 78% of capital provided in the early stage (seed’) funding rounds, but only 50% in scaleup funding rounds (see Figure 4).

^{Figure 4 -Foreign VC investments in European start-ups (Source: Author’s illustration, based on KfW Research - Trends in cross-border venture capital investments in Germany and Europe (2025))} 

While cross-border investment from outside the EU helps domestic scaleups, it can also induce companies to relocate their operations abroad, leading to jobs and know-how in Europe being lost. This is because companies can benefit from being physically closer to their main investors, as these offer mentorship and specialised networks. Moving to US tech hubs, for instance, can help firms dip into local talent pools and sell their products in a fully integrated single market. The deep capital markets in the US also offer better opportunities for founders to exit their companies and turn their shares into financial return by going public and listing on a stock exchange through an initial public offering (IPO), or by merging with or being acquired by other companies (M&A).

In some cases, investment from large US VC funds could even crowd out European investment. Local VC funds have more limited financial firepower and often a less established reputation compared to US-based ones. Consequently, US funds tend to be more attractive for scaleups seeking investment and can negotiate more favourable funding terms for themselves. This makes it more difficult to nurture a local ecosystem. Hence, to prevent a brain drain of innovative companies, actively taking measures to develop the domestic VC ecosystem further is vital. However, this requires sensitive reforms on the national level – for example, changes to the pension system – and will necessarily be a long-term project. 

To address the lack of VC and the dependence on foreign investors in the short term, the Scaleup Europe Fund is stepping in. Thanks to its size, it would be able to provide the required investment volumes for growth, especially for firms at the scaling stage – albeit only for a limited number of companies, since the fund’s size is limited. It also intends to lead investment rounds. This often requires individual tickets approaching $50 million, which is only feasible for funds in the $500m to $1bn range. Given the dearth of such large funds in the EU, currently 82% of all scaleup deals involve a foreign lead investor. Lead investors play a crucial role in coordinating funding rounds and negotiating the terms of investment. They can mobilise additional investment from less sophisticated investors thanks to their expertise and experience. Additionally, they provide advice and networks to companies and can also directly influence their decision-making processes by joining boards of directors. So, as a lead investor, the Scaleup Europe fund can substantially contribute to the development of VC networks in Europe while also actively steering the growth of promising companies.

2.2. Existing EU programmes are failing to adequately serve strategically relevant sectors

There is already a wealth of EU programmes and initiatives that aim to promote innovation and technological sovereignty by providing grants, debt, or equity financing for companies. However, they are not sufficient to fill the gap that the private sector leaves for European scaleups. 

Many EU innovation programmes distribute grants. When it comes to supporting companies, grants are especially fitting for ventures with no short-term revenue prospects, uncertain commercial viability, or primarily public-good outcomes. They can also absorb investment risks and help leverage private capital in blended finance approaches. For ventures that are closer to commercial viability but which still face certain barriers in accessing finance (due to a lack of physical collateral, for instance), public finance can de-risk private investment by offering guarantees to allow companies to access credit. However, from a public finance perspective, none of these approaches is ideal for high-risk, high-reward ventures because they do not allow for participation in the economic upside potential if firms end up growing exponentially. That requires direct equity or quasi-equity investments. 

The EU engages in direct equity investment only to a limited extent (see Table 1). For direct equity investments, currently the maximum investment amount is €30 million. As discussed before, this is often too low to initiate VC investment rounds in later growth stages as a lead investor. Additionally, the EU uses public capital to further develop the EU’s VC system, so that the private sector can provide growth and later-stage investment. It does this by investing in or alongside selected private funds. For example, the European Tech Champion Initiative (ETCI) uses a fund-of-funds approach and pools public money from the European Investment Bank (EIB) and six EU member states to invest in other VC funds. However, all indirect approaches imply limited political steering because they support the investment strategies of private investors, rather than actively funneling money towards specific technologies. This tends to favour technologies and applications that are already well-known and easily scalable, and hence align with the logic of classic VC. Hence, less capital flows towards technologies that offer additional societal returns or spillovers beyond financial gains, for example, by contributing to the green transition or economic security, since fund managers tend to limit their exposure to these higher-risk, longer-term investments. Consequently, they underinvest – from a social point of view – in companies with positive external effects. 

This means that, in the current programming landscape, scaleups with large financing needs that are active in strategically relevant sectors often remain underserved. The Scaleup Europe Fund can change this by combining large equity investment sums with stronger political steering to channel capital towards these sectors in a more focused and effective way. 

Table 1 – Equity financing in EU innovation policy

3. Designing the Scaleup Europe Fund

The Scaleup Europe fund will be established as a new sub-compartment of the EIC Fund, run by the European Innovation Council and SMEs Executive Agency (EISMEA), but will be managed by an independent fund management company. This fund manager is planned to be responsible for developing the portfolio, recommending investment decisions, approving them within the fund’s mandate, and managing exits. The European Commission will participate on equal terms with the other investors and have a corresponding representation in the Fund's governance structure. The details of the fund’s governance and investment strategy are still subject to negotiations between the EIC Fund, the founding investors (including the European Commission), and shortlisted applicants for the position of fund manager. The fund manager is expected to be selected in April 2026, with the fund’s operations planned to start in May. 

The fund has the potential to combine large investment tickets with stronger political steering that allows it to promote public-good outcomes. However, it must unite two different logics: on the one hand is the logic of VC, which favours innovations that are easy to commercialise and highly scalable, and rapid, lucrative exits, which tend to happen in the US. On the other hand, to achieve goals such as the green transition and tech sovereignty, Europe needs highly capital-intensive companies with physical infrastructure that face uncertain future demand and high technological and regulatory risks – for example, compare devising clean energy solutions with software development. Additionally, if highly innovative companies are successful, their innovations might be replicated by other firms at significantly lower costs, creating positive spillovers. 

This means that there is an economic rationale for public intervention, but it is in tension with the logic of VC that aims for high profits within a fixed time horizon. Managing this tension requires a balancing act: if funding decisions are too policy-driven, the fund becomes a subsidy mechanism that leaves little room for market expertise and incentives and is unlikely to be attractive to private investors. If there is too little policy steering, the fund might invest primarily in companies that fit the VC model well and are therefore more likely to receive funding through fully private markets, while companies offering breakthrough innovation remain underserved. Only if the Scaleup Europe Fund can manage this tension can it fill the gap described in section 2. 

Beyond promoting and anchoring strategic technologies, the Scaleup Europe Fund should act as a bridge for scaleups that need financing while the private VC ecosystem in Europe is still underdeveloped. To achieve these two objectives, the European Commission should use its heft as the initiator and as a major founding investor to shape the details of the fund – including the investment guidelines, fee structure, and reporting standards – during negotiations with potential fund managers. Specifically, three principles must be implemented and should be enshrined in the fund’s final strategy and governance framework. 

First, provide the large investment tickets that innovative scaleups need. The crucial funding gap lies in capital-intensive, later-stage investment rounds of €100-500 million. So this is where the money needs to go, also to avoid financing what the private sector can already deliver, as well as duplication with other EU programmes. According to preliminary information on the fund’s governance and strategy, the fund will invest €100m or more per company. This includes potential follow-on investment rounds, so initial investments may be lower. This principle must also be reflected in the final investment guidelines. Furthermore, to channel capital towards innovative companies with limited assets without creating complex thresholds, investment should be restricted to small midcaps and SMEs with fewer than 500 employees. 

Second, focus on high-risk, high-reward companies and technologies with high strategic potential. The size of the fund is limited. If it were to invest €100m per company, that would help scale 50 companies. It is therefore important to focus on companies with high potential for positive spillovers and societal benefits. Hence, the European Commission needs to ensure that the investment guidelines define sectors in which the selected companies should be active. This ought to limit investments to risky, capital-intensive technologies that are of strategic domestic importance. Sectors at the global technology frontier that are especially capital-intensive and hence attractive candidates are advanced semiconductors, quantum technologies, and space systems. Energy and decarbonisation technologies are also highly capital-intensive and face – on top of technological risks – high regulatory risks and uncertain demand, especially now that decarbonisation policies are increasingly under pressure. A geographically balanced allocation of investments across European member states should only be considered insofar as is necessary for risk diversification. The Scaleup Europe Fund should support the very best companies, no matter where they are located. 

Third, take measures to keep the funded companies in Europe. The fund is better placed to keep funded companies and the associated technologies in Europe, compared to fund-of-funds initiatives like the ETCI. To fully exploit this potential, the investment guidelines need to specify that companies must be based in or are relocating to the EU. Additionally, it should be an explicit part of the fund’s strategy that it leads or co-leads investment rounds, which allows the fund manager to select European co-investors. This aids the development of the European VC ecosystem in the scaleup segment and ensures that target companies gain access to networks across the EU. Additionally, leading investment rounds, and thereby the targeted placing of the large volumes of capital required, allows for board-level representation of the fund in scaleups to actively guide their development in the single market. Finally, private VC funds are often focused on lucrative exits to maximise returns, including when this means that a foreign buyer acquires the firm. To address this risk, policymakers should consider tying performance payments for the fund manager to company exits within the EU. 

4. Limitations and policy implications

The Scaleup Europe fund cannot solve all the problems that underdeveloped capital markets are causing for scaleups in Europe, both due to its limited size and its focus on providing capital only during the scaleup phase. It can be a valuable tool for helping scale some European champions, but further measures need to be taken to create a more developed financing ecosystem for these and other innovative EU companies to thrive in. 

First, as a long-term solution that ensures access to sufficient capital for all European scaleups, the local VC ecosystem has to grow. This relates to the fund’s first objective, which is to offer a bridging resource to EU scaleups to compensate for the bloc’s comparatively underdeveloped VC landscape. To tackle the root of this problem, EU institutional investors – particularly insurance companies and pension funds – need to invest more heavily in the VC sector. These investors have very long-term liabilities and are thus able to provide ‘patient capital’. This is crucial in VC because it can take over a decade for an investment to generate returns. 

To do this, investors first need to build up the required expertise. In a recent survey conducted in Germany, both VC funds and institutional investors cited insufficient experience and a lack of internal expertise regarding the asset class among institutional investors as one of the most important barriers. To generate the necessary initial momentum for these entities to build up their capacities, initiatives like Tibi in France and WIN in Germany can help by creating a politically sponsored platform and framework via which institutional investors pledge to invest in VC funds. Additionally, pension systems need to be reformed towards capital-market invested (‘pre-funded’) systems and non-guaranteed retirement products that allow for riskier and less liquid investments. Where the regulatory framework discourages VC investments by institutional investors, these disincentives should be removed (or at least minimized) without enabling excessive risk-taking. Taken together, these measures would increase the amount of available VC in Europe and allow for larger private sector VC funds to be created and nurtured.

Second, the environment for exits – by acquisition or by listing on a stock exchange – needs to improve. Currently, many scaleups choose to list on US stock exchanges instead of in the EU (see Figure 5). If there are no attractive options for founders to list on a European stock exchange or sell their company to a local actor, they may still relocate after making it through the notorious scaleup ‘valley of death’. In particular, an acquisition by a foreign enterprise can result in values created by the company, such as functioning business models or intellectual property, leaving the continent and could even lead to complete relocation. Listing on a foreign stock exchange can also entail that the company ends up focusing its business activity on that foreign country to attract further investors there.

^{Figure 5 - Stock exchange location for IPOs involving EU scale-ups (Source: Author’s illustration, based on EIB - The scale-up gap (2024))}

Additionally, when successful companies list on foreign exchanges, this reinforces the outflow of EU capital towards the US – because the most attractive investment opportunities can be found there – and hampers the development of domestic capital markets. To make listing on EU stock exchanges more attractive, regulatory changes could help, for example, by creating listing segments with listing requirements for smaller companies that are proportionate to their age, size, and ownership structure. In his flagship report, Enrico Letta also proposed the creation of a pan-European Deep Tech Stock Exchange that can gather capital more efficiently across member states.

Third, differences in national corporate forms create transaction costs and risks that deter cross-border investments in the EU and restrict companies’ access to financing. A pan-European corporate legal framework designed for young, innovative firms, recently proposed by the European Commission under the name ‘EU Inc.’, could facilitate more simplified and efficient capital allocation across the EU. As argued in a previous Policy Brief, investors would not have to gather information about different corporate forms and the associated rights and responsibilities they have as shareholders, or adjust their VC contracting practices depending on the country. A pan-European corporate status that allows companies to scale across the EU more easily would also make them a more attractive target for investors.

Implementing these measures would be a major step in enhancing private sector financing conditions for scaleups in the EU and make them less likely to relocate abroad. Yet even if the private VC ecosystem improves, the fund’s second objective – anchoring strategic technologies with positive spillovers in Europe – will persist, given the tendency of VC to favour scalable technologies and lucrative exits, as well as the private sector’s inability to capture spillovers. Hence, the European Commission should evaluate the Scaleup Europe Fund after its lifetime and decide whether the initiative should be continued; it should also consider – in the event that steering capital towards strategic technologies turns out to be ineffective – enlarging the mandate of the EIB for direct equity investment in the bloc’s strategically important high-tech priority sectors.

5. Conclusion

The Scaleup Europe Fund has the potential to fill an important gap in the private and public innovation financing landscape by combining large equity investments with more targeted steering of private capital towards strategic sectors. To maximise its impact, the fund needs to channel capital towards innovative companies in later growth stages that provide strategic technologies and which present high-risk, high-reward investment opportunities that create positive spillovers. For this approach to work, the European Commission now needs to ensure that these priorities are reflected in the fund’s governance arrangements, which are currently being negotiated. In addition, further policy measures must be implemented to develop the EU’s VC ecosystem, make listing on local stock exchanges more attractive, and facilitate cross-border investments. Otherwise, Europe will continue to lose its most promising companies and fall further behind in the global race for innovation.