Is Public Funding Propping Up Mediocre European VCs?

European venture capital (VC) is at a crossroads.

As the tech ecosystem faces a prolonged period of reduced startup funding and a decline in VC fundraising—dropping to €21 billion in 2024 from €34 billion in 2022—the role of Limited Partners (LPs) has become a central issue. A closer look at the data reveals a heavy reliance on government-backed entities as the backbone of European VC, raising questions about the ecosystem’s sustainability and competitiveness.

Public sector players dominate Europe’s LP landscape, with institutions like the European Investment Fund (EIF) and Bpifrance leading the charge. Since 2015, the EIF alone has backed 671 VC funds, far outpacing any private counterpart. While these entities fill crucial gaps in the market, critics argue that they also distort it, crowding out private investment and perpetuating mediocrity.

The Case for Public LPs

Supporters of public funding view it as a necessity in a still-maturing ecosystem. They point out that Europe’s private capital base for VC is not yet robust enough to sustain innovation at scale. Without public backing, many funds would struggle to raise capital, and the broader tech ecosystem could falter. Government involvement has proven essential in other markets, such as Israel and Singapore, where state-led initiatives have jumpstarted innovation.

Advocates also emphasize the role of public LPs in fostering economic development and addressing market gaps, particularly in underserved regions and emerging technologies. Programs like the UK’s British Patient Capital and Germany’s KfW Capital aim to catalyze private investment by anchoring funds and sharing risks.

The Case Against Public LPs

Critics argue that Europe’s reliance on government-backed LPs creates a closed system that prioritizes economic development over financial returns. This dynamic, they claim, sustains underperforming VC firms and leads to suboptimal capital allocation. Private LPs, with their focus on returns, are seen as better equipped to drive accountability and reward top-tier performance.

Opponents also contend that government involvement stifles open discourse within the ecosystem. Many VCs are hesitant to critique systemic issues or underperforming LPs for fear of jeopardizing their funding. This lack of transparency, they argue, hinders the development of a competitive and self-sustaining market.

Bridging the Gap

Both sides of the debate agree on one point: Europe’s VC ecosystem is not yet fully developed. Proponents of public funding see this as a reason to double down on government-backed initiatives, while critics call for systemic changes to attract more private capital. Possible solutions include tax incentives for private LPs, streamlining bureaucratic processes, and fostering a culture of risk-taking among European investors.

We have to start from where we are.

The future of European VC may hinge on finding the right balance between public and private funding. Achieving this equilibrium will require reforms, clear incentives, and a credible commitment to building a globally competitive ecosystem.

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