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### Summary — key facts and high-level findings
- VC investments in the EU averaged 0.3 percent of GDP per year over the last decade.
- US VC funds raised $800 billion more than EU VC funds to invest in innovative startups.
- The EU accounts for 10 percent of the world’s top high-tech companies by market capitalization.
- Real output per hour worked is 26 percentage points lower in the EU than if it had evolved in line with US productivity since 2000.
- European VC industry is characterized by fewer funds and smaller funds compared with the United States; as a share of GDP, VC financing in the EU is less than one-third as large as in the United States.
- Banks dominate the EU financial system and are ill-suited to financing high-tech startups because:
  - reliance on collateral disadvantages firms with intangible assets (R&D, patents, IP);
  - many bank risk models are not well attuned to knowledge-intensive, initially unprofitable firms;
  - bank debt-servicing and maturity requirements mismatch startup development timelines;
  - regulation and supervision require high-risk exposures to be amply buffered by capital and provisions, reducing banks’ returns on startup lending.
- National fragmentation of the EU’s economic and financial system raises costs and complexity for scaling startups and limits cross-border pooling of private capital.
- Many fast-growing EU startups fundraise abroad and relocate, driven by constrained domestic exit options (IPOs, acquisitions) and shallower private capital pools.
- Policy levers highlighted:
  - National: preferential tax treatments for equity investments in startups and VC funds; national PFIs investing on commercial terms to crowd-in private capital, especially institutional investors such as pension funds and insurers.
  - EU: further integrate and deepen the single market (first-best but time-consuming); fine-tune rules for larger VC funds and for insurers to invest in them; expand capacity and instruments of the European Investment Fund (EIF) and the European Investment Bank (EIB); EIF to develop funds-of-funds to bring EU institutional investors into cross-border financings of large pan-EU VC funds.

### I. Introduction — structural impediments and consequences
- Single market frictions:
  - Higher barriers to trade in goods across national borders within the EU than within countries.
  - Integration in services is even lower; labor mobility is much lower than in the US; cost of moving between EU countries is significantly higher than moving between US states.
- Firm structure and dynamism:
  - Distribution of firms in the EU is weighted more towards SMEs than in the United States.
  - Fewer frontier technology firms; EU lags materially on R&D and ICT investment versus the US.
- Financial structure and household behavior:
  - European households exhibit greater risk aversion, placing a larger proportion of savings in bank deposits and a lower proportion in equities, investment funds, and private pension schemes.
  - Nonfinancial corporates in Europe rely more on bank loans and unlisted equity; listed equity plays a smaller role than in the United States.
- Fragmentation in financial markets:
  - Cross-border banking integration is lower today than pre-GFC.
  - Occupational pension schemes largely do not offer cross-border products; pension funds and insurers show strong home-country bias.
  - Regulatory, legal, and tax frictions impede cross-border investing and trading; long and complicated procedures for reclaiming withholding taxes are a disincentive.
  - Capital market fragmentation limits private cross-border risk sharing; consumption smoothing through capital markets is four times stronger across the 50 US states than in the EU.
- Implications:
  - Shallowness of private capital pools limits the formation of larger VC funds and reduces exit options, depressing valuations and investor returns and thereby reducing incentives to invest in startups throughout their lifecycle.
  - Under-developed VC undermines Europe’s competitiveness, growth prospects, and green ambitions; European VC investments in clean-tech sectors are a fraction of US levels.

### II. The Economic Effects of Venture Capital — mechanisms and evidence
- Firm-level impacts:
  - VC financing significantly supports innovation, patenting, firm growth, and size; VC-backed firms tend to outperform non-VC peers over time.
  - VC brings knowledge, advice, monitoring, and networks that add value beyond finance.
  - Evidence: calibrated models suggest that matching startups only with banks (less expertise) could reduce aggregate annual growth by 0.5 percentage points (model of Akcigit et al. 2022 calibrated to US data).
- Channels to aggregate growth:
  - VC increases R&D investment and innovation; R&D and innovation feed aggregate growth via endogenous-growth mechanisms and non-rivalrous ideas.
  - VC can improve entry-exit dynamics and firm selection, strengthening the overall startup population and contributing to aggregate productivity and employment.
  - Studies show resources allocated to less-dynamic firms and slower entry/churn contribute to aggregate productivity slowdowns; more VC can improve the ex-ante composition of startups and generate employment and productivity gains.
  - VC helps create more firms than it funds, increasing entrepreneurship and growth.
- Caveats:
  - VC’s focus on generating returns within fixed horizons may skew portfolios toward sectors easier or faster to commercialize (e.g., software).

### III. Startup Financing Stages and the Ecosystem — lifecycle, actors, and financing magnitudes
- General ecosystem design:
  - Financing innovation requires knowledge, risk appetite, scale, and patience across the startup lifecycle.
  - Early stages demand expertise and high risk tolerance (angel investors, incubators, pre-seed/seed VC); later stages require larger players and patient institutional capital (pension funds, insurers, banks), often cross-border.
  - Startup lifecycles can span a decade; patient capital is key.
- Five startup financing stages (industry terminology) with numeric facts preserved:
  - Pre-seed
    - Funds raised in Europe can range from €10,000 per venture to as much as several million euros, but typically average a few hundred thousand euros (Pitchbook 2024a).
  - Seed
    - Only 10−15 percent of those that attracted seed funding during 2010−13 were able to achieve a successful exit (Crunchbase 2021; Dealroom 2016).
    - Investors usually demand equity shares in the range of 15−40 percent (Pitchbook 2024b).
    - Financing raised can range from less than €100,000 to over €5 million.
  - Early stage
    - Typically companies five years or less; expected firm growth of say, three- to five-fold over the next two years in many cases.
    - Euro amounts range from a few million to tens of millions.
    - Only about one-third of startups that receive seed-stage financing raise funds in a Series A round, and only about half of those in a Series B round (Dealroom 2016).
  - Later stage
    - Typically over five years old; financing amounts can range from several million to hundreds of millions of euros.
  - Exit
    - Successful exits must generate sufficient returns to compensate for failed bets and provide risk-adjusted returns attractive to institutional investors.
- Role of actors across stages:
  - Early-stage actors: angel investors, startup incubators, pre-seed and seed VC funds provide capital plus advice.
  - Later-stage actors: larger VC funds, institutional investors (pension funds, insurers), banks, corporate VC, private equity, hedge funds provide scale and diversification.
  - Public institutions: PFIs, EIF, and EIB can play catalytic roles if they invest on commercial terms and crowd-in private institutional capital.

### Roles and structure of startup financing actors; debt and PFIs
- VC funds:
  - Are typically structured with a 10-year horizon.
  - Raise capital from limited partners including wealthy individuals, family offices, endowments, pension funds, investment funds, and insurers.
  - Larger VC funds rely more on institutional financing, increasing regulatory intensity of the funding base as scale rises.
- Debt financing and banks, venture debt:
  - Banks and venture debt firms are important debt sources, especially for more mature startups.
  - Venture debt firms typically charge relatively high interest rates and typically require equity warrants.
  - Bank limitations: risk models may struggle with startups’ uncertain revenue and growth prospects; banking regulation and supervision tend to reduce rates of return.
- Role of PFIs and interaction with private financing:
  - PFIs can catalyze the VC ecosystem by providing capital as anchor investors and creating funds of funds.
  - PFIs can lend to startups, guarantee loans, and reduce cyclicality of VC funding markets.
  - Government VC performs best when mixed with private finance; firms receiving solely government VC tend to perform worse than those receiving private funds.
  - Evidence of additionality: more investments at the extensive margin (more investors) and the intensive margin (more investment per investor) in early funding rounds.

### Exit options, agglomeration, and ecosystem geography
- Exit ecosystem elements that strengthen valuations and returns:
  - A wider set of large high-technology strategic buyers.
  - More large private equity growth funds.
  - Deeper, more liquid stock markets for listings.
- Exits matter for recycling capital; founders and VC firms often reinvest gains in new startups.
- Agglomeration and clustering:
  - The VC industry is “people-centric” and concentrated in clusters (Crisanti et al. 2023).
  - Hub-and-spoke networks are vital; other cities/regions must develop angel investors and early-stage VC funds to link to VC hubs.

### State of Venture Capital in the EU — key findings and statistics
- EU VC industry is much less developed than in the United States with large intra-EU heterogeneity.
- Annual VC financing:
  - EU averaged 0.2 percent of GDP in 2013−23.
  - US averaged 0.7 percent of GDP in 2013−23.
- Structural contributors:
  - National fragmentation: 27 sovereign states, only 20 share a currency, 24 languages.
  - Intra-EU capital markets integration has declined since 2019 (AFME, 2023).
- Private capital pools:
  - Assets held in private pension funds and insurance companies:
    - EU: $11.9 trillion.
    - United States: roughly $42.5 trillion.
  - A far smaller share of VC funds’ capital in the EU comes from institutional investors than in the United States.
- Scale-up financing scarcity and migration:
  - Few large VC funds (> €500 million) in the EU: less than 35 such funds have been raised in the EU in last decade.
  - EU VC funds raised about $130 billion over 2013-23 versus $924 billion raised by US VC funds.
  - Shortage of €30−50 million growth financing per later-stage round pushes startups to turn to US funds, creating incentives to migrate abroad.
- Exit limitations and outward migration at exit:
  - “Third country” non-EU acquirers accounted for nearly half of acquisitions of EU startups in 2023.
  - Two-thirds of EU startup IPO exits occurred outside the EU in 2023.

### Legal, regulatory, and market infrastructure contributors
- Solvency II and insurers:
  - Solvency II covered (re)insurers had €8.4 trillion in assets under management.
  - LTE (long-term equity) category exists but is little used; industry-identified issues include complexity, ALM contradictions, and geographic criterion constraints.
  - Political agreement on Solvency II reached on 14 December 2023; at the time of writing the final agreement was not public yet.
- EuVECA:
  - Funds may register as EuVECA if they have less than €500 million in assets under management.
  - Eligible investors include professional clients as defined in MiFID II or investors that commit a minimum of €100,000.
- AIFMD:
  - Captures any fund manager that manages more than €500 million in assets; restricts eligible investor base to so-called professional investors.
  - Professional investor recognition criteria: execution of on average 10 financial transactions per quarter of significant size, have a portfolio of more than €500,000 and/or have relevant work experience in the financial sector of at least one year.
- IORP II:
  - Assets under management of IORP regulated funds stood at close to €2.5 trillion at end 2022.
  - Netherlands account for 60 percent of that; Germany about 10 percent; Sweden 9 percent; Italy 6.5 percent.
  - Investment rules (article 19) are broad but biased against VC and private equity.

### Fragmentation of capital market infrastructure and economic costs
- Including the United Kingdom:
  - Europe has 35 listing exchanges, 41 trading exchanges, and 18 central securities depositories.
  - United States has 3 listing exchanges, 16 trading exchanges, and 1 central securities depository.
- Fragmentation driven by national legal and regulatory differences across corporate, securities, insolvency, accounting, and consumer protection regimes.
- Economic costs:
  - The EU loses growth benefits and positive externalities when promising startups migrate or exit abroad; early or premature exits reduce proceeds reinvested into the domestic startup ecosystem.

### Practical reform directions (policy priorities)
- First-best: create a true single market for goods, services, labor, and capital.
- Near-term (second-best) policy measures:
  - Preferential tax treatment for equity investments in startups and VC funds at national level; limit benefits to equity investments beneath a certain size and require minimum holding periods.
  - National PFIs should follow principle of additionality and invest on commercial terms alongside private co-investors; PFIs can act as conduits for institutional investors to access VC.
  - Enhance capacity of the EIF and EIB to increase capital available for scaling up fast-growing EU firms:
    - Increasing EIB group resources could come from (i) shareholders contributing more capital, (ii) funds from the EU budget, or (iii) remove the gearing ratio that limits lending to 2.5 times its subscribed capital.
    - The EIF could develop a sizable fund-of-funds aimed at institutional investors across Europe to invest in large (>€500 million) pan-EU focused VC funds.
  - Align eligibility criteria across fund sizes (apply lighter-touch EuVECA standard to larger funds) to broaden investor base for large VC funds.
  - Solvency II review and further specification to avoid undue obstacles to insurers’ VC investment.
  - Commission could document national pension regulations and provide best-practice recommendations; develop private pension schemes where small or non-existent.
  - Reduce stock market fragmentation: European Single Access Point; Listing Act; streamlined procedures for cross-border withholding tax refunds; FASTER initiative.
  - Consider broad review of laws affecting high-tech sectors (GDPR, DMA, DSA, AI Act) to identify unintended consequences for startups.
- Medium-term priorities:
  - Invest more in education and R&D, develop private pension schemes, and increase economic and financial integration.
  - Address national legal, regulatory, and tax differences (including quantitative and foreign asset restrictions in pension fund rules) and pursue stock market consolidation to improve exit options for startups.

### Figures, data sources, and empirical context
- Key figure/data highlights preserved as presented:
  - Figure 3 values shown: 73, 56, 10, 10, 10, 7, 7, 28.
  - Investor-type averages, EU 2013-2023: 30%, 9%, 31%, 30% (as presented).
  - Investor-type averages, US: 72%, 7%, 4%, 17% (as presented).
  - Venture Capital Funds Raised over 2013-2023 example bar values: 130 and 924 (as presented).
- Data sources referenced: Pitchbook Data, Inc.; IMF WEO April 2024; Eurostat; European Commission; OECD; Invest Europe; World Federation of Exchanges; Dealogic; Bank for International Settlements.
- Notes on coverage and caveats:
  - Several figures note exclusions and data caveats (e.g., Ireland and Luxembourg accounting practices, exclusions for certain EU members where data is unavailable).
  - Pension and insurer asset datapoints refer to 2022; pension and insurance country coverage exclusions are noted in figure notes.

*Source: wpiea2024146-print-pdf - Annex I. Key Players in the VC Ecosystem; Annex II. Key EU Legislation and Regulations; selected excerpts from “Stepping Up Venture Capital to Finance Innovation in Europe.”*

### Annex I. Key Players in the VC Ecosystem ...............................................................................

### Annex I. Key Players in the VC Ecosystem

### Summary — key facts and high-level findings
- VC investments in the EU averaged 0.3 percent of GDP per year over the last decade.
- US VC funds raised $800 billion more than EU VC funds to invest in innovative startups.
- The EU accounts for 10 percent of the world’s top high-tech companies by market capitalization.
- Real output per hour worked is 26 percentage points lower in the EU than if it had evolved in line with US productivity since 2000.
- European VC industry is characterized by fewer funds and smaller funds compared with the United States; as a share of GDP, VC financing in the EU is less than one-third as large as in the United States.
- Banks dominate the EU financial system and are ill-suited to financing high-tech startups because:
  - reliance on collateral disadvantages firms with intangible assets (R&D, patents, IP);
  - many bank risk models are not well attuned to knowledge-intensive, initially unprofitable firms;
  - bank debt-servicing and maturity requirements mismatch startup development timelines;
  - regulation and supervision require high-risk exposures to be amply buffered by capital and provisions, reducing banks’ returns on startup lending.
- National fragmentation of the EU’s economic and financial system (goods, services, labor, capital) raises costs and complexity for scaling startups and limits cross-border pooling of private capital.
- Many fast-growing EU startups fundraise abroad and relocate, driven by constrained domestic exit options (IPOs, acquisitions) and shallower private capital pools.
- Policy levers highlighted:
  - National: preferential tax treatments for equity investments in startups and VC funds; national PFIs investing on commercial terms to crowd-in private capital, especially institutional investors such as pension funds and insurers.
  - EU: further integrate and deepen the single market (first-best but time-consuming); fine-tune rules for larger VC funds and for insurers to invest in them; expand capacity and instruments of the European Investment Fund (EIF) and the European Investment Bank (EIB); EIF to develop funds-of-funds to bring EU institutional investors into cross-border financings of large pan-EU VC funds.

### I. Introduction — structural impediments and consequences
- Single market frictions:
  - Higher barriers to trade in goods across national borders within the EU than within countries.
  - Integration in services is even lower; labor mobility is much lower than in the US; cost of moving between EU countries is significantly higher than moving between US states.
- Firm structure and dynamism:
  - Distribution of firms in the EU is weighted more towards SMEs than in the United States.
  - Fewer frontier technology firms; EU lags materially on R&D and ICT investment versus the US.
- Financial structure and household behavior:
  - European households exhibit greater risk aversion, placing a larger proportion of savings in bank deposits and a lower proportion in equities, investment funds, and private pension schemes.
  - Nonfinancial corporates in Europe rely more on bank loans and unlisted equity; listed equity plays a smaller role than in the United States.
- Fragmentation in financial markets:
  - Cross-border banking integration is lower today than pre-GFC.
  - Occupational pension schemes largely do not offer cross-border products; pension funds and insurers show strong home-country bias.
  - Regulatory, legal, and tax frictions impede cross-border investing and trading; long and complicated procedures for reclaiming withholding taxes are a disincentive.
  - Capital market fragmentation limits private cross-border risk sharing; consumption smoothing through capital markets is four times stronger across the 50 US states than in the EU.
- Implications:
  - Shallowness of private capital pools limits the formation of larger VC funds and reduces exit options, depressing valuations and investor returns and thereby reducing incentives to invest in startups throughout their lifecycle.
  - Under-developed VC undermines Europe’s competitiveness, growth prospects, and green ambitions; European VC investments in clean-tech sectors are a fraction of US levels.

### II. The Economic Effects of Venture Capital — mechanisms and evidence
- Firm-level impacts:
  - VC financing significantly supports innovation, patenting, firm growth, and size; VC-backed firms tend to outperform non-VC peers over time.
  - VC brings knowledge, advice, monitoring, and networks that add value beyond finance.
  - Evidence: calibrated models suggest that matching startups only with banks (less expertise) could reduce aggregate annual growth by 0.5 percentage points (model of Akcigit et al. 2022 calibrated to US data).
- Channels to aggregate growth:
  - VC increases R&D investment and innovation; R&D and innovation feed aggregate growth via endogenous-growth mechanisms and non-rivalrous ideas.
  - VC can improve entry-exit dynamics and firm selection, strengthening the overall startup population and contributing to aggregate productivity and employment.
  - Studies show resources allocated to less-dynamic firms and slower entry/churn contribute to aggregate productivity slowdowns; more VC can improve the ex-ante composition of startups and generate employment and productivity gains.
  - VC helps create more firms than it funds, increasing entrepreneurship and growth.
- Caveats:
  - VC’s focus on generating returns within fixed horizons may skew portfolios toward sectors easier or faster to commercialize (e.g., software).

### III. Startup Financing Stages and the Ecosystem — lifecycle, actors, and financing magnitudes
- General ecosystem design:
  - Financing innovation requires knowledge, risk appetite, scale, and patience across the startup lifecycle.
  - Early stages demand expertise and high risk tolerance (angel investors, incubators, pre-seed/seed VC); later stages require larger players and patient institutional capital (pension funds, insurers, banks), often cross-border.
  - Startup lifecycles can span a decade; patient capital is key.
- Reasons private equity/VC is well-suited:
  - Public debt and listed equity have substantial reporting and minimum-size/liquidity requirements making them less appropriate for startups.
  - Debt is generally not ideal for early-stage high-tech startups.
- Five startup financing stages (industry terminology) with preserved numeric facts:
  - Pre-seed
    - Earliest and riskiest stage; financing from personal resources, friends and family, crowdfunding, angel investors, startup incubators, pre-seed VC funds.
    - Funds raised in Europe can range from €10,000 per venture to as much as several million euros, but typically average a few hundred thousand euros (Pitchbook 2024a).
  - Seed
    - Refine product, build team, attract early customers; investors include angel investors, incubators, seed-stage VC funds.
    - Only 10−15 percent of those that attracted seed funding during 2010−13 were able to achieve a successful exit (Crunchbase 2021; Dealroom 2016).
    - Investors usually demand equity shares in the range of 15−40 percent (Pitchbook 2024b).
    - Financing raised can range from less than €100,000 to over €5 million.
  - Early stage
    - Typically companies five years or less; generating revenue; Series A and Series B financing common.
    - Expected firm growth of say, three- to five-fold over the next two years in many cases.
    - Euro amounts range from a few million to tens of millions.
    - Only about one-third of startups that receive seed-stage financing raise funds in a Series A round, and only about half of those in a Series B round (Dealroom 2016).
  - Later stage
    - Typically over five years old; generating revenue; preparing to scale, launch products or enter new countries; may prepare for exit via acquisition or IPO.
    - Includes Series C, Series D, Series E and beyond; rounds may include debt to limit dilution.
    - Financing amounts can range from several million to hundreds of millions of euros.
    - Funding is usually led by VC funds but may solicit institutional investors and banks; corporate VC, private equity, and hedge funds may co-invest.
  - Exit
    - Common forms: strategic acquisition by a larger firm, acquisition by a private equity firm, or a stock market listing.
    - Successful exits must generate sufficient returns to compensate for failed bets and provide risk-adjusted returns attractive to institutional investors.
- Role of actors across stages:
  - Early-stage actors: angel investors, startup incubators, pre-seed and seed VC funds provide capital plus advice on business plans, products, and markets.
  - Later-stage actors: larger VC funds, institutional investors (pension funds, insurers), banks, corporate VC, private equity, hedge funds provide scale and diversification.
  - Public institutions: PFIs, EIF, and EIB can play catalytic roles if they invest on commercial terms and crowd-in private institutional capital.

*Source: wpiea2024146-print-pdf - Annex I. Key Players in the VC Ecosystem.*

### 17. Critical elements of the startup financing ecosystem include angel investors, incubators, and

### wpiea2024146-print-pdf - 17. Critical elements of the startup financing ecosystem include angel investors, incubators, and

### Roles and structure of startup financing actors
- Angel investors, incubators, and VC firms screen startups, select the most promising, and provide financing while also supplying knowledge, advice, and access to professional and financial networks (Annex I).
- VC funds:
  - Are typically structured with a 10-year horizon.
  - Invest in a diversified portfolio of startups.
  - After raising a fund, allocate a portion of capital to a portfolio, winnow out underperformers over subsequent years, and channel unallocated portions to successes.
- VC funds’ financing sources:
  - Raise capital from limited partners including wealthy individuals, family offices, endowments, pension funds, investment funds, and insurers.
  - Wealthy individuals, family offices, and endowments tend to be unregulated or very lightly regulated, often subject only to minimal data-reporting requirements.
  - Institutional investors (managers of retail savings with fiduciary duties) are heavily regulated with rules on eligible investments, leverage, disclosure, and more.
  - Larger VC funds rely more on institutional financing, increasing the average regulatory intensity of the VC funding base as scale rises.

### Debt financing and banks, venture debt, and venture-backed startups
- Banks and venture debt firms are important debt sources, especially for more mature startups.
- Debt is attractive because it avoids ownership dilution.
- Startups generating revenues and growing rapidly, especially with VC follow-on equity support, can often borrow from banks or venture debt firms.
- Bank limitations:
  - Risk models may struggle with startups’ uncertain revenue and growth prospects.
  - Banking regulation and supervision tend to reduce rates of return.
- Venture debt firms:
  - Typically faster and nimbler than banks.
  - Charge relatively high interest rates and typically require equity warrants.

### Role of public financial institutions (PFIs) and government agencies
- PFIs can catalyze the VC ecosystem by providing capital and broadening the investor base for VC firms.
- PFIs help VC funds achieve scale by:
  - Providing capital as anchor investors (Kraemer-Eis and Croce 2023b).
  - Creating funds of funds to let institutional investors invest at greater scale, with PFIs conducting due diligence and allocating capital to VC funds.
  - Attracting institutional investors until they become comfortable investing directly in VC funds.
- PFIs can expand financing types and smooth financing across the startup lifecycle:
  - Can lend to startups and help attract debt financing by guaranteeing loans from banks or venture debt firms.
  - Guarantees can produce multipliers by lowering risk-based capital requirements at banks.
  - Can help reduce cyclicality of VC funding markets, important for startups that need to raise financing every 12−18 months (Kraemer-Eis and Croce 2023a).

### Interaction of private and public VC financing
- Government VC performs best when mixed with private finance:
  - Firms receiving solely government VC tend to perform worse than those receiving private funds (Brander et al. 2015; Breschi et al. 2021).
  - Public-only VC recipients show fewer investments overall, less successful exits, and higher probabilities of failing.
  - Governments may screen with different objectives (public goods, inclusiveness, externalities) or lack selecting capabilities (Lerner 2002).
  - A mix of private and public VC leads to a higher overall amount of investments compared to pure government VC.
  - Evidence of additionality: more investments at the extensive margin (more investors) and the intensive margin (more investment per investor) in early funding rounds, with more nuanced effects in later rounds (Brander et al. 2015; Breschi et al. 2021).

### Exit options, agglomeration, and ecosystem geography
- Exit valuations determine rates of return for startup investors; a variety of exit options strengthens founders’ and investors’ negotiating positions and can lift valuations.
- Valuable exit ecosystem elements:
  - A wider set of large high-technology strategic buyers.
  - More large private equity growth funds.
  - Deeper, more liquid stock markets for listings.
- Exits matter for recycling capital: founders and VC firms often reinvest gains in new startups or expand the size of subsequent funds.
- Agglomeration and clustering:
  - Cities/regions where ecosystem parts cluster (hubs) are central due to agglomeration effects in ideas, financing, and development.
  - The VC industry is “people-centric” and concentrated in clusters (Crisanti et al. 2023).
  - Hub-and-spoke networks are vital: other cities/regions must develop angel investors and early-stage VC funds to provide early-stage financing and links to VC hubs.

### State of Venture Capital in the EU — key findings and statistics
- EU VC industry is much less developed than in the United States with large intra-EU heterogeneity (Figures 12 and 13a).
- Annual VC financing:
  - EU averaged 0.2 percent of GDP in 2013−23.
  - US averaged 0.7 percent of GDP in 2013−23 (Figure 13b).
- EU has fewer VC funds and its largest funds account for a smaller share of aggregate capital raised (Figure 13c).
- Some member states’ shares of the EU’s total VC activity greatly exceed their shares of total EU GDP (Figure 13d).
- Member states where households invest more in capital markets and spend more on R&D relative to GDP tend to have higher VC investment ratios (Figure 14).
- EU VC funds rely much more on PFIs for capital than US peers.

- Structural contributors:
  - National fragmentation: 27 sovereign states, only 20 share a currency, 24 languages, significant legal, regulatory, and tax differences.
  - Intra-EU capital markets integration has declined since 2019 (AFME, 2023).
  - Fragmentation reduces pools of capital available to VC funds, direct growth financing, and exit options (Asdrubali 2023, Kraemer-Eis and Croce 2023b).
  - Historical factors: European VC industry developed later than US peer and Brexit removed London as the EU’s largest financial center and VC hub.

- Market integration and regulatory factors:
  - Goods, services, and labor markets are less integrated in Europe than the United States; legal and intrinsic reasons impede cross-border expansion (Pelkmans 2024; Ebeke et al. 2019).
  - Labor market rigidities and divergence in insolvency regimes may make EU VC funds more risk averse (Financial Times 2024a).
  - Divergence in transposition and application of EU directives contributes to fragmentation; linguistic and cultural differences are additional barriers.

- Private capital pools and fragmentation:
  - Assets held in private pension funds and insurance companies:
    - EU: $11.9 trillion.
    - United States: roughly $42.5 trillion (Figure 15).
  - National fragmentation and home-country bias split already-smaller EU capital pools into national silos (Figure 16; Bhatia et al. 2019).
  - A far smaller share of VC funds’ capital in the EU comes from institutional investors than in the United States (Figure 17).
  - Very few EU VC funds can finance later-stage needs (several million to hundreds of millions of euros) while maintaining proper diversification.

- Cross-border investment behavior:
  - More than one-third of investments by EU VC funds in Europe are cross border (Asdrubali 2023).
  - Post-Brexit, UK-based VC funds still invest substantially in the EU (Figure 18).
  - Raising larger VC funds across borders is often required to provide later-stage financing but is more difficult due to fragmentation.

- Obstacles to raising VC funds:
  - Limited familiarity with the VC asset class among institutional investors in many EU countries (Atomico 2023).
  - Costs of due diligence, perceived riskiness, and quantitative limits on VC investments constrain participation by institutional investors.
  - Historical precedent: 1979 US pension reform allowing riskier assets increased pension funds’ share in VC from 15 percent to more than 50 percent in eight years (Kortum and Lerner 1998).
  - Home bias arises from informational frictions, tax issues, regulatory constraints, moral suasion, and political pressure.
  - As regulatory intensity increases, cross-border frictions generally increase.

- Scale-up financing scarcity and migration:
  - Few large VC funds (> €500 million) in the EU: less than 35 such funds have been raised in the EU in last decade.
  - EU VC funds raised about $130 billion over 2013-23 versus $924 billion raised by US VC funds (Figure 19).
  - Shortage of €30−50 million growth financing per later-stage round pushes startups to turn to US funds, creating incentives to migrate abroad and often do so (Testa et al. 2022; Fratto et al. 2024).

- Exit limitations and outward migration at exit:
  - “Third country” non-EU acquirers accounted for nearly half of acquisitions of EU startups in 2023 (Kraemer-Eis and Croce 2023a).
  - Two-thirds of EU startup IPO exits occurred outside the EU in 2023.
  - Smaller, less liquid EU stock markets hurt valuations and IPO attractiveness (Figures 20 and 21).
  - Fewer domestic exit options and lower valuations reduce incentives to invest in VC and lead to premature exits or listings at immature stages (Botsari et al. 2021).
  - Greater risk aversion in the EU may contribute to these outcomes (Fendoglu and Xu 2024a,b).

- Legal and regulatory contributors to growth financing shortage:
  - Rules governing institutions for occupational retirement provision are qualitative and leave many aspects to national authorities, creating heterogeneity across the EU.
  - National rules on withdrawal of pension plan participants can affect pension funds’ ability to invest in illiquid, long-term assets like VC (Atomico 2023).
  - Solvency II rules attach relatively high risk weights to VC for insurers; the “long-term equity” option to lower risk weights is little used due to complexity, interaction with national regulations, and geographic restrictions.

- Fragmentation of capital market infrastructure:
  - Including the United Kingdom:
    - Europe has 35 listing exchanges, 41 trading exchanges, and 18 central securities depositories.
    - United States has 3 listing exchanges, 16 trading exchanges, and 1 central securities depository (Financial Times 2024b).
  - Fragmentation driven by national legal and regulatory differences across corporate, securities, insolvency, accounting, and consumer protection regimes.
  - Long and complex procedures for reclaiming withholding taxes disincentivize cross-border investments in EU equity markets.
  - Nasdaq in Sweden has been disproportionately successful in attracting IPOs, suggesting lessons for other countries.

- Economic costs of fragmentation:
  - The EU loses growth benefits and positive externalities when promising startups migrate or exit abroad; growth and employment benefits often accrue abroad.
  - Early or premature exits reduce proceeds reinvested into the domestic startup ecosystem, diminishing domestic spillovers from innovation and R&D (example: post-Skype exit in Estonia).

- Impact of PFIs:
  - PFIs at national and EU levels, notably the EIF, have largely proven impactful in increasing financing and familiarity with VC among institutional investors (Kraemer-Eis et al. 2016).
  - Examples:
    - Tesi in Finland helped Finnish pension funds and insurers invest in VC via KRR funds of funds.
    - Dansk Vækstkapital (Danish state and pension funds partnership) plays a similar role.
    - Invest NL in the Netherlands has helped attract pension funds to VC focused on deeptech startups.
    - EIB’s venture debt instruments have been shown to crowd in private investments (Gatti et al. 2022).

### Practical reform directions (policy priorities)
- First-best: create a true single market for goods, services, labor, and capital to address EU scale, productivity, and growth issues; politically difficult and long-term.
- In the interim: pursue second-best policy measures to mitigate fragmentation and scale constraints.
- Continued efforts to deepen the single market, complemented by targeted reforms to expand pools of long-term capital, reduce cross-border frictions, and enhance institutional investor engagement with VC.

*IMF WORKING PAPERS — Stepping Up Venture Capital to Finance Innovation in Europe (excerpt provided).*

### 38. Investments in education, R&D, and ICT are necessary for innovative startups to thrive. Estonia

### 38. Investments in education, R&D, and ICT are necessary for innovative startups to thrive. Estonia

### Education, R&D, ICT, and commercialization
- Estonia exemplifies how an emphasis on digital skills in education combined with public and private investment in digital infrastructure creates fertile ground for innovative startups.
- Facilitating commercial spinoffs of innovations developed at universities and research institutes, or licensing such innovations to entrepreneurs, can help commercialize research and expand the startup pool.
- Existing high-tech firms and their employees are important sources of ideas, with clusters of startups developing around them.
- Well-designed R&D tax incentives can increase R&D investments and patenting, especially by smaller and more financially constrained firms.
- At the EU level, an assessment of the EU’s innovation policy instruments, including the European Innovation Council, suggests scope for improving governance, design, and resources to increase impact.

### Labor market, immigration, compensation, and insolvency
- Startups need access to skilled employees and flexibility to adjust as they grow; laws on immigration and labor can impair startups’ ability to attract necessary talent or change strategy.
- Stock options are an important form of compensation for startup employees; tax treatment that does not discourage their use and greater harmonization across EU countries could ease hiring and cross-border expansion.
- Developing portable private pension schemes across the EU would facilitate attracting skilled workers from other EU countries.
- Overly restrictive and costly rules on shedding staff can deter entrepreneurs, investors, and firms from investing in and adopting risky technologies.
- Efficient insolvency regimes help investors reallocate capital more quickly from failed startups.

### National-level reforms: VC, tax incentives, and public financial institutions (PFIs)
- Where the VC sector is underdeveloped or non-existent, preferential tax treatment (e.g., more favorable treatment of capital gains and losses for angel or VC investments) can help jumpstart VC activity; such schemes should limit tax benefits to equity investments beneath a certain size and require minimum holding periods.
- Harmonization and simplification of tax regimes matter for venture capitalists investing across borders.
- National PFIs should follow the principle of additionality: complement and crowd-in private investors rather than crowd them out.
  - PFI investments should generally be made on commercial terms alongside private co-investors, for instance by acting as anchor limited partner while contributing less than half of the total.
  - PFIs can act as conduits for institutional investors to access the VC asset class (example: Tesi in Finland).
  - A faster European Commission approval process for PFI design and operations would be desirable.
- National PFIs can partner with the EIB and EIF; new PFIs can channel resources through EIF umbrella national funds while learning monitoring and control best practices (EIF-NPI Equity platform).
- Local initiatives should acknowledge the hub-and-spokes network nature of the EU VC ecosystem and focus on bridging to more developed VC hubs rather than aim to develop full-scale national VC ecosystems.
- National tax, legal, and regulatory frameworks should avoid discouraging cross-border investments; favorable tax treatment for domestic private equity can disincentivize cross-border investment, so incentives should target early-stage VC and limit overall size of tax benefits.
- Restrictions on foreign assets or tight limits on VC assets can discourage cross-border investments.
- Over the medium term, developing private pension schemes where they are small or non-existent would expand domestic capital for VC; larger pension funds tend to invest more in equity and are less risk averse than smaller ones.

### EU-level reforms: EIF/EIB capacity, new instruments, and regulatory adjustments
- Near-term impactful action: enhance capacity of the EIF and EIB to increase capital available for scaling up fast-growing EU firms.
  - Increasing EIB group resources could come from (i) shareholders contributing more capital, (ii) funds from the EU budget, or (iii) remove the gearing ratio that limits lending to 2.5 times its subscribed capital, as proposed by the EIB President (Calviño 2024).
- The EIF could develop a sizable fund-of-funds aimed at institutional investors across Europe to invest in large (>€500 million) pan-EU focused VC funds, pooling capital to achieve scale and improve cross-border integration.
  - This approach would build on the EIF’s Asset Management Umbrella Fund platform experience and could be similar in intent to the European Tech Champions Initiative (ETCI) but funded by the private sector.
  - Complementary EIB expansion could support venture debt and credit provision to more-mature startups.
- Regulatory framework adjustments:
  - EuVECA functions well for managers of small VC funds below €500 million; it requires a minimum investment of €100,000 and self-attestation of awareness of the risks.
  - AIFMD imposes stricter criteria to qualify as a “professional investor” eligible to invest in VC funds of €500 million or larger, limiting the investor base; aligning eligibility criteria across fund sizes (applying the lighter-touch EuVECA standard) could be beneficial.
  - Insurers invest little in VC; regulatory constraints and frictions contribute to this. The Solvency II review (political agreement reached in December 2023) is expected to ease some constraints, streamlining some requirements related to insurers’ long-term investments in equity, but further specifications are needed to avoid undue obstacles to VC investment.
- Pension funds: rules largely set at national level; OECD surveys show some EU countries have quantitative limits constraining investments in private equity and VC. The Commission could document national frameworks and provide best-practice recommendations.
- Reducing stock market fragmentation could improve EU exit options for startups by improving liquidity and valuations; causes include political, legal, regulatory, and supervisory factors.
  - Initiatives: European Single Access Point for listed firms’ financial information; the Listing Act; streamlined procedures for cross-border withholding tax refunds; the FASTER initiative introducing a common EU digital tax residence certificate to allow fast-track procedures on withholding taxes.
  - Greater consolidation and deeper integration of equity markets would be politically challenging and require many legal, regulatory, supervisory, and tax changes; an optimal solution may be national “doors” to a few large, consolidated listing and trading platforms.
  - Euronext provides an example of partial integration (single central order book across seven EU countries) but fragmentation remains due to separate subsidiaries and national supervision.
- The EU could consider a broad review of laws and regulations affecting high-tech sectors (e.g., General Data Protection Regulation, Digital Markets Act, Digital Services Act, Artificial Intelligence Act) to identify unintended consequences and inconsistencies vis-à-vis pre-existing provisions for high-tech startups.

### Conclusion and key priorities
- Developing the startup financing ecosystem, with VC at its core, is important for Europe’s future growth, competitiveness, and green transition.
- First-best solution: improve the Single Market through deeper integration of goods, services, labor, and capital markets, prudent use of tax instruments, and targeted regulatory changes — but these take time.
- Near-term second-best steps at national and EU levels include expanded roles for PFIs and increased EIF/EIB capacity; increasing private financing to scale up innovative firms on commercial terms is preferable to fiscally costly subsidies.
- Medium-term priorities: invest more in education and R&D, develop private pension schemes, and increase economic and financial integration.
- Addressing national legal, regulatory, and tax differences (including quantitative and foreign asset restrictions in pension fund rules) and pursuing stock market consolidation to improve exit options are crucial for the Capital Markets Union (CMU) ambitions.

*Source: IMF Working Paper excerpt titled “Stepping Up Venture Capital to Finance Innovation in Europe.”*

### 57. While some steps will be politically challenging, others more technical in nature can be taken

### 57. While some steps will be politically challenging, others more technical in nature can be taken now.

### Policy actions referenced (Eurogroup March 2024 and IMF)
- Eurogroup’s March 2024 statement on priority actions to advance the CMU contains ideas to develop in greater detail, including:
  - supervisory convergence
  - harmonizing insolvency and accounting frameworks
  - improving conditions for cross-border investment in equity
  - consider developing new instruments at the EIF to facilitate VC exits
  - developing occupational and private pension schemes
- IMF note: many recommendations from five years ago in the three areas of transparency, regulation, and insolvency remain valid today.

### Progress, outstanding work, and implementation approaches
- Progress cited:
  - ESAP initiative
  - FASTER initiative
- Outstanding issues:
  - Remaining recommendations on transparency, regulation, and insolvency continue to be relevant.
- Implementation approach:
  - Suggestions by some member states that “coalitions of the willing” should press forward in areas where unanimity is elusive may warrant serious consideration.

### Specifics for Venture Capital (VC)
- The paper lists several actionable suggestions for VC (text notes: “For VC specifically, this paper has listed several actionable suggestions.”)
- Recommended VC-related measures referenced earlier in the text include:
  - developing new instruments at the EIF to facilitate VC exits
  - improving conditions for cross-border equity investment
  - harmonizing insolvency and accounting frameworks to reduce cross-border frictions
  - supervisory convergence to support integrated markets
  - developing occupational and private pension schemes as potential long-term investors in VC

### Figures and empirical context (selected highlights from figures included)
- Figure references and data sources:
  - Figure 1: Intra-EU Trade in Goods and Services (Percent of GDP). Sources: Eurostat; European Commission; and IMF staff calculations.
  - Figure 2: Distribution of Firm Size by Employment (Share of total employment by firm size, in percent). Sources: OECD; and IMF staff calculations. Note: Data refers to employees for the US, and to persons employed for EU countries. EU includes all EU27 countries except Bulgaria, Croatia, Cyprus, and Malta.
  - Figure 3: Nationality of Largest High-Tech Firms by Market Capitalization (Percent share of number of largest companies). Data source: companiesmarketcap.com as of May 17, 2024; and IMF staff calculations. Values shown: 73, 56, 10, 10, 10, 7, 7, 28 (as presented in figure).
  - Figure 4: R&D and ICT Investments, and Labor Productivity. Sources: OECD; and IMF staff calculations. Notes: EU excludes Cyprus and Malta due to lack of data and Ireland because multinationals’ accounting practices excessively inflate its numbers. Denmark and Poland 2020 data is unavailable.
  - Figure 6: Household Balance Sheets and NFC Funding Structure. Sources: OECD; and IMF staff calculations. Notes: Euro area: 2022 Q4 data except for investment firms' assets which are based on EBA 2015 data, categories 1-4, 8, 10, 11. US data: 2022 Q4 data.
  - Figure 11: Innovation Financing Ecosystem (pre-seed, seed, early stage, later stage, exit). Sources: PitchBook Data, Inc.; IMF April 2024 WEO; and IMF staff calculations.
  - Figure 13: Venture Capital Invested, 2013-2023 (Percent of GDP). Sources: PitchBook Data, Inc.; IMF WEO April 2024; and IMF staff calculations. EU and US series shown.
  - Figure 17 and 18: Sources of VC Funds – Investor Type and Location. Investor-type averages, EU 2013-2023: 30%, 9%, 31%, 30% (as presented). US investor-type averages: 72%, 7%, 4%, 17% (as presented).
  - Figure 19: Venture Capital Funds Raised over 2013-2023 (Billions of USD). Aggregate values presented for EU and US; example bar values shown include 130 and 924 (as presented).
- Notes on data coverage and caveats present in the figures:
  - Several figures note exclusions and data caveats (e.g., Ireland and Luxembourg accounting practices, exclusions for certain EU members where data is unavailable).
  - Pension and insurer asset datapoints refer to 2022; pension and insurance country coverage exclusions are noted in figure notes.

### Annex I — Key players in the VC ecosystem (roles and functions)
- Innovators and entrepreneurs:
  - Innovators typically in universities, research institutes, or high-tech companies; translating ideas into start-ups often requires pairing innovators with entrepreneurs (e.g., via university IP licensing offices).
- Angel investors:
  - Provide earliest-stage equity and introductions to other investors.
- Venture capital firms:
  - Create VC funds (usually with an investment horizon of 10 years).
  - Provide a small part of capital and pool investments from outside investors (wealthy individuals/family offices, institutional investors, public financial institutions, corporations).
  - Provide advice and services (e.g., recruiting), deploy capital in initial years, follow-on invest in better performing start-ups, and cut losses on failures.
  - Fund size determines ability to support start-ups as they scale.
- Institutional investors:
  - Pension funds, insurers, academic endowments, sovereign wealth funds, and other long-term investors; key source of private capital for VC funds.
  - Allocation to VC depends on experience with asset class, scale of VC funds, risk-return profile, and regulatory constraints.
- Public financial institutions (PFIs):
  - National or multinational development banks (e.g., EIB) or funds (e.g., EIF) can jump-start VC ecosystems.
  - Can invest alongside private investors on commercial terms, directly co-invest, create “fund of funds,” provide credit or guarantees, and de-risk private lending.
  - Caution: instruments must be designed not to encourage excessive credit or overleverage.
- Venture debt and banks:
  - Debt financing becomes attractive as start-ups scale; venture debt funds lend alongside VC funds with relatively soft terms and equity warrants.
  - Banks can finance more mature start-ups with tangible investments; PFIs’ guarantees can increase availability and lower cost of venture debt and bank credit.
- “Exit” options:
  - Exits convert VC stakes into returns to investors; three main types (besides failure):
    - sale to another private equity (PE) fund (often a larger “growth fund”),
    - acquisition by a larger firm,
    - publicly listing through an initial public offering (IPO).
  - Exits feed returns back into new VC funds and enable founders to become serial entrepreneurs, angel investors, or VC partners.

*IMF Working Paper: Stepping Up Venture Capital to Finance Innovation in Europe — excerpted content provided in the source PDF.*

### Annex II. Key EU Legislation and Regulations

### Annex II. Key EU Legislation and Regulations

### European Venture Capital Fund Regulation (EuVECA)
- Voluntary EU passporting regime for smaller venture capital funds; offers an EU-wide marketing passport for registered funds.
- Eligibility and thresholds:
  - Funds may register as EuVECA if they have less than €500 million in assets under management (AUM).
  - At least 70 percent of capital must be used to support eligible companies.
  - Eligible companies: at the time of the first investment either not admitted to trading on a normal trading venue and employ up to 499 persons, or meet the SME criteria of MiFID II and are listed on an SME growth market.
  - Loans are limited to a maximum of 30 percent of committed capital of the fund to any given company; remaining investments must be in the form of (quasi-)equity.
  - EuVECA funds must not be leveraged.
- Investor limits:
  - Eligible investors are professional clients as defined in MiFID II or investors that commit a minimum of €100,000.
- Comparative and supervisory notes:
  - EuVECA comes with lower authorization and compliance costs compared to AIFMD, which is mandatory for funds with AUM above €500 million.
  - European Commission’s department Financial Stability, Financial Services and Capital Markets Union (FISMA) and ESMA are currently evaluating the EuVECA framework.
- Market coverage:
  - With most EU VC funds below the threshold, European venture capital funds are primarily captured by the EuVECA.

### Alternative Investment Fund Managers Directive (AIFMD)
- Mandatory regulatory framework for large fund managers; harmonized framework for EU-established managers of alternative investment funds (non-mutual funds sold to retail investors).
- Scope:
  - Covers venture capital, private equity, real estate, hedge funds.
  - Captures any fund manager that manages more than €500 million in assets.
- Key regulatory areas:
  - Authorization, capital requirements, conduct of business standards, remuneration, valuation of assets, delegation, depositaries, transparency, and marketing.
  - Introduces procedures for independent valuation of assets and reporting on leverage; grants competent national authorities powers of inspection and intervention.
- Investor base limits:
  - Restricts eligible investor base to so-called professional investors (Article 31).
  - Investors may be recognized as professional investors if they meet two of the following three criteria (as laid down in MiFID II): execution of on average 10 financial transactions per quarter of significant size, have a portfolio of more than €500,000 and/or have relevant work experience in the financial sector of at least one year.
  - Alternatively, member states may allow marketing of alternative investment funds to retail investors in their territory only (Article 43(1)).

### Solvency II Directive
- Sets requirements for insurance and reinsurance companies in the EU covering capital requirements, risk management, governance, and harmonized supervision (primarily at the national level).
- Sector size:
  - Solvency II covered (re)insurers had €8.4 trillion in assets under management.
- Long-term equity (LTE) category:
  - Allows insurers to set up an LTE category benefiting from lower risk weights to reflect long-term nature of investments (such as VC where investors usually don’t have early redemption rights).
  - Many insurance companies have not used the LTE category (Article 171a of Solvency II Delegated Acts) since it was introduced.
- Industry-identified issues with LTE:
  - Complexity and sometimes contradictory asset-liability management (ALM) requirements (Article 171a para1 (a)-(e)), creating unnecessary complexity and cost, particularly for smaller insurers; interaction with national regulation can make application next to impossible in some member states.
  - Geographic criterion: equities in the LTE bucket must be either listed in the EEA, or for unlisted companies the headquarter must be in the EEA (Article 171a para1 (f)); industry views this as too constraining and reducing diversification.
- Review of framework:
  - In the context of the review of Solvency II (part of the 2015 Capital Markets Union agenda), the Commission proposed to reduce the risk weight on certain private equity investment to 39 percent.
  - Industry representatives have argued that the risk weight should be more in the range of 20 – 30 percent (Invest Europe 2017).
  - Political agreement on Solvency II has been reached on 14 December 2023. At the time of the writing of this text, the final agreement was not public yet.

### Institutions for Occupational Retirement Provision Directive (IORP II)
- Scope and coverage:
  - Covers occupational pension funds (pillar 2); excludes institutions operating on a pay-as-you-go basis.
  - Over 125 000 IORPs (2014), many smaller schemes with fewer than 100 members (member states can exempt them).
  - Assets under management of IORP regulated funds stood at close to €2.5 trillion at end 2022.
  - Geographic distribution of assets: Netherlands account for 60 percent of that; Germany about 10 percent; Sweden 9 percent; Italy 6.5 percent.
- Directive features:
  - Sets out basic requirements and some rules for supervision: ring-fencing of assets, information provision, prudent investment of assets, rules for operating cross-border.
  - Generally no detailed quantitative requirements; member states define details.
- Investment rules and bias:
  - Investment rules (article 19) are broad but biased against VC and private equity: assets shall be predominantly invested on regulated markets; other investments must be kept to prudent levels (article 19 para 1(d)).
  - Member states shall not prevent IORPs from investing in instruments that have a long-term investment horizon and are not traded on regulated markets (article 19 para 6(c)).
  - Impact depends on how “prudent levels” are defined at the national level.
- Review of directive:
  - Commission started preliminary work on the IORP II directive review and will issue its proposal during the 2024-2029 EC mandate.

### Cross-cutting legal and market observations
- EuVECA targets smaller VC funds with lower compliance costs than AIFMD; AIFMD establishes a comprehensive framework for larger funds and operational standards.
- Solvency II’s LTE category aims to better accommodate long-term equity exposures like VC but faces implementation frictions (ALM complexity, geographic constraints).
- IORP II’s broad investment rules create potential national-level variation that can inhibit occupational pension investment into VC depending on domestic definitions of “prudent levels.”

### Data descriptions (Annex III content included)
- Pitchbook:
  - Data on VC investments: completed deals from 2013 to 2023 covering VC stages: Pre/accelerator/incubator, angel, seed, early stage, and later stages.
  - Location restricted to HQ only.
  - Data for VC raised consists of LP commitments to Venture Capital funds limited by the fund HQ location.
  - Data as of March 26, 2024.
- Invest Europe:
  - Data used to compute geographic breakdown of VC sources consists in venture investments by location of private equity offices investing in European companies.
- OECD – Capital formation by activity:
  - Presents gross capital formation, gross fixed capital formation, changes in inventories and acquisition less disposals of valuables broken down by ISIC rev.4 industries; gross fixed capital formation also by type of assets.
- EU KLEMS (National Accounts):
  - Industry level growth and productivity project providing detailed data for 27 EU Member States, the US, Japan and the United Kingdom, across 40 industries (coverage may vary), 23 industry aggregates, over the period 1995-2020.
- Dealogic:
  - Private database covering transactions in fixed income and equity capital markets, mergers & acquisitions; equity capital markets section covers Initial Public Offerings (IPOs).
- World Federation of Exchanges:
  - Industry association of trading venues providing a database based on data reported by their members; all major EU and US stock exchanges are WFE members.
- Bank for International Settlements – Consolidated Banking Statistics:
  - Classifies quarterly data on resident banks' international financial claims on non-resident banks by debtor country, remaining maturity, and sector of the borrower; for Immediate Counterparty Basis positions are allocated to the primary party to a contract.

*IMF WORKING PAPERS — Stepping Up Venture Capital to Finance Innovation in Europe (Annex II and Annex III).*

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### R&D, patents, and growth literature
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### Financial markets, pension funds, and institutional investors
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- Kakes, J. (2006). Financial behaviour of Dutch pension funds: a disaggregated approach. DNB Working Papers No. 108, Netherlands Central Bank.
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- Axon. (2019). Participation of Institutional Investors in European Venture Capital.

### Trade, integration, and market structure
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- Sancho, et al. (multiple entries preserved in original list).

### Empirical methods and labor dynamics
- Bartelsman, E. J., Gautier, P. A., & De Wind, J. (2016). Employment protection, technology choice, and worker allocation. International Economic Review, 57(3), 787-826.
- Haltiwanger, J., Jarmin, R. S., & Miranda, J. (2013). Who creates jobs? Small versus large versus young. Review of Economics and Statistics, 95(2), 347-361.
- Puri, M., & Zarutskie, R. (2012). On the Lifecycle Dynamics of Venture-Capital- and Non-Venture-Capital-Financed Firms. The Journal of Finance, Vol. LXVII, No.6, 2247-2293.
- Sterk, V., Sedláček, P., & Pugsley, B. (2021). The nature of firm growth. American Economic Review, 111(2), 547-579.
- Haltiwanger, J., Jarmin, R. S., & Miranda, J. (2013). Who creates jobs? Small versus large versus young. Review of Economics and Statistics, 95(2), 347-361.

*Stepping Up Venture Capital to Finance Innovation in Europe — Working Paper No. WP/24/146*

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_Source: https://www.imf.org/-/media/files/publications/wp/2024/english/wpiea2024146-print-pdf.pdf_