Why the EU Needs Venture Capital to Build Thriving Economic Clusters
By Daniele Viappiani, VC Investor at GC1 Ventures
As world economies navigate an increasingly complex international scenario, governments are always pondering the age-old question of how to create economic clusters that can weather the storm of recessions, pandemics, trade and geopolitical conflict. An enviable example is the solid, globally relevant group of businesses offered by Silicon Valley. These companies established a leadership seemingly unscathed by two decades of challenges.
In fact, Silicon Valley has repeatedly demonstrated an unusual capacity to absorb shocks and reassert leadership during periods of economic and geopolitical stress. During the dot-com crash and the 2008 financial crisis, the region shed thousands of jobs, yet it also laid the groundwork for the next wave of dominance: cloud computing, mobile platforms, and the social web. Capital did not flee permanently; it reallocated. Venture funding tightened, valuations reset, and business models matured. Companies that survived emerged leaner and more disciplined, while new entrants, such as Airbnb, Uber, and WhatsApp, were born directly out of recessionary conditions, exploiting inefficiencies exposed by the crisis. This pattern of contraction followed by reinvention has been a defining feature of the Valley’s resilience.
The same dynamic was evident during the COVID-19 pandemic and the subsequent period of geopolitical tension marked by supply-chain disruption, US-China tech decoupling, and renewed industrial policy. While offices emptied and global markets stalled, Silicon Valley firms accelerated the shift to remote work, digital services, AI, and automation, embedding themselves even more deeply into the global economy. Big tech companies leveraged scale and balance sheets to invest through uncertainty, while startups pivoted rapidly toward health tech, cybersecurity, defence tech, and energy resilience, sectors directly shaped by geopolitical risk. Rather than being sidelined by conflict and fragmentation, the Silicon Valley adapted its innovation agenda to them, maintaining its leadership by aligning technology development with the world’s most urgent structural pressures.
By contrast, no comparable, self-sustaining innovation hub has emerged in the European Union despite repeated, high-profile attempts. The Lisbon Strategy of the early 2000s set out to make the EU “the most competitive knowledge economy in the world” by 2010, but collapsed under fragmented execution and uneven national priorities. More recently, initiatives such as GAIA-X sought to create a sovereign European cloud ecosystem, yet struggled to gain market traction against hyperscalers, while the Digital Single Market project has remained only partially realised, leaving startups to scale across regulatory, fiscal, and capital barriers that do not exist in the US.
The cost of this gap is substantial: Europe has produced no tech companies of comparable scale to the US platforms that now dominate cloud, AI, and digital infrastructure, sectors collectively worth several trillion euros in market capitalisation and growing. Economists estimate that the EU’s failure to convert research strength into globally scaled firms has shaved multiple percentage points off long-term productivity growth, equivalent to hundreds of billions of euros in foregone economic value each year and a persistent dependency on non-European technology at a moment of heightened geopolitical risk.
One of the leading factors that has led to Silicon Valley development and resilience is Venture Capital investment. Many of the largest companies in the S&P index were either born in Silicon Valley (Apple, Google, Nvidia, Tesla) or fuelled by Silicon Valley’s Venture Capital industry (Amazon, Microsoft, Meta). In the US, VC-backed firms account for roughly 20% of total market capitalization and employed around 4 million people, but the spillage effect of their contribution to the economy and to innovation is much larger. Venture capitalists not only provide money but also mentorship, strategic guidance, and industry connections, helping startups grow.
It’s clear that leveraging the role of Venture Capital could really help inject innovation into EU efforts to develop economic districts and new economic clusters, especially at a time when economic resilience and independence have become so strategic. Data drawn from the US, where pension funds have been able to invest in VC since 1979, show that VC-backed companies account for 82% of overall R&D investment: a staggering proportion that could drive industries such as healthcare, technology, and transportation well into the future.
If Europe aims to recreate a “Silicon Valley” model, building an enabling environment is necessary but not sufficient. Easing the creation and operation of businesses, simplifying bureaucracy, modernizing employment law, improving corporate governance, updating innovation-related regulation, and fostering academic entrepreneurship all help remove friction and barriers; however, the main missing pieces lie elsewhere.
Two often overlooked factors are decisive: talent and capital markets. In the United States, labour mobility, stock-based compensation, and a cultural tolerance for failure allow skilled individuals to shift rapidly between startups, scale-ups, and established firms, carrying knowledge and networks with them. By contrast, Europe’s more rigid labour markets, fragmented immigration regimes, and uneven treatment of equity incentives continue to discourage risk-taking and slow the circulation of experienced operators, limiting the speed at which innovation ecosystems can compound.
Equally important are deep and sophisticated capital markets capable of sustaining companies from inception through global scale. In the US, credible exit routes through mergers, acquisitions, and public listings are supported by large institutional pools of capital such as pension funds, 401(k) plans, and university endowments, alongside family offices and corporate venture arms. This breadth of long-term capital enables general partners to raise large venture funds, back companies through multiple cycles, and recycle gains into new investments, creating a self-reinforcing loop of funding, exits, and reinvestment.
Finally, EU-wide pension legislation often applies prudential limits rather than a free market approach to VC investment. The main framework governing occupational pension investment is the Institutions for Occupational Retirement Provision Directive (IORP II) (Directive 2016/2341), which sets the principles for how pension assets must be managed. It requires pension funds follow a “prudent person principle,” meaning sponsors must justify that any asset class fits within a sound, diversified strategy. In practice this principle has been interpreted restrictively in many member states.
Many EU countries thus impose quantitative caps or limits on alternative asset classes. For example, some jurisdictions limit pension holdings in unlisted equity or other illiquid assets (which typically include VC and private equity) to a small percentage of total assets, constraining how much a fund can allocate to venture funds. It is worth noting that in Sweden, by contrast, state pension provider AP6 is uniquely permitted by domestic rules to invest directly into unlisted companies, but this is an exception rather than the norm.
There are also emerging policy adjustments intending to encourage deeper participation in VC from pension funds: Italy, for example, has introduced legal incentives for pension schemes that direct a defined portion of assets into venture capital vehicles. Although initial targets are modest, it is a signal for a more free market approach. For the EU to develop true economic clusters of resilience and technological excellence, it must begin by shaking off the tradition of constraint to shallower capital markets and lack of late-stage investors, as well as developing a more competitive IPO ecosystem.
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