57 billion euros. That’s how much venture capital investors are estimated to have invested in European start-ups last year, according to Pitchbook. Once again, the total was lower than the previous year. And it continues to remain significantly below the amount raised by US start-ups, where the volume reached 209 billion dollars in 2024, a nearly 30% increase.

It is an uneven competition, where founders in Europe have always had to fight against the dominant American scene. In the US, where the venture capital market has developed significantly more than in Europe, more capital flows into innovative start-ups, both in relation to economic power and per capita. In 2024, it was about 0.7% of GDP, or about 620 dollars per capita.

For comparison, German start-ups raised just over 7 billion euros last year, according to consultancy firm EY, which accounts for less than 0.2% of GDP. On a per capita basis, that amounts to about 83 euros. France and the Netherlands are slightly ahead of Germany in this regard, but still far behind the United States.

The reasons for the financing gap between the US and Europe are manifold, and not solely due to the differing maturity of the ecosystems. For example, US institutional investors, such as pension funds, are more heavily involved in the asset class, and the US has a much simpler and more unified legal framework – both for founders and investors.

„If a programmer in the US has a business idea, he only needs to click on a website, fill out a form, and he has created a company into which investors can immediately put money, whether they are in Boston, New York, San Diego, San Francisco, or Los Angeles“, explains Andreas Klinger, once the co-founder of the Austrian social media marketing company Die Socialisten, and now a solo investor. „That’s because the regulatory standards for such investment processes are standardised in the US.“

Europe is different. Despite EU-level legislation, many key areas for the success of start-ups are still governed by national regulations. Tax policy is a prime example, where the EU has very limited authority. Employment and corporate law are also largely regulated at the national level.

This often causes headaches for both founders and investors. „Investors need to consult lawyers and tax advisors in each country they want to invest in, to check if the founders have chosen the right legal form, if the shareholder agreement is set up properly, or whether the investment will have specific tax implications in that country“, says Klinger. Investors might be willing to undertake such efforts for several larger investments in a country, but not for smaller early-stage investments.

With the „EU Inc“ initiative, the European venture capital scene aims to address these challenges. Launched in autumn last year, the project – which is co-led by Klinger and supported by prominent founders, investors, and start-up associations – calls for the creation of a unified European legal form for start-ups. The goal is to offer start-ups and their investors simpler regulatory frameworks at various stages of development. „It starts with the founding process“, states Klinger. It needs to be a process „that is standardised and digital, instead of varying across European countries, with some still requiring a notary appearance.“

The frequent notary appointments are problematic. According to the EU Digitalization Directive, founders of GmbH or UG (common legal forms for start-ups in Germany) no longer have to appear personally at the notary for the incorporation process, and can now do this online. However, for the direct transfer of company shares, for example to employees, a physical notarisation is still required. „This leads to costs and effort that are disproportionate to the purpose of employee share schemes“, notes lawyer Frido J. Kent from Rose & Partner. In the US, such processes are much more flexible.

The transfer of employee shares, essential for talent acquisition in cash-strapped start-ups, is already a complicated issue. Tax law considerations play a significant role, and national legislation varies greatly. „Coordinating this across several European countries is almost impossible“, says investor Klinger.

It often requires comprehensive legal and tax advice, which young companies can hardly afford. „In Germany, many founders resort to granting virtual shares to their employees instead“, explains lawyer Kent. „While this is the path of least resistance, the payments associated with these virtual shares are subject to the income tax, which is usually much higher than the capital gains tax.“ As a result, employees lose out.

Given the complexity of a pan-European approach, it’s no surprise that start-ups in the region are advocating for better frameworks. In a survey of European founders and investors, London-based venture capital firm Atomico asked where changes were needed in the next decade to help the scene reach its full potential. Regulatory reforms and the reduction of bureaucracy came second, right after the perennial issue of capital raising.

The problems have been recognised within the EU for many years, which is why they’ve called for an EU Inc., says Klinger, adding that "we didn’t even come up with the name ourselves.“ The initiative frequently refers to previous advocacy from important figures, such as former ECB President Mario Draghi. In his much-commented on report on the future of the EU’s competitiveness, Draghi suggested giving innovative start-ups the option to adopt a „new, EU-wide legal status.“

And European Commission President Ursula von der Leyen reiterated at the World Economic Forum in Davos that the Commission is working on such a concept.

But can these well-established insights, and an initiative supported by renowned investors including Sequoia, Speedinvest, HV Capital, Lightspeed, Creandum, really persuade EU member states to give up their sovereignty in certain areas, especially at a time when nationalism is rising across Europe?

Kent is skeptical, at least when it comes to harmonising tax policy. „It’s a mammoth task that would require the agreement of all member states. While it’s desirable, I’m not sure it’s really achievable“, he says.

Instead, Kent sees further harmonisation in corporate law as more likely. In the past, something like this happened with the creation of the SE (Societas Europaea). This Europe-wide standardised legal form, which was introduced about 20 years ago, gives companies operating across Europe a certain degree of flexibility, and allows them to relocate their headquarters within the EU without hassle. Originally designed for large corporations, the form has been particularly well-received by medium-sized businesses. Kent is optimistic that the EU could create something similar for start-ups.

The increasing scepticism concerning the EU hasn’t gone unnoticed by Klinger and his co-initiators. The goal of the EU Inc. project is not to offer a „utopian ideal solution“, but a compromise that even EU-critical member states won’t oppose. „We don’t want to attack the sovereignty of the member states“, emphasises the investor. „If an EU Inc. is established in Germany, it would still be a German company that operates under German labour and tax law.“

The proposal for EU Inc, which has recently been worked on by the VC scene over several weeks, is now being handed over to the EU Commission in its final version. The recommendations include, among other things, taxing employee shares only at the time of actual liquidity inflow, solving the dry-income problem. Employee share options should also be convertible into non-voting shares, to maintain control by the management and speed up decision-making processes.

Klinger is convinced that a European approach is the only way forward. While there are national solutions, such as Austria's FlexCo, that simplify the lives of start-ups, he is certain that „no national solution, not even FlexCo, will ever be an adequate substitute for an EU Inc.“