Analysis from European Women in VC, Founders Forum Group, and Tech Nation has highlighted the need for more institutional investment into European venture capital.
At a time when investors are increasingly conscious of sustainability and impact when allocating to venture capital (VC), a lack of women-led businesses and regulatory complexities are among the reasons why European firms are struggling to attract the capital they need.
European tech start-ups saw investments of €53bn in 2023, a third of which was raised by impact startups that directly addressed one or more of the UN Sustainable Development Goals (SDGs). However, overall institutional allocations to the sector still remain very small. According to the Beyond Returns report from European Women in VC, Founders Forum Group and Tech Nation, only 0.01% of pension fund assets under management are invested into European VCs.
In order to catalyse more institutional investment, policymakers must create a favourable pan-European regulatory environment to incentivise greater asset allocations, according to the report.
Kinga Stanislawska, co-founder of European Women in VC (EWVC) told Impact Investor that one of the main challenges faced by the sector is that so few assets are currently being allocated to venture in Europe, which she said is caused by regulatory constraints.
“The main challenge is that so little of assets are allocated to venture in Europe. The reasons are constraints coming from regulatory aspects, they are exacerbated by small teams in the alternatives space at pension funds and general belief that venture is a highly risky asset class.
“However, venture is defined as encompassing fund of fund investment, venture fund investment, start-up, scale up and any other involvement. These types of investment all have different risk levels and should not be treated as one,” said Stanislawska.
Focus on SDGs
The report comes at a time of growing awareness of the role VCs can play in tackling critical issues faced by the planet and society.
While investors are increasingly conscious of impact goals when selecting VC managers, there is still a venture capital funding gap that needs to be filled. “We’ve seen governments increase funding for VCs, but it’s essential that this investment goes into positive impact funds, funds that address society’s most pressing needs, to drive change,” the report stated.
Greater diversity
The report also found there is a broad recognition for the need for greater diversity within the sector, with 87% of limited partners (LPs) and VCs surveyed saying they believed increased diversity in venture capital and women-led VCs leads to better investment decisions and financial returns.
However, there is still little discussion around the level of VC funding allocated to women founders.
To tackle this, policymakers must better support women and diverse general partners (GPs) to raise greater capital more rapidly, the report added.
While progress has been made, women-led start-ups still only raise 10% of total VC funding in Europe, and women GPs only manage 9% of European VC assets.
In addition to this, the report also suggests creating simplified impact reporting to build a framework to support scaling companies that align with solving the SDGs.
