France is spearheading a new initiative to unify the European Union’s fragmented capital markets, aiming to provide the necessary scale to support its burgeoning startup sector and reduce reliance on dominant U.S. venture capital, according to ministers, CEOs, and investors.
Currently, a patchwork of local regulations and oversight keeps Europe’s financial markets confined within national borders, hindering the development of deep capital markets to compete with those in the United States.
For startups in France and the broader EU, this often means turning to U.S. venture capital for growth funding due to the lack of substantial domestic investors.
While U.S. funding is beneficial, it represents a missed opportunity for Europe, as Matthieu Rouif, CEO of French startup Photoroom, highlighted.
Photoroom recently secured $43 million from UK fund Balderton and Silicon Valley’s Y Combinator.
“A huge amount of wealth has been created over the past 20 years, created off the back of tech innovation, and the fact Europeans don’t have access to that is a big issue,” Rouif said at the Viva Technology fair in Paris.
The dominance of U.S. venture capital is stark, with the top ten firms all based in the United States, significantly outpacing their European counterparts in investment capacity.
A 2023 report by venture capital firm Atomico estimated that European startups would raise $45 billion, compared to $120 billion in the U.S.
In response, the French government is advocating for the next European Commission to prioritize the long-delayed EU capital markets union, aiming to harmonize financial regulations and supervision across the 27-nation bloc.
Despite a growing consensus among EU governments, some remain hesitant to cede regulatory control over their financial markets.
French Finance Minister Bruno Le Maire emphasized the urgency, citing the example of Mistral AI, France’s counterpart to OpenAI.
“Mistral needs to raise money in the next six months, it’s going to be a lot of money.
“So either we move ahead with capital markets union or else they will go somewhere else,” Le Maire said at the Paris tech fair.
Bank of France Governor Francois Villeroy de Galhau suggested another solution: increasing public sector involvement, such as that of the European Investment Bank, in financing startups by accepting more risk than private investors.
For European venture capital firms, a unified market would also make it more appealing to float the companies they fund within Europe rather than in the U.S.
Antoine Moyroud of Silicon Valley venture capital fund Lightspeed, an investor in Mistral, expressed disappointment in the current situation.
“As a French citizen, it’s a shame to see that the value creation flywheel isn’t spinning as fast in Europe as it is in the U.S.”
Furthermore, European startups that list on local markets could benefit from a more stable investor base compared to the U.S., where investors are more likely to offload foreign holdings during downturns.
Louis Dussart of RTP Global noted, “It would truly be a pivotal moment if we could establish Europe as an attractive place to exit and bring liquidity back into the ecosystem.”