ā¬800 billion.šø That is the amount of investment that Europe needs to close the competitiveness gap with the US and China, according to Mario Draghiās estimates.
This realisation unfolds two questions:
Where to find that money?
And, how to make sure it is catalyzed to innovation and new businesses?
š”Europeās Big Problem (or Opportunity)
Europe has the talent but lacks local funding to finance its next unicorns. Fragmented and underfunded VC markets, combined with limited institutional investment backing alternative assets, fuel dependence on foreign capital - and the risk of losing top talent abroad.
Amongst this ālack of fundingā problem. A core issue identified is the insufficient involvement of institutional investors, such as pension funds and insurers, in funding European VC funds, particularly at later growth stages. Governments are not enough anymore. As an example, 30% of the EU budget is spent on climate change today, which represents until 2027 a total of ā¬87 billion. According to European auditors, this sum represents less than 10% of the investment needed to reach the 2030 targets the EU set for its transition, with real needs around one trillion euros per year.
The conclusion is that, while government funding has played its role in Europe up until now (EIF, KFW, Bpifrance, amongst others); tougher economic situations in the continent are slowing down their efforts.
š”The share of global VC funds raised in the EU is only 5%, compared to 52% in the US and 40 in China.
Europeās private fund-of-funds market remains significantly underdeveloped. Unlike in the U.S., European universities lack sizable endowments or foundations with the capacity to invest in venture and growth funds. The gap can be bridged by institutional investors who could pool, manage and invest sufficient amounts - into private fund of funds.
These investors have never fully bet on capital risk: despite progress, the share of alternative assets under management (AUM, for which institutional investors account for 31% 28) into European VCs has declined in the past two decades. Today, 8% of European asset manager allocation in alternative assets are in venture capital, which is half of the US average of 16%.
š”Former ECB President Mario Draghiās landmark report warned Europe urgently needs more investment to stay globally competitive. FoFs are becoming the policy tool to mobilize Europe's massive savings into innovation.
Europe is suffering from:
šø Capital Shortage: European institutional investors contribute only ~30% of VC funding versus 72% in the US (France Digitale).
š Small Scale: Between 2013-2023, Europe produced just 11 billion-dollar VC funds compared to 137 in the US (EIB Report).
š Lack of institutional investors: Government funding alone does not suffice. Only 0.024% of European pension fund assets are invested in local VCs, highlighting enormous untapped potential (France Digitale). With very little investing from university endowments and foundations, privately managed fund of funds are a must for Europe.
European Competitiveness, Wake-Up Call š£
While European household savings amounted to EUR 1,390 billion in 2022 compared to EUR 840 billion in the US, EU households have considerably lower wealth, with net household wealth increasing by only 55% in the EU between 2009 and 2023, compared to 151% in the US. This gap is largely attributed to less efficient financial intermediation and the fragmentation of capital markets.
The annual additional investment needed for the EU is estimated at EUR 750-800 billion, representing 4.4%-4.7% of EU GDP.
In 2023, venture capital investment in Artificial Intelligence (AI) in the EU was USD 8 billion, significantly lower than USD 68 billion in the US and USD 15 billion in China.
Europe has fewer and less equipped large-scale VC funds, with only 11 funds larger than USD 1 billion since 2013, compared to 137 in the US.
Pension funds are "significantly underdeveloped" in much of the EU, with assets at 32% of GDP in 2022, vastly lower than 142% in the US and 100% in the UK.
š Fund-of-Funds: The investment case
FoFs can be a safer entry into venture and growth capital, especially attractive for pension funds, insurance companies, and other institutional investors under-exposed to VC because of their risk profile.
š Diversification: A single FoF can provide exposure to 20 or more VC funds, significantly reducing the risk compared to direct investments (Pattern Ventures).
š Stable Returns: With less volatility, FoFs help investors smoothly navigate the notorious venture "J-curveā, implying a clear de-risked way to participate in VC as the portfolio of the underlying fund mitigates poor performance of single assets, if applicable.
š§ Expert Management: Professional teams handle selection and due diligence, helping LPs achieve net returns that rival direct VC fund investments.
š”Median returns (TVPI) for venture FoFs historically average around 2.5Ć, typically without loss of principal (LevelVentures).
š Superior Access: Access to top-performing and exclusive funds that are often closed to new LPs.
š Lower Return Dispersion: FoFs has a 0.58x spread (top to bottom quartile), while direct VC has a 1.21x spread.
š° Fees Are Justified in VC: Top 5% of VC funds outperform the median by ~45%, while in hedge funds, itās only ~10%. The gap absorbs the second fee layer.
ā±ļø Cost & Time Efficiency: FoFs fees can be cheaper that paying the Management team, plus it is operationally simpler.
Typical Cons of FoFs, according to LPs
šø āDouble Layer of Feesā: A typical objection is that fees eat into returns. The reality is that VCās return dispersion is so high that FoFs still outperform direct VC net of fees. FoFs are a lower risk, consistent return option.
š¤·āāļø Signals Weakness or Inexperience: Many consider that using a FoF means the LP canāt execute a direct VC strategy. Actually, most LPs are generalists; choosing a FoF shows smart delegation and a focus on performance.
š Less Fun or Less Prestige: Direct VC investing is more engaging and high-status. However, top FoFs host curated LP/GP events, intros, and experiences that enrich the LP journey.
Closing thoughts š
Fund-of-Funds represent a powerful strategy for Europe to harness institutional capital, drive innovation, and enhance competitiveness. With targeted policy support and savvy investors recognising their potential, FoFs can transform Europe's fragmented funding landscape into a powerhouse of global innovation. The benefits outweigh the drawbacks, especially for institutional investors looking for reduced risk, but looking for good assets that can, as a side benefit, catalyze innovation.
šÆ Key Takeaways: we need to develop all asset classes in Europe!
FoFs offer critical diversification and stability, especially suited to cautious institutional investors.
Europe requires ā¬750-800 billion in additional investment annually to close its competitiveness gap with the US and China (approximately 4.4%-4.7% of EU GDP). In this context, Europe needs FoFs to unify fragmented markets and unlock vast institutional savings.
The European VC share is only 5% of the global total, compared to 52% in the US and 40% in China, highlighting the need for stronger local funding.
European VC funds have been much smaller compared to the US, with only 11 funds over $1 billion between 2013-2023, versus 137 in the US.
The European pension fund market remains underdeveloped, holding only 32% of GDP in 2022, far behind the 142% in the US and 100% in the UK, indicating untapped capital potential for VC investments - are fund of funds the way to accelerate the deployment?
FoFs offer superior access to exclusive funds, with lower return dispersion (0.58x spread vs. 1.21x for direct VC), and their fees, though higher, are justified by higher returns from top VC funds.
Europe must strengthen its entire venture capital stack - and that means developing all asset classes. Public capital has a critical role to play in accelerating the growth of private fund-of-funds structures, to act as LPs to Europeās VC ecosystem.
š Want to learn more? Check the articles below! š”
Are you an LP or a GP looking to make an impact through gender-smart investing? This is your opportunity to join the movement shaping the future of equity and inclusion in Europe.
Michelle Kang, Self-made Tech Entrepreneur, Leader and Billionaire.
Michele Kang is the owner and CEO of the Washington Spirit, a professional womenās soccer team in the NWSL. She became the teamās controlling owner in 2022 and has since led major efforts to professionalize and invest in womenās sports. In 2023, Kang launched the first-ever global womenās soccer holding company, bringing together teams across Europe and the U.S. to elevate investment in the womenās game.
Sophie Purdom, Self-made Tech Entrepreneur, Leader and Billionaire.
SophieāÆPurdom is the founder and Managing Partner of PlaneteerāÆCapital, a New Yorkābased early-stage climate tech VC firm targeting PreāSeed and Seed investments in hardware-enabled software companies tackling carbon management, decarbonization, climate intelligence, and sustainable agriculture
Incofin Investment Management's Water Access Acceleration Fund reaches ā¬61m final close as first private equity fund dedicated to water access. Targeting Africa, Asia, and Latin America, the blended finance initiative aims to deliver 20 billion litres of water to 30 million people through scalable water businesses.
Industry: Healthtech AI | Location: š«š· France | Funding: $70M Series B French healthtech startup Nabla, co-founded by Delphine Groll, has raised a $70 million Series B round led by HV Capital. Nabla develops AI-powered tools for medical professionals to streamline clinical documentation and improve patient care.
Industry: Data Infrastructure | Location: š«š· France | Funding: $18M Series A extension Sifflet, a French data observability platform co-founded by Salma Bakouk, announced an $18 million extension to its Series A round. The investment comes from existing backers EQT Ventures and Mangrove Capital Partners, supporting the companyās growth in the enterprise data quality space.
Kasia Piasecki participated in an event held in š®š¹ Milan, where she spoke about gender bias in investments and presented the latest report findings. While Italy has seen a growing number of women entering the venture capital space, significant gaps remain in visibility, support, and representation. We were proud to be part of this important milestone. Thank you to Laura Morelli for an invitation!
20th Anniversary of Founders Forum, š¬š§ London Tech Week
Founders Forum Global brings together the very best in global tech, including trailblazing unicorn founders, top CEO, and world-class VCs. Kinga StanisÅawska had a pleasure of being a part of 20th Anniversary of Founders Forum at Tate Modern! Congrats to Brent Hoberman, Carolyn Dawson and entire Team!
We were also a part of š¬š§ London Tech Week, which unites the global tech ecosystem in one place. It brings together the innovators creating the technologies of tomorrow, the investors funding them, and the enterprise leaders who will adopt them. The highlight was definitely fireside chat of Luciana Lixandru with Beatrice York. Thank you for having us!
