Closing Europe’s VC Gap: Pricing, Reform & Industrial Policy

Europe’s startup economy has matured enormously but the funding engine still underperforms relative to the United States. The result is fewer breakout companies, thinner alumni networks, and less recycling of talent and capital back into the ecosystem. This article weaves together four strands of evidence:

1. Pricing and traction differences in early-stage rounds (Equidam Valuation Delta® Q3-2025).
2. ESOP culture and policy gaps holding back the “growth flywheel.”
3. Industrial and regulatory policy that often treats symptoms (growth-capital gaps) rather than causes (inception-capital gaps).
4. Comparative statistics on EU vs U.S. funding volumes, per-capita gaps, and stage mix.

The conclusion is pragmatic: Europe funds at similar stages but demands more proof, prices more conservatively, and returns less upside to employees. Fixing stock options and inception-stage capital is how we can expand the pool of available capital at the earliest stages and enable a healthier risk appetite amongst investors.

Pricing, Traction, and Dilution: What the Data Say (2020–2025)

Equidam’s aggregated early-stage data (2020–2025) show near-identical stage mix between regions (late-stage share ≈ 57% in both), so the gap isn’t about “raising later.” Instead, within stage, European rounds tend to happen at higher current revenue but with lower valuations, smaller checks, and higher implied dilution. Median projections are also less ambitious in Europe—consistent with tighter underwriting and/or lower expected exits.

Median Round Size ($) by Region (New Money Raised)

Median Pre-Money Valuation ($) by Region

Averages (2020–2025):

• Valuation: U.S. $14.64M vs EU $6.54M (EU ≈ 0.45× U.S.).
• Funding target: U.S. $1.20M vs EU $0.65M (EU ≈ 0.54× U.S.).
• Implied dilution (target ÷ [valuation + target]): U.S. ≈ 7.8%, EU ≈ 9.2%.

Traction thresholds: The median revenue at raise for startups in the EU is $1–5M vs $100k–$1M in the U.S.; the ≥$5M revenue share is ~48% in the EU vs ~29% in the U.S. In plain English: Europe asks for more proof yet pays lower multiples.

These patterns align with broader third-party evidence that U.S. early-stage rounds are larger and more numerous, with a thicker “risk-on” slice of pre-revenue deals, while Europe’s funding is more conservative and milestone-driven.

Target dilution: getting tougher in Europe

From 2020 Q1 to 2025 Q3, target dilution in the EU sat above the U.S. in 20 of 23 quarters, widening post-2022:

• • Overall averages: U.S. 7.17% vs EU 8.88% (+1.7 pp EU).

• 2023–2025 Q3: U.S. 6.21% vs EU 8.84% (+2.64 pp EU).

This gap typically understates final outcomes, since actual dilution often creeps higher after upsized rounds or hard valuation negotiations. The takeaway for founders: treat target dilution as a floor, not a forecast.

The Missing Flywheel: Europe’s ESOP Culture Problem

Regulatory friction around options matters (taxing illiquid options as income is self-defeating), but culture is the deeper issue. Many European teams still don’t expect meaningful equity; many boards still treat ESOPs as a cost center rather than the engine of future founders and angel LPs.

“European tech companies should be minting more millionaires.” — Finn Murphy, Nebular

“If employees of a successful startup get rich in an exit, they reinvest — by founding or angel investing.” — Yoko Spirig, Ledgy

“Giving equity to employees is perhaps the key element to making startups work.” — Sam Altman, OpenAI

U.S. examples show what happens when options are normalized: Google reportedly minted 1,000+ $5M+ payouts; Facebook created 1,000+ millionaires. That money seeded the next wave of companies and angels. Europe needs the same flywheel.

The policy and practice blueprint already exists. Index Ventures’ Rewarding Talent handbook and OptionPlan benchmarks provide a common language for founders and employees, and show that countries like Estonia, the UK, and France are closer to best practice—proof that policy and practice can converge to shift culture.

Actionable playbook for founders and boards (now):

• Normalize ESOPs as part of total compensation, explained with the same fluency you use with investors.
• Budget larger pools earlier to avoid starving the scale-up phase.
• Adopt standard vesting (4 years, 1-year cliff), fair strike prices, and exercise windows that don’t strand employees at exit.
• Use tax-optimized schemes (e.g., UK EMI) and push local advisors to structure employee-friendly terms.
• Protect vested employees at exit (cashless exercise, extended windows, roll-over rights).

If we want more “Revolut mafias,” we must make the upside real for employees of successful startups — so they stay, found, and fund.

Policy: Stop Treating Symptoms — Back Inception-Stage Risk

A common EU reflex is to pour more money into the “growth-capital gap.” But growth is downstream of inception. If angel, pre-seed, and seed capital are too scarce—or too risk-averse—fewer companies survive long enough to need growth checks.

Recent analyses argue that the state’s highest-leverage role is to fund emerging managers and inception-stage vehicles, then taper support as track records mature. This catalyzes risk appetite, diversifies who gets funded, and increases the entropy of origination. Capital flows into overlooked seams of opportunity rather than clustering in safe, over-credentialed bets.

The logic is consistent with external work, too: the IMF urges Europe to accelerate the development of its VC ecosystem to stop losing promising startups to foreign capital; the EIB documents persistent fragmentation and financing frictions; and the Draghi Report calls for far deeper, coordinated investment and a more integrated single market to unlock productivity and scale.

What “inception-first” policy looks like:

• Back funds I–III (emerging managers) explicitly targeting pre-seed/seed; sunset public capital by Fund IV as private LPs crowd in.
• Harmonize ESOP tax across the EU to reduce cross-border friction for talent; copy the best of UK/Estonia/France.
• Reduce cross-border deal costs (legal, payroll, data compliance) via single-market instruments and standardized documentation.
• Deploy risk-sharing (first-loss, co-investment guarantees) to increase LP risk appetite without distorting pricing.

A Broader Look at the EU–U.S. Gap

Beyond individual rounds, ecosystem-level indicators still favor the U.S.:

• Per-capita early-stage capital is roughly 4–5× higher in the U.S., with ~10,000 pre-seed/seed deals annually (2023 baseline) versus ~2,500–3,000 in the EU. U.S. early-stage round sizes are also materially larger.
• Exit channels and depth (IPO windows, secondary liquidity, acquirer base) remain broader in the U.S., supporting higher expected values and, in turn, higher underwriting multiples at entry. (See NVCA/PitchBook trendlines across 2023.)
• The IMF and EIB both document how fragmentation and capital-market shallowness suppress scale and productivity, leading to a persistent shortfall in innovation finance relative to the U.S.

Stylized Comparison, Early-Stage (2020–2025 Averages)

(EU/US medians from Equidam Valuation Delta® Q3-2025 analysis; stage-mix parity cross-checked against U.S. NVCA trend data.)

What This Means for Founders, VCs, and Policymakers

Founders (Europe)

• Position for multiples, not just milestones. If you have strong current revenue, pair it with a U.S.-style upside narrative (market size, speed drivers, capital map to Category Leadership).
• Benchmark dilution realistically. Expect EU targets to land higher; either earn a higher valuation through KPI leadership/comps or import cross-border leads trained to underwrite earlier.
• Institutionalize ESOPs. Treat options as the retention and network-building tool that can transform your alumni into the next cohort of founders and angels. Use public benchmarks (Index’s OptionPlan) to set levels transparently.

VCs (Europe)

• If you want power-law outcomes, enter earlier. Lift pre-revenue exposure where your thesis demands outliers; right-size check policy and syndication so companies aren’t under-capitalized during compounding phases.
• Lean into talent flywheels. Push portfolio companies to adopt competitive ESOPs; your future deal flow depends on today’s employee-owners.

LPs and Policymakers

• Risk-sharing beats price-setting. Use co-investment guarantees/first-loss to raise risk appetite without distorting deals.
• Standardize ESOPs and cut cross-border friction. Make the EU labor and tax surface feel more like a single market.
• Fund emerging managers at inception. Shift from symptom relief (growth cheques) to cause fixing (more shots on goal at pre-seed/seed). The IMF, EIB, and Draghi all point to the same structural prescription: deeper, more integrated capital markets and earlier, bolder risk taking.

Limitations and Metrics to Watch

This synthesis uses region-level medians, not deal-level regressions; ratio-of-medians can mask distribution tails. We also don’t observe fund sizes, reserves, or realized exits by cohort—variables that could rationalize some pricing differences without invoking risk preference.

High-value next steps:

• Within-stage revenue multiples (valuation ÷ ARR at raise) to isolate pricing behavior.
• Within-stage dilution after final terms (vs targets) to measure negotiation drift.
• Cross-lead counterfactuals (U.S. leads in EU vs EU leads) to identify preference effects.

Bottom Line

With stage mix held constant, Europe funds at higher proof and lower multiples, with slightly higher profitability at raise and smaller projected paths. The evidence stack (same stages, stricter thresholds, lower price, higher dilution) is most consistent with a more conservative investment stance in Europe (a blend of investor preferences and lower expected exit values).

Conservatism has virtues (lower downside, tighter burn) but it undercapitalizes outliers. To close the gap, Europe should fix ESOP culture and move capital earlier. That means employee ownership that actually pays, and public capital that primes inception, not just patches growth.

If we do that, the flywheel turns: more upside to employees → more angels and founders → more ambitious inception-stage bets → more category leaders → more liquidity → more growth in Europe.