European VC Funding is in Trouble

As recently reported, European venture capital is on track to raise the least amount of fresh capital in a decade. According to Pitchbook, 2025 is shaping up for just $10 billion in VC fundraising. To put that in perspective, 2022 — the peak year — saw $38 billion raised.

The in-between years hovered around $20 billion, but we’re now sliding back to mid-2010s levels. Even with some mega-funds still to close this year, the trajectory is not great.

There is still dry powder — between $30–40 billion across ~1,000 active VC firms from funds raised in 2022, 2023 and 2024 — but that’s down 30–40% since 2022. Deal volume is also down 30% year-on-year, although average deal sizes are rising (a sign of capital concentrating into fewer, bigger bets). AI and mega-deals are skewing those numbers up, but for most startups, capital is harder to come by.

The Liquidity Crunch

The core problem is a liquidity bottleneck, the big problem of our age in venture. LPs — pensions, endowments, family offices — are capital constrained. This liquidity crisis is not a European venture phenomenon, it applies globally and also to private equity as well.

The assets under management in European venture are approximately $250 billion (versus global $3 trillion). In the past ten years, the average new money committed (see table above) to European venture funds is approximately $20 billion and the average value of exited companies is also c. $20 billion (not all of which will flow to funds since some of that flows to founders and employees), that is not an attractive ratio. Even if no more money went in, it would still take 12 years to clear the backlog.

The delivery of actual cash (rather than mark-ups) in a timely fashion to investors is in venture really hard. Take a look at this recent chart from Carta (this is for US funds but the picture will be the same in Europe, or perhaps worse). Only 31% of funds raised ten years ago (2015) have returned the original capital back to LPs yet!

The US is struggling with the same issues at bigger scale BUT at least the IPO window is open (CoreWeave, Chime, Circle, etc) and big transformational exits such as Wiz ($33 billion), WIndsurf ($2.4 billion) and Scale AI ($14 billion) are happening. IPOs aside, MAG 7 has over $500 billion of cash on the balance sheet, much of which could be used for M&A of VC backed tech companies. Especially now that the FTC under Donald Trump has had its wings clipped.

And for LPs thinking of allocating, venture is made even less attractive when one compares VC to other asset classes, which are currently ripping. In every year from 2005 to 2024 inclusive, $100 invested in the Nasdaq ETF (QQQ) is worth more than $100 today so for each year the LP could automatically be above 1x DPI. And $100 invested in 2015 would today be worth $536 (so 5.36x), a figure only bettered by top decile venture

Why Europe Feels It More

Europe’s structural weaknesses make this worse. Our VC ecosystem is disproportionately reliant on public money: 30–40% of all European startup deals involve government backing (EIF, BBB, etc.).

Private LP participation is too thin. Pension funds and insurers hold over £3 trillion in the UK and an estimated €20 trillion across Europe — but less than 1% of this flows into venture or growth equity.

The rules governing these pools are outdated. The UK’s definition of “prudence,” for example, still overweights short-term volatility and underweights long-term returns — which is absurd when pension schemes are decades away from maturity.

Meanwhile, retail investors can buy crypto or meme stocks with a few taps on their phone — yet they face impossible barriers if they want to invest in venture capital or productive assets. Why is it easier to speculate on Dogecoin than to back funds investing in companies such as Mistral, Helsing or ElevenLabs?

What Needs to Change

This can be fixed — but it will require unlocking risk capital and aligning incentives for long-term growth.

1. Unlock pension fund capital. Reform prudence rules to reflect long-term returns, not quarterly volatility. Merge smaller schemes to give them the scale and sophistication to allocate to VC and private equity — as Canada and Australia have done with great success. The same should also be said for premiums held by insurance companies.

2. Make VC accessible to retail investors. If retail can freely buy high-risk crypto ETFs, there’s no reason they shouldn’t have structured, regulated access to venture capital. There is now a big push for this in the US, for example.

3. Cut red tape and align tax incentives. If we’re giving huge tax breaks to pension savers, it’s fair to expect more of those savings to be invested into productive, local assets — startups, infrastructure, AI, and deep tech.

European Founder Talent - what to do?

The good news is that the European founder talent has never been better - look at what is happening in Stockholm (Legora and Lovable) for example. This is being recreated at a smaller scale across the continent, not to mention the huge call to action in the resilience category.

However, the barriers in Europe are significant - less risk capital, more regulation, fragmented ecosystems, difficult labour and tax regimes, (at times) an entitled workforce and slow to adopt buyers. So building here remains as challenging as ever. The odds might be better for those hightailing it over the pond.