Venture Capital as the anchor for the next generation of economic clusters
With economic volatility becoming the norm rather than the exception, governments across the globe are showing renewed ambition to cultivate industrial and technological clusters hoping towithstanding recessions, pandemics, trade disputes and geopolitical fragmentation. In an era marked by supply chain realignments, competition in strategic technologies and a return to industrial policy, resilience has become entwined with competitiveness.
Few places illustrate this dynamic better than Silicon Valley. For over five decades, the Californian ecosystem has shown a remarkable capacity not merely to survive crises, but to convert them into opportunities for renewal. Europe, despite its outstanding scientific base and industrial heritage, has yet to generate a comparably self-sustaining innovation engine. To close this gap, Europe should look beyond subsidies and regulation toward a more decisive lever: the systematic mobilisation of venture capital.
Crisis as catalyst: the Silicon Valley pattern
Silicon Valley’s resilience is not accidental. During the dot-com crash of the early 2000s and the 2008 global financial crisis, thousands of employees were laid off and capital flows temporarily tightened. However, these crises also laid the foundation of the cloud economy, mobile computing and the social web.
Instead of disappearing, capital was reallocated, and surviving firms emerged leaner and more focused. New companies were founded precisely because crises exposed inefficiencies and latent user needs. Airbnb, Uber and WhatsApp all took shape in the aftermath of the financial crisis, leveraging growing mobile digital infrastructure to exploit new market gaps.
A similar process occurred during the COVID-19 pandemic and the subsequent period of geopolitical tension. As offices emptied and global trade stalled, Silicon Valley firms accelerated investment in remote collaboration, cybersecurity, health technology, artificial intelligence and automation. Rather than being paralysed by uncertainty, the ecosystem aligned innovation with structural changes in the global economy. Startups and investors pivoted toward sectors such as defence, supply chain resilience and energy security.
Europe’s innovation paradox
Europe has long aspired to replicate such dynamism, such as the Lisbon Strategy that in the early 2000s, which sought to transform the EU into the world’s most competitive knowledge economy,and more recent initiatives such as GAIA-X and the Digital Single Market, which aimed to build technological sovereignty and cross-border scale.
These projects fell short of regenerating the economy. As regulatory fragmentation persists, startups seeking to expand across the EU still face divergent tax systems, labour laws and supervisory regimes. Sovereign cloud projects still struggle to compete with global hyperscalers. Undoubtedly, Europe has not produced digital platforms of comparable global scale to those dominating cloud computing, artificial intelligence and digital infrastructure today.
The economic lag is tangible. While European universities and research institutions generate world-class science, the context they operate in means they have struggled to translate research strength into globally scaled firms.
Venture capital as strategic infrastructure
At the heart of Silicon Valley’s success lies venture capital, with many of today’s largest corporations either born in the Valley or fuelled by its investors. Apple, Google, Nvidia and Tesla all emerged from the region’s entrepreneurial networks, while Amazon, Microsoft and Meta were deeply shaped by Silicon Valley’s capital markets and venture financing culture.
In the United States, venture-backed firms account for 20% of overall market capitalisation and millions of jobs. More striking still is their contribution to innovation, as VC-backed companies represent the overwhelming majority of private-sector research and development spending. Venture capitalists provide more than just capital. They supply mentorship, strategic guidance, governance expertise and access to networks of talent and customers. They help founders scale operations, refine business models and navigate global expansion.
This dense web of funding, mentorship, merges and acquisitions, and reinvestment create a virtuous cycle where successful exits generate returns, which are then put to use into new funds. Experienced founders and operators become angel investors or start new ventures while talent migrates between companies, carrying knowledge and operational expertise.
The structural barriers in Europe
Europe’s innovation challenge is often framed as a regulatory problem. Certainly simplifying bureaucracy, harmonising rules and improving corporate governance would ease business and reduce friction. Encouraging entrepreneurship and facilitating cross-border business growth are necessary, too.
However, two structural constraints are both often overlooked and far more decisive: labour mobility and capital market depth.
In the US, stock-based compensation for employees and carry-based compensation for VC fund managers is a cornerstone of startup innovation, because employees at all levels can share in upside gains. This system aligns incentives and attracts talent willing to accept risk. Labour mobility is high, failure carries limited stigma, and skilled operators frequently move between startups, scale-ups and established firms. This system of labour mobility compounds knowledge over time and across the ecosystem.
By contrast, Europe’s labour markets remain rigid, with equity incentive often taxed unfavourably or treated inconsistently across member states. Immigration regimes vary widely, complicating the recruitment of global talent and slowing the circulation of experience that fuels cluster formation.
Even more critical is the integration and depth of capital markets. The Silicon Valley ecosystem is backed by a network composed of large pools of institutional capital from pension funds, endowments, family offices and corporate venture arms. These allocators dedicate substantial resources for venture funds (often around 2-10% of their investment portfolio). Deep public markets also provide viable exit routes through IPOs and at earlier stages through corporate mergers and acquisitions.
Europe’s capital markets are relatively shallow and fragmented. Late-stage financing rounds require foreign participation. and promising companies frequently relocate, list abroad or sell to non-European buyers. Without robust exist pathways, venture funds struggle to scale and returns are harder to recycle domestically.
Pension funds: Europe’s untapped reservoir
One of the most consequential differences between the United States and Europe lies in pension fund participation. Since the late 1970s, US pension funds have been permitted to allocate capital to venture funds under a flexible interpretation of fiduciary duty. This decision unlocked vast, long-term pools of capital for high-growth innovation.
In the European Union, the main regulatory framework governing occupational pensions is the Institutions for Occupational Retirement Provision Directive (IORP II) (Directive 2016/2341), built around the “prudent person principle.” In theory, this standard allows diversified exposure to various asset classes, including venture capital but in practice, many member states interpret prudence conservatively. Quantitative caps or restrictive guidelines often limit allocations to unlisted equity and other illiquid assets.
As a result, European venture capital funds typically operate at smaller scale relative to their US counterparts, limiting their ability to support companies through multiple funding rounds and to compete in capital-intensive sectors such as advanced manufacturing, biotechnology or artificial intelligence.
There are exceptions, for example Sweden’s AP6 fund is permitted to invest directly in unlisted companies, illustrating that alternative models are feasible within Europe, while Italy has introduced incentives encouraging pension schemes to channel a portion of assets into venture vehicles. These initiatives signal a shift in thinking, but they remain incremental and if Europe is serious about building resilient economic clusters, it must treat venture capital not as a niche asset class, but as a strategic financial infrastructure.
