From OpenAI to Deepseek to Perplexity, a new wave of AI companies have become household names in the past year. These innovators have become synonymous with the fast-moving technological revolution in the U.S. and China. In contrast, Europe often appears to be a third wheel.
The continent is burdened by innovation-dampening high taxes, bureaucracy, and sluggish growth of just 0.2% in Q2. Against a backdrop of macroeconomic headwinds, the PitchBook Q2 2025 European Venture Report showed that fundraising hit a record low in the first half of the year, even as select sectors like AI and defence saw investment.
Yet there is huge potential for European startups to push the barriers of technology if the right policies are in place. After all, Europe has a strong foundation of top universities, financial hubs, innovation centres, and a massive combined market of 500 million consumers.
To put the continent back in the race for future technology leadership, there needs to be a proactive and coordinated policy response to reduce friction and boost early-stage growth. Several key steps should be taken to address this.
1. Simplify access to grant funding
Grant funding is vital for startups, offering non-dilutive capital that extends runway and de-risks initial development. It also lends credibility to support future funding rounds. In a recent investor survey we conducted, it was named as the number one change governments could make to support innovation.
Yet the grant application process is often confusing and time-consuming. Startups struggle to identify which grants they are eligible for amidst a mountain of complex paperwork.
To address this, governments across the EU should learn from rising startup hubs like Singapore. It’s national champion, Singapore’s Startup SG, has successfully streamlined access to grant funding, improving awareness and simplifying the application process. By adopting this model, European governments can offer a similar lifeline for startups.
2. Enhance the R&D tax credit system
R&D tax credits are critical for de-risking innovation, yet the process in Europe is too often lengthy, opaque, and requires costly third-party advisors. This diverts money away from the very innovation the policy is meant to support.
While European R&D spending is growing, its R&D intensity is still below that of its key competitors. In 2023, the EU’s R&D expenditure as a percentage of GDP was 2.22% while the UK’s was 2.77%. This is well below the ratios recorded in the United States (3.59%) and South Korea (4.85%).
As a start across Europe, there should be a commitment to raising investment in R&D to match the best performers in the world. This would send out a strong signal to businesses that Europe backs innovation.
Secondly, national treasuries could simplify the process, so startups can file claims directly rather than using third-party advisors. This would reduce the burden on startups, ensuring 100% of the rebate is reinvested into product development and growth.
3. Promote national startup tax incentive schemes across Europe
The Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) have been cornerstones of the UK’s vibrant startup ecosystem for decades. These schemes significantly mitigate the high risk of early-stage investment through generous tax reliefs. Our regular interactions with UK investors show this relief is often the primary reason they back startups.
Similar government-backed initiatives exist across Europe. For example, Ireland offers the Employment & Investment Incentive (EII) scheme, which functions similarly to the UK’s EIS. In France, “JEI, JEIC and JEIR” (differentiated by innovation type and investment limits) are all tailored to reward early-stage and deeptech investment. Germany’s “INVEST” scheme offers a grant programme for business angels and is available to permanent residents in any EEA country, encouraging cross-border angel investing.
Despite their success, these schemes remain an under-utilised tool for expanding the pool of angel investors, and governments have a significant opportunity to do more. By launching national awareness campaigns, they could help educate a wider audience of potential investors about the financial benefits.
This would encourage more aspiring investors to take their first step into angel investing, supporting a broader and more resilient funding ecosystem.
4. Introduce startup-specific tax relief
One of the biggest struggles for new startups, and a leading cause of their failure, is cash flow. However, as discussed, many current support mechanisms, such as grants and R&D tax credits, are often complex and slow to deliver. This means that startups under financial pressure need to wait a long time to benefit from them.
Governments should consider providing targeted tax breaks to ease financial pressure during a startup’s crucial early stages. By delivering support when it is needed most, such policies can help these promising ventures survive and, ultimately, thrive.
5. Invest in founders’ education and skills
While many startup founders are brilliant innovators, they often lack the practical skills needed to scale a business successfully. This is a critical gap, especially given that a recent Eurobarometer survey found a remarkable 46% of young Europeans aged 15-30 would consider starting their own business. The desire to innovate is there, but the “playbooks” for entrepreneurial success are not widely available.
Existing support structures like accelerators, incubators, and mentoring programmes play a massive role, but a more systemic change is needed. Our current education systems are largely designed for the Industrial Revolution, but to thrive in the coming AI revolution, we need to overhaul them entirely.
This should involve equipping the next generation with the skills needed to build dynamic companies. Not only teaching an understanding of the fundraising process, but also the mental resilience required to run a business, plus crucial business skills like marketing and HR. By embedding entrepreneurial education from an early age, we can build a stronger, more innovative Europe from the ground up.
6. Make talent acquisition easier
Every startup needs great people to grow. But when demand outstrips domestic supply, especially in technical roles, startups cannot compete with big companies on hiring power. In the UK, there has been a familiar exodus of value-generating companies moving to the USA, Dubai and Singapore, where a wider talent pool and more favourable startup setups exist. Great European businesses like Revolut, Spotify and Dyson have had to move, meaning the value has been realised in other countries rather than in Europe.
Governments could help tackle some of these issues by simplifying visa routes for talent outside the continent or creating a fast-track system for critical startup hires. This could help to create a more level playing field, ensuring companies can bring in top global talent when they need it most.
I do not pretend to have all the answers, but I hope this article gets people thinking about how we can shake things up and cement Europe’s position as a global startup leader.
Read the orginal article: https://www.eu-startups.com/2025/10/how-smart-policies-can-strengthen-europes-startup-ecosystem-and-boost-economic-growth/
