Why UK and European businesses struggle to raise capital compared to US startups

Raising capital remains one of the defining challenges for innovative businesses in the UK and across Europe. While the US continues to produce the majority of global unicorns, many European founders face a tougher route to scaling their ideas into sustainable, world-class companies. I recently attended the Sifted Summit, where discussions made clear just how wide the funding gap has become and what that means for the UK economy.

Why US venture capital outperforms UK and European funding

Across almost every measure, the US outpaces Europe. Research by Challenge Advisory shows that American venture capital funds have achieved average ten-year returns of 10.3%, compared with just 4.6% in the UK. The typical US fund is nearly twice as large as its British counterpart, and there is around eight times more growth-stage capital available.

According to Sifted, European startups raised around $51 billion in 2024, representing 16% of total global venture capital. UK-based companies accounted for roughly a third of that amount. Yet overall funding remains less than half the $117 billion seen at the 2021 peak. Late-stage finance is where the gap is most pronounced, leaving many European founders unable to scale without relocating.

How UK pension funds miss out on startup returns

The imbalance has broader consequences. CEPA research suggests that US firms are 40% more likely to secure venture capital in their first five years than their European peers. When UK and European startups secure US investment, the resulting profits often flow back across the Atlantic. That means fewer returns for UK pensioners, fewer domestic jobs, and a smaller UK tax take from high-growth sectors that could otherwise drive national prosperity.

Can the Mansion House Accord change this?

The Mansion House Accord aims to change the landscape by encouraging UK pension funds to invest directly in startups and infrastructure. Seventeen pension providers, representing about 90% of active savers’ defined contribution schemes, have pledged to invest £50 billion by 2030, with at least 5% allocated to UK-based businesses.

If implemented effectively, this could help keep profits, innovation and jobs in the UK. However, much depends on regulatory support and the willingness of pension trustees to shift from a risk-averse mindset towards a more growth-oriented one.

University spinout IP ownership may slow UK innovation

Universities play a critical role in commercialising research, yet their approach to intellectual property and equity stakes can make life difficult for founders. The Tracey/Williamson Review found that while university spinout investment rose five-fold between 2014 and 2021, the process remains slow and complicated, averaging 11 months.

There are signs of improvement. Global University Venturing reports that the University of Southampton recently reduced its equity share in IP-heavy spinouts to 10%, following recommendations that universities take no more than 25% in life sciences and 10% in software. Simplifying ownership structures could make UK spinouts more attractive to investors and help them scale faster.

R&D tax relief changes can make claims harder for startups

For innovation-led businesses, R&D tax relief remains one of the most valuable government incentives available. But claiming it has become harder. From April 2024, the previous SME and large company schemes merged into one, with tighter rules across the board. Overseas R&D is now largely excluded, and HMRC has ramped up scrutiny after billions were lost to fraudulent claims.

Loss-making, research-intensive SMEs can still access enhanced support through ERIS, but overall the rules are narrowing. For startups already struggling to raise capital, these changes create additional barriers. Getting claims right can make a real difference to cashflow and competitiveness.

How UK startups can prepare for investment despite funding challenges

Despite these challenges, UK entrepreneurs are well positioned to succeed if they prepare early and understand how investors think. That means maintaining strong governance, producing reliable management information, and planning how to bridge the funding gap between seed and Series A rounds.

Startups with clear financial visibility and evidence of sound commercial potential are more likely to attract backing. Those in research-led sectors should also stay informed on R&D and pension-led funding developments, as these could shape future investment flows.

Can the UK startup ecosystem compete with US venture capital?

The UK’s innovation potential is not in question. What remains uncertain is whether the ecosystem around it, pension funds, universities, and government incentives, can evolve quickly enough to keep pace with global competition. A more coordinated approach to investment could ensure that ideas, profits and talent stay rooted in the UK, creating long-term growth and tax revenues that benefit everyone.