VC, policy and entrepreneurship: Europe needs to upgrade its innovation flywheel

Europe’s innovation challenge is no longer simply about capital, talent, or regulation in isolation. As venture moves deeper into AI, industrial technology, health, energy, and other strategically regulated sectors, investors alongside policymakers and entrepreneurs are being forced to reassess their role in shaping markets more constructively, pushing Europe to build a stronger innovation flywheel between capital, policy, and company-building.

Something is unfinished in how Europe builds its innovation economy.

Not for lack of talent, capital, ambition, or even market regulation. Europe has all four. What it lacks is the connective architecture between the people writing the rules, financing the companies, building them, and owning the capital underwriting the entire system.

These communities increasingly depend on one another. Yet they still operate in parallel worlds, with different incentives, languages, and time horizons. Policymakers debate sovereignty and competitiveness. Founders worry about scaling across fragmented markets. GPs navigate regulatory exposure of their own business and their portfolios sector by sector and country by country. LPs are concerned about Europe’s trajectory as an investable innovation market.

Everyone is looking at the same structural challenge from a different angle. But rarely through the same lens. And that gap is becoming harder to ignore.

For much of the last two decades, venture capital could afford to remain relatively detached from policy. Software, particularly B2B SaaS, rewarded speed, low capital intensity, and limited regulatory exposure. The dominant venture playbook evolved accordingly: scale quickly, stay asset-light, and look at policy only once companies became large enough to attract scrutiny.

That era is ending and prompts investors to reassess their role in the policy-innovation stack

The next wave of venture is moving deeper into sectors where markets, infrastructure, and regulation are inseparable from the beginning: AI, health, energy, defence, advanced manufacturing, semiconductors, climate infrastructure, industrial software, mobility, compute, robotics, and the broader reindustrialisation of Europe itself.

These are not markets where policy sits downstream from innovation. Policy shapes whether markets emerge at all and can shape the trajectory of entire allocation portfolios.

A frontier AI company depends on compute policy, energy policy, data governance frameworks, procurement regimes, and liability structures. A health startup navigating AI-enabled diagnostics lives inside regulatory systems from day one. An advanced manufacturing company scaling batteries, chips, or defence technologies depends on industrial policy as much as product-market fit.

In other words: venture is increasingly moving from pure software into the regulated economy. That changes the role of capital itself.

The implications go beyond GPs. They increasingly reach LPs, particularly pension funds, insurers, sovereign funds, endowments, and long-duration institutional investors whose exposure is tied not just to individual companies, but to the long-term competitiveness and resilience of entire markets.

For these actors, the question is no longer simply whether Europe produces attractive startups. It is whether Europe can build an environment where innovation, capital formation, and governance reinforce rather than undermine one another over time.

That concern now surfaces in places that would have seemed unusual only a few years ago.

The debate around the Capital Markets Union is no longer merely a financial integration discussion. Increasingly, it is also a competitiveness debate about whether European capital can scale European innovation up to growth and exit stages. Initiatives such as EU Inc reflect growing recognition that fragmentation itself has become an economic constraint. The European Innovation Council is an important effort of the European Commission to connect with key stakeholders. Platforms like Rise Europe are trying to create new bridges between entrepreneurship and public policy. Campaigns such as Not Optional, the AI Champions Initiative launched by General Catalyst during the AI Action Summit, or Electro Union by Norrken all point toward the same underlying reality: parts of the ecosystem increasingly understand that Europe’s innovation challenge is structural, not merely financial.

And yet, despite the growing number of initiatives, the connective tissue architecture remains incomplete.

Most efforts still operate as campaigns, ad-hoc coalitions, selected convenings or moments. What remains missing is durable infrastructure: an ongoing platform where policymakers, LPs, GPs, founders, and technologists can engage systematically around the future of European markets and innovation power.

Because Europe’s challenge is not simply that regulation exists. It is that the systems shaping innovation remain fragmented across twenty-seven jurisdictions, multiple political cultures, legal traditions, and investment ecosystems.

A founder scaling across Europe still encounters a patchwork of compliance environments. A GP building a pan-European portfolio still manages different forms of regulatory exposure country by country. Policymakers in Brussels still often hear more consistently from incumbent platforms than from the startup and investment ecosystem seeking to build alternatives.

The result is not necessarily bad regulation. Often, European regulation identifies real societal challenges earlier than markets do. The deeper issue is that Europe still lacks sufficient mechanisms for coordinated market shaping between capital, entrepreneurship, and policy.

This becomes particularly visible in AI.

A recent survey conducted by Project Liberty Institute, Reframe Venture, and ImpactVC found that more than 90% of surveyed VCs see significant financial opportunity in infrastructure enabling responsible AI by design: assurance systems, governance tooling, trusted data infrastructure, and technologies supporting human agency and accountability.

At the same time, policymakers across Europe and a great number of middle-powers around the world increasingly seek precisely these outcomes: trustworthy AI systems, stronger digital sovereignty, interoperable infrastructure, and greater resilience against concentrated technological power.

The alignment, at least conceptually, already exists. But alignment without coordination does not compound.

Too often, Europe still falls into a familiar cycle. Venture reflexively positions regulation as a constraint. Policymakers respond to crises with broad frameworks developed without sufficient engagement from those closest to emerging technologies and markets. Founders adapt reactively. LPs observe from a distance while carrying long-duration exposure to the consequences.

Everyone ends up frustrated with outcomes nobody fully intended.

The irony is that Europe may actually possess comparative advantages precisely in the areas where coordination matters most. Europe has strong public institutions, sophisticated industrial capabilities, deep pools of scientific talent, and a regulatory culture that increasingly understands the strategic importance of trust, resilience, and market structure.

But these strengths only become advantages if they are connected through platforms capable of sustained execution.

That is why the real missing piece is not another summit, campaign, or declaration. Europe already produces many of those. What it lacks is a neutral, trusted, execution-oriented platform that continuously brings together LPs, GPs, founders, policymakers, and technologists around frontier market questions before moments of crisis emerge.

Not lobbying in the narrow sense. Nor performative “ecosystem building.” But genuine market infrastructure for collective problem-solving.

A relationship built with regulators over several years matters more than last-minute interventions during legislative negotiations. Shared evidence developed across multiple policy cycles matters more than isolated position papers. Coordinated engagement between LPs, GPs, founders, and policymakers creates stronger markets than fragmented reactions after rules have already hardened. Not only GPs, but also LPs are increasingly wondering whether they should create dedicated policy functions.

And unlike the United States, Europe must solve this across multiple sovereign systems simultaneously. That makes the challenge harder. It also makes durable coordination mechanisms disproportionately valuable.

This is about more than reducing friction between innovation and regulation. It is about addressing the deeper structural constraints on European competitiveness identified in the Draghi report.

A Europe capable of aligning entrepreneurship, investment, and governance around frontier industries could become one of the most compelling innovation environments of the coming decades precisely because the next generation of markets will depend increasingly on trust, resilience, interoperability, industrial capacity, and long-term legitimacy.

In that world, responsible innovation that optimizes for both governance and scale is not the opposite of competitiveness. Increasingly, it is the condition for it.

Europe already has many of the ingredients: world-class researchers, ambitious founders, sophisticated capital, growing industrial policy capacity, and a rising awareness that the old model is no longer sufficient.

What remains unfinished is the architecture connecting them.