The start-up challenge in Europe: Part Deux
On Tuesday, I wrote about a study by the OECD that compared start-up financing in the EU and the US.
In Europe, the cost of capital for start-up firms is higher than in the United States, according to a study by Bo Becker, Efraim Benmech, and Joao Monteiro. While growth-oriented companies in Europe receive the same average funding as their US counterparts, larger firms or "rising superstars" can accumulate significantly more funding in the US compared to Europe.
However, the study focused on listed companies and it is speculated that the same issue may apply to private companies before they go public. The researchers aimed to explain why the majority of global megacaps are based in the US, with no European companies reaching the trillion-dollar mark. The gap between US and European firms is not due to fundamental differences but rather the cost of capital.
Initially, it was thought that lower interest rates in Europe would result in cheaper debt for firms. While the cost of equity is similar in both regions, according to the annual survey by Pablo Fernandez, the cost of capital is indeed higher for European firms. This gap becomes even more pronounced for smaller companies, with European small caps facing a larger "size premium" in their cost of capital compared to their US counterparts.
The study found that this gap has widened during the second half of the 2010s, making it even more challenging for European small companies to secure the capital needed for growth.
Written by urgent.news from Klement on Investing's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
