Angel investors, key backers of early-stage European startups, often navigate a landscape fraught with bureaucratic hurdles. While large funding rounds grab attention, angels support from the wings, usually at the riskiest stages, bringing specialized knowledge from industries like fintech and biotech. Their role is vital, yet they are contending with complex regulations that deter cross-border investment. The European Commission’s proposed 28th Regime could streamline these processes by harmonizing legal structures across the EU, potentially easing these burdens. Investors are keen to see whether this potential regulatory simplification can indeed manifest and affect change.
Regulatory issues have been well-documented previously, but there’s increasing urgency now. People like Carmen Alfonso Rico, of Cocoa Ventures, highlight how the choice between complex regulations and simplified US systems led to Cocoa’s US setup, where AngelList efficiently manages administrative tasks.
“AngelList handles state administration and cross-border formalities, allowing us to focus on investment rather than bureaucracy.”
Similarly, investors like Simon Leicht from SDAC Ventures speak about disproportionately high fixed costs hindering smaller funds, a problem persistently faced over the years.
How Can Regulatory Complexity Affect Angel Investors?
Angel investors in Europe regularly face the challenge of a fragmented regulatory environment. Alfonso Rico noted that when establishing Cocoa Ventures, she experienced the inefficiencies first-hand: “The complexity of the notary process made it clear: doing everything in-house would have been impossible for a $15–17 million fund,” underscoring how bureaucratic processes push investors to opt for jurisdictions with simpler administrative requirements.
Microfunds also suffer. In contexts such as those described by Simon Leicht, small funds incur fixed regulatory costs similar to those of larger funds, which disproportionately impacts their operations. This situation dissuades angel investors from participating in cross-border activities due to increased legal and accounting demands.
Why Is Cross-Border Investment Hampered?
One major barrier is the lack of standardization within Europe, affecting everything from legal documentation to stock option schemes. Leicht emphasized that investing across Europe requires untangling varying legal and tax frameworks, further exacerbating the costs over a fund’s lifecycle. He stated,
“We lack a simple SAFE note equivalent, and in a major market like Germany, you can’t even find one universal standard for a convertible loan.”
This illustrates how such complexities make smaller cross-border investments impractical.
Angel investors like Alfonso Rico also express frustration over inefficiencies within national frameworks that lead to significant delays and extra costs. The varied approaches to option schemes among EU countries also hamper startups’ abilities to attract talent through equity compensation, further lagging behind competitive markets like the US.
Market differences reflect regulatory environments similar to past reports. In comparison, earlier emphasis was more on national initiatives, while recent discussions pivot to broader harmonization under the 28th Regime proposal. If successful, such an initiative could deliver long-awaited pan-European cohesion, drawing parallels to US systems that allow seamless state-to-state investments.
Continuing to grapple with fragmentation, Europe risks losing its burgeoning founders to the US, where more conducive environments exist. The capability to pivot flexibly without being restrained by extensive regulatory barriers might be essential to truly nurture its startup ecosystem. An integrated regulatory system could foster a more conducive environment for innovation, retaining talent and investment within Europe. While the proposal of the 28th Regime holds promise, it remains to be seen whether it will effectively simplify the investment landscape.
